Trusts and the 5th Anti-Money Laundering Directive
There has been some publicity in the media recently about the effect on trusts of the 5th Anti-Money Laundering Directive (5th AMLD). Much about the impact of the 5th AMLD remains unclear at present while we await a government technical consultation which has been promised for the early part of this year. A previous consultation was held on the implementation of the directive between April and June 2019 but the responses to that have yet to be published.
In this article we look at the current position.
What is the 5th AMLD?
The 5th AMLD is the latest EU directive intended to strengthen the preventative framework designed to counter money laundering and the financing of terrorist activity across the EU. The UK was obliged to implement the directive as we remained a member of the EU on 10 January 2020, the date by which the 5th AMLD had to be incorporated into member states’ national law.
The customer due diligence aspects of the 5th AMLD came into effect on 10th January. The implementing regulations did not, however, include provisions relating to trusts, and it was announced that a further technical consultation would be held on this aspect before new trust regulations, as required by the 5th AMLD, are introduced.
This delay is probably due to the fact that trust regulation is perhaps more problematic in the UK due to our common law traditions, and frequent use of trusts for a myriad of purposes, compared to other parts of the EU where trusts are far less common.
How did the 4th Anti-money Laundering Directive affect trusts?
The 4th Anti-Money Laundering Directive (4th AMLD) imposed a number of obligations on trustees including the necessity to keep records on beneficial ownership and to register with the Trust Registration Service (TRS) if the trust had a “tax consequence”. A tax consequence arose if in any one tax year the trust was subject to income tax, capital gains tax, inheritance tax, stamp duty land tax, stamp duty reserve tax or (in Scotland) buildings transaction tax . The requirement to register with the TRS meant that a considerable amount of information had to be provided including details of the settlor, the trustees, the protector (if any), beneficiaries or a class of beneficiaries and any other natural person exercising effective control over the trust. Some advisers have found it difficult to provide all the information needed (for example, national insurance numbers). This is acknowledged in the first consultation on the 5th AMLD which states that the government is minded to reduce the amount of information required, even for trusts with tax consequences.
What will change for trusts under the 5th AMLD?
Under the 5th AMLD the scope of the TRS will be expanded by the requirement to register all UK express trusts, and some non-EU resident trusts, whether or not they have tax consequences. In addition, the government will be required to share data from the TRS with a specified range of persons under certain circumstances.
In the consultation the government acknowledges that UK trusts are at low risk of being used for money laundering or terrorist financing and states that it is “keen to ensure that the registration process is applied proportionately”. Nevertheless the requirement has caused consternation among those involved in advising trustees partly due to the multiple ways trusts are used under our legal system. Trusts are encountered and created by ordinary people every day, whether it is putting an insurance policy into trust or declaring who owns the beneficial interest in a property, and there are many inactive trusts where there is no current adviser. Given this, professional bodies have called for the government to issue detailed guidance on which trusts will be required to register so that this determination does not need to be made by advisers or unrepresented trustees.
Sharing of data on the TRS
The 5th AMLD requires the government to share information on trusts and their beneficial owners with entities covered by anti-money laundering directives (known as “obliged entities” and including credit and financial institutions, lawyers, tax advisers and estate agents) if they have entered into a business relationship with the trust. The government has suggested that in order to speed up this process trustees should themselves share information with obliged entities.
Information will also have to be shared with anyone who has demonstrated a “legitimate interest” for access to information on a particular trust and its beneficial owners. The government has proposed that the definition of legitimate interest should be tied to the directive’s purpose of combatting money laundering and terrorist financing. It seeks to reassure trustees and beneficiaries by stating that those who are using trusts for legitimate purposes “can be confident that their privacy will be protected” and that no information on minor children will be released in any circumstances.
The final category where data is required to be shared is with persons who require information on trusts which have a controlling interest in a non-EU company.
It is hoped that more detail on data sharing will be included in the second consultation, particularly on how this assessment of legitimate interest and the accompanying process will work in practice and whether trustees will have any right of appeal.
The government is apparently considering whether other registration services already in existence for particular trust types could fulfil the registration requirement. There are many unanswered questions and concerns to be addressed as to which trusts will be covered by the new regulations, on data collection and sharing, penalties for non-compliance and time scales. We hope that the second consultation and accompanying draft legislation will deal with these.
While it is true to say that trusts have suffered tax and (many) regulatory changes since 2006 it is premature to predict the death of trusts on the strength of these forthcoming regulations. Trusts perform many varied and useful functions and remain one of the most useful legal vehicles for beneficiary protection.
The promised consultation began on 27 January and we will report on its contents in due course.