The UK and Maltese Trust Registers and their wider implications STEP Malta conference 13 April 2018 John Riches, RMW LAW LLP
Today s Talk Genesis of Trust Registers What needs to be disclosed and to whom? AML and Tax Information exchange- crossover and degree of disclosure Structuring trust arrangements in light of the new regime AMLD5, Brexit and public access
Genesis of Trust Registers
Lineage 2012 FATF Guidelines AMLD 4/5 Trust and Corporate Registers
FATF 2012 the connecting factor Recommendations 10, 24 and 25 (and their interpretive notes) Recommendation 10- Customer Due Diligence Recommendation 24- Legal Entities Recommendation 25- Legal Arrangements
FATF 2012 Recommendation 10 (1) Recommendation 10 deals with Customer Due Diligence It requires Banks and other persons in the regulated sector to identify beneficial owners of account holders and states :- Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer. Guidance notes state Identify the beneficial owners of the customer and take reasonable measures to verify the identity of such persons, through the following information
FATF 2012 Recommendation 10 (2) Legal entities For legal persons: (i) The identity of the natural persons who ultimately have a controlling ownership interest in a legal person; (ii) To the extent there is doubt as to whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person or arrangement through other means ; (iii) Where no natural person is identified under (i.i) or (i.ii) above, financial institutions should identify and take reasonable measures to verify the identity of the relevant natural person who holds the position of senior managing official.
FATF 2012 Recommendation 10 (3) Legal arrangements: Trusts the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust (including through a chain of control/ownership); Other types of legal arrangements the identity of persons in equivalent or similar positions
FATF 2012 Recommendation 24 Recommendation Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and DNFBPs undertaking the requirements set out in Recommendations 10 and 22. Guidance Competent authorities should be able to obtain, or have access in a timely fashion to adequate, accurate and current information on the beneficial ownership and control of companies and other legal persons (beneficial ownership information) that are created in the country. Countries may choose the mechanisms they rely on to achieve this objective, although they should also comply with the minimum requirements set out below. It is also very likely that countries will need to utilise a combination of mechanisms to achieve the objective.
FATF 2012 Recommendation 25 Recommendation Countries should take measures to prevent the misuse of legal arrangements for money laundering or terrorist financing. In particular, countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries, that can be obtained or accessed in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and DNFBPs undertaking the requirements set out in Recommendations 10 and 22. Guidance Countries should require trustees of any express trust governed under their law to obtain and hold adequate, accurate, and current beneficial ownership information regarding the trust.this should include information on the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust. Countries should also require trustees of any trust governed under their law to hold basic information on other regulated agents of, and service providers to, the trust, including investment advisors or managers, accountants, and tax advisors
Beneficial ownership and transparency for legal entities and arrangements - conclusions from FATF 2012 The FATF 2012 recommendations move away from a strict legal definition of who might be entitled to enjoyment of an asset as a beneficial owner to an expanded concept of a beneficial owner as a person with control Controllers the AML handbook adopts a three-tier test for legal entities : individuals with a material controlling interest in the capital of the company (shares or voting rights) or who exerts control through other ownership means. where no individual exerts control through ownership, any other individual exerting control though other means, e.g. appointment and removal of directors. Where no individual is identified, individuals who exert control through positions held, e.g. strategic decision-taking or senior management positions. Legal arrangements Adopt a 1 stage approach where all parties considered in 3 stage test for legal entities are considered at inception
Corporate beneficial ownership registers (UK as example) EU Fourth Anti-Money Laundering Directive approach derives from FATF 2012 A person with significant control (a PSC ) by reference to a company is defined by reference to an individual holding: ownership of 25% shares ownership of 25% voting rights ownership of rights to appoint or remove directors significant influence or control Control of trust or partnership: trustees or partners would be PSCs if individuals Look through corporate entities until you find an individual Build up approach where quest for natural person occurs only if cannot locate an individual with requisite ownership stake Final stage is to identify senior managing official of ultimate corporate entity if no natural person identified
What Needs to Be Disclosed and to Whom?
Legislation FATF 2012 Recommendations EU Fourth Anti-Money Laundering Directive (EU) 2015/849 ( 4 AMLD ) UK Legislation Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the 2017 MLR ) The 2017 MLR became law on 26th June 2017 Maltese Legislation Trusts And Trustees Act (Register Of Beneficial Owners) Regulations The TTA became law on 1st January 2018.
Applies to: Who is registrable? UK s5(2) 2017 MLR Malta - s(2)(1)(e) TTA UK 2017 MLR 1) UK Express Trusts; and 2) Non-UK Express trusts Which generate a tax consequence in the requisite year. Settlor Trustees Named beneficiaries Beneficiaries who have received a distribution from the trust. Anyone who exercises ultimate control over the management of the trust. Maltese Trust Regulations Only express trusts with a Malteseresident trustee which generate a tax consequence Settlor Trustees Named beneficiaries Protector Anyone exercising ultimate and effective control over the trust by any means, including: any other person whose consent is to be obtained; or Whose direction is binding in terms of the terms of the trust instrument or of any other instrument in writing, for material actions to be taken by the trustee.
Trustee obligations Trustee must register: UK 2017 MLR Maintain an up-to-date register of the Beneficial Owners of the Trust and Advisers to the Trust; Report the market value of the Trust assets at the time of registration (but not subsequently), including both UK and non-uk assets its status as a trustee; the Beneficial Owners of the Trust; and any change of Beneficial Owners (within 14 days of the change occurring). Maltese Trust Regulations Within fourteen days of being appointed as a trustee of an express trust, submit a declaration on the beneficial ownership of the trust. its status as a trustee; the Beneficial Owners of the Trust; and any change of Beneficial Owners (within 14 days of the change occurring).
Declare Beneficiaries? Information to be declared UK 2017 MLR Declare named beneficiaries Declare discretionary beneficiaries when they receive a benefit. Full name and date of birth; Details of the individual s role(s) in relation to the Trust; and National Insurance number or unique taxpayer reference or address and passport for non-residents Maltese Trust Regulations Declare named beneficiaries Name Date of birth Nationality Country of residence Official identification document number indicating the type of document and country of issue; Role of beneficial owner
UK 2017 MLR Maltese Trust Regulations Accessible to A private register UK law enforcement authorities EU and foreign law enforcement authorities Tax authorities A private register Maltese law enforcement authorities EU and foreign law enforcement authorities Tax authorities
Meaning of control UK Trust Register FATF 2012 recommendation 10: identify any other natural person exercising ultimate effective control over the trust No definition of natural persons exercising effective control in CRS context not clear whether this includes protectors in relation to a FI (as opposed to a passive NFE) In the context of the 4 AMLD and the trust register, HMRC have stated: control means a power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law to dispose of, advance, lend, invest, pay or apply trust property; approve proposed trust distributions; vary or terminate the trust; add or remove a person as a beneficiary or to or from a class of beneficiaries; appoint or remove trustees or give another individual control over the trust; direct, withhold consent to or veto the exercise of a power mentioned in the paragraphs above
UK ultimate control vs Malta material actions a power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law to (a) dispose of, advance, lend, invest, pay or apply trust property; (b) vary or terminate the trust; (c) add or remove a person as a beneficiary or to or from a class of beneficiaries; (d) appoint or remove trustees or give another individual control over the trust; (e) direct, withhold consent to or veto the exercise of a power mentioned in sub-paragraphs (a) to (d). Any person whose consent must be obtained or whose decision is binding for material actions to be taken by the trustee: a) amendment of the trust instrument; b) addition or removal of any beneficiary, or any person from a class of beneficiaries, or any action affecting the entitlement of a beneficiary; c) the appointment or removal of trustees or protectors or to give another individual control over the trust; d) the acceptance of an additional settlor as may be applicable in terms of the terms of the trust instrument; e) the change of the Proper Law of the trust; f) the assignment or transfer of all or most of the assets of the trust or the termination or revocation of the trust
Corporate entities look through rule Where a corporate entity is involved in a Trust in any capacity (including with respect to both settlors and beneficiaries), there is obligation to look through that entity and identify the individual or individuals who control it; those individuals are subject to disclosure in their own right
HMRC guidance on the meaning of control What is meant by any person exercising effective control over the trust? Examples of such persons include the following: A person who can compel the trustees to dispose of, advance, lend, invest, pay or apply trust property/assets. A person who can compel the trustees to vary or terminate the trust. A person who can compel the trustees to add or remove a person as a beneficiary to or from a class of beneficiaries. A person who can compel the trustees to appoint or remove trustees. A person who has the power directly to appoint trustees, or to add or remove beneficiaries
Foreign Trust registration on UK Trust Register UK Trust Register extends to foreign trusts which have a reporting obligation for a relevant UK Tax These taxes are Income and Capital Gains Tax Inheritance Tax Stamp Duty Land Tax or Stamp Duty Reserve Tax In year of first registration, the date is 5 October following the conclusion of the tax year not 31 January in the following year. This has been extended to 5 December in 2018. In subsequent years, the filing needs to be made by normal 31 January deadline Penalties apply for late registration Note that where a Trust holds a UK asset at 10 year charge or a UK asset that generates UK source income and trustee must file UK tax reture, obligation to register requires disclosure of entire trust fund For trusts with non-uk domiciled settlors, preferable to appoint revocable interest to beneficiary and dispose of directly held UK assets so that obligation to file does not arise
Foreign (Maltese-resident) trust holds an offshore company in the UK, with 50m USD of assets, inc. 1m USD appt. in central London. Trust created on 1st April 1998. Under UK IHT rules introduced in April 2017, look through the Maltese company to charge IHT on 20 th anniversary of trust, 1 April 2018. Obligation to pay IHT at a rate of 0.6% of the value of the apartment as at 1 April 2018 (tax only computed from April 2017). IHT liability of 6000 due at the end of October 2018. Maltese Trust Offshore Company $50m Need to report register trust for UK TRS by 31 January 2019 providing full market-value of entire trust fund. Once information filed, remains on register until 2028 even though no need to file again until that point unless trust is wound up in the interim or the UK property is sold. $1m London property
Maltese Regulations: Only trusts with a Maltese-resident trustee. Declare the nature and extent of a beneficiary s interest (including the suspension of the trustee s duty to inform beneficiary of his/her right to benefit). With regard to discretionary beneficiaries, the information to be declared includes the: class of beneficiaries; the name of the class and the members declared; a trustee must declare a new child or spouse within 3 months of the birth or marriage. A trustee who has submitted a declaration of beneficial ownership for any trust in terms of regulation 3 or regulation 7 shall, for every such trust, submit annually thereafter, and by not later than 31st January of each year, a declaration confirming that there have been no changes to the beneficial ownership of the trust in the previous calendar year.
AML and Tax Information exchange- crossover and degree of disclosure
CRS - connection with FATF 2012 CRS Commentary states :- 132. Subparagraph D (6) sets forth the definition of the term Controlling Persons. This term corresponds to the term beneficial owner as described in Recommendation 10 and the Interpretative Note on Recommendation 10 of the Financial Action Task Force Recommendations (as adopted in February 2012), and must be interpreted in a manner consistent with such Recommendations, with the aim of protecting the international financial system from misuse including with respect to tax crimes. The Controlling Person concept will therefore evolve as FATF refines its guidance on beneficial ownership over time
Comparison with CRS Control definition is much wider than CRS Overlap with concept of Natural Person Exercising Effective Control Not only protectors but other indirect power holders will need to be named Possible convergence with CRS over time
Contrasting disclosure under CRS and UK trust register Assumptions: The settlor is deceased A discretionary trust No current distributions Large class of beneficiaries named in the trust deed (some named and some identified by reference to a class) No protector, but an individual holds the power to appoint a protector The Trust is a Financial Institution
Contrast disclosure under CRS and UK trust register Trust CRS (Trust is FI) Name of Trust Jurisdiction of trustee residence UK Trust Register Name of Trust Date of creation Place where the trust is administered Contact address for the trustees Settlor No disclosure Name of settlor Beneficiaries Protector Discretionary beneficiaries who receive a distribution Name, address, jurisdiction of residence, TIN(s) and date and place of birth None, Consider whether person holding power to appoint protector is NPEEC Disclose all discretionary beneficiaries, including those referred to in a letter of wishes List the description of the class of beneficiaries until a member of this class of beneficiaries receives a trust distribution; then, this beneficiary becomes registrable under his or her own name Consider whether person holding power to appoint protector is NPEEC
Contrast disclosure under CRS and UK trust register Trust Fund Professional Advisers CRS (Trust is FI) No disclosure of the total value in absence of the living settlor, fixed income beneficiary or NPEEC If the total value is disclosed, it is based on the balance sheet and not current market value No disclosure UK Trust Register Statements of accounts for the trust, describing the trust assets and identifying the value of each category of the trust assets All advisers providing legal, tax or investment advice
Structuring Trust Arrangements In Light of the New Regime
Structure Beneficial class consider narrower class with power to add beneficiaries at a later stage UK guidance requires persons named in a Letter of Wishes to be identified if known to Trustees. Will settlors withhold letters of wishes? Use of testamentary powers to add beneficiaries Preserves certainty for settlor post death but limits extent of register disclosure until power exercised Fragmentation Hold assets that might trigger requirement to register in separate trusts
Governance Arrangements Governance arrangements: need to be more thoughtful about who is given material powers, especially beneficiaries and those closely connected with the trust. Consider using professional protectors as an alternative mechanism to achieve reasonable oversight of the trustee role without influence of undue family control. Potential use of indirect mechanisms in hands of family such as appointment (but not removal) powers over protectors may still require registration
AMLD5, Brexit and public access
Fifth Anti-Money Laundering Directive Final position agreed in December 2017 Modified form of public access persons who are able to demonstrate a legitimate interest with respect to money laundering, terrorist financing, and the associated predicate offences, such as corruption, tax crimes and fraud NGOs and investigative journalists with an anti-corruption profile could apply to court for access Important to note however that full public access will apply to any non-eu companies controlled by EU resident trusts on basis the information on these This would appear to apply to typical offshore holding company structure Requirement to interlink the various EU registers by 2021 Requirement to provide mechanisms for verification of data
5 AMLD: Trusts Established or Residing Outside the EU Proposed new Article 31(3a) of 5 AMLD: "Member States shall require, that the beneficial ownership information of express trust and other types of legal arrangements when having a structure or functions similar to trusts shall be held in a central beneficial ownership register set up by the Member State where the trustee of the trust or similar legal arrangement is established or resides. Where the place of establishment or residence of the trustee of the trust or similar legal arrangement is outside the Union, the information referred to in paragraph 1 shall be held in a central register set up by the Member State where the trustee enters into a business relationship or acquires real estate in the name of the trust or similar legal arrangement. Some commentators have noticed that: Therefore, trusts should register in the Member State where the trustee is established or resides. If the trustee resides outside of the EU, then the trustee must register in the Member State where s/he enters into a business relationship or acquires real estate in the name of the trust. e.g. if an Irish trust purchases a property in France, the beneficial ownership would be registered on the French register.
5 AMLD: Trusts Owning a Controlling Interest in a Non- EU Company Proposed Art 31(4) of 5 AMLD: "The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. It may also allow timely access by obliged entities, within the framework of customer due diligence in accordance with Chapter II. Member States shall notify to the Commission the characteristics of those national mechanisms to ensure that the information on the beneficial ownership of a trust or a similar legal arrangement is accessible in all cases to: a) competent authorities and FIUs, without any restriction; b) obliged entities, within the framework of customer due diligence in accordance with Chapter II; c) any person or organisation that can demonstrate a legitimate interest; d) any person that files a written request in relation to a trust or similar legal arrangement which holds or owns a controlling interest in any corporate or other legal entity other than those referred to in Article 30(1), through direct or indirect ownership, including through bearer shareholdings, or through control via other means. Some commentators have noticed: Access to the register of trusts must also be granted to any member of the public in relation to a trust which holds or owns a controlling interest in a company that is not incorporated in the EU (so would not be registered on any Member State s register of companies). If a trust owns a controlling interest in a non-eu incorporated company, then access to that State s register of trusts will be open to the public, meaning the legitimate interest test will not apply. e.g. if an Irish trust owns a controlling interest in a Cayman company which enters into a transaction in France, then the French register of trusts will be open to the public. On the other hand, if an Irish trust owns a controlling interest in a French company, then the French register of trusts will remain subject to the legitimate interest test. The difference is that the French company s beneficial ownership information will already be on the French register of companies which will be open to the public. Consequently, the outcome is that any person using companies or trusts and dealing with a EU State must be prepared for their beneficial information to be potentially publically transparent."
EU 4AMLD Agreed position announced on 19 December 2017 The Amendments: In Member States, companies beneficial ownership registers will be public. As the UK s beneficial ownership register is already publicly accessible, this is not a significant amendment. However, Member States will have to introduce verification mechanisms to beneficial ownership registers to enhance the accuracy and reliability of the information contained. Moreover, the beneficial ownership registers will be interconnected between Member States. The information regarding the beneficial owners of trusts will be accessible to competent authorities, Financial Intelligence Units and regulated professionals subject to AML rules (e.g. banks and lawyers), as well as anyone else who can demonstrate a legitimate interest. At the moment the definition of this phrase appears to be left to each Member State to decide, although non-binding recitals refer to the good work carried out by NGOs and civil society.
Fifth Anti-Money Laundering Directive - Brexit UK Trust Register currently has no provision for any form of access except to competent authorities In Brexit transition, recent Parliamentary report stated 'The transposition date for most of the Directive, including the changes to the Register of Companies, will be 18 months after its publication in the Official Journal. If the legislation is adopted in April 2018 and published in the Official Journal in May, that date will fall in November 2019. The modified Register of Trusts would then have to be up and running by January 2020, and the central register of bank accounts by June 2020. The interconnection of the registers between Member States via the Central Platform would be scheduled to go live in January 2021, depending on the speed with which the necessary technical systems can be put in place.
Fifth Anti-Money Laundering Directive - Brexit continued Although these dates all fall after the UK's projected exit from the EU in March 2019, it now appears likely the Government will agree to a post-brexit transitional period during which EU law would continue to apply in the UK as if it were still a Member State. In those circumstances, the new AMLD would have to be implemented if its transposition dates occur within that period (which, considering the Prime Minister has said the transition is likely to be "around two years", is likely to be the case for all three types of register).'
Conclusions
Conclusion Trust registers were initially conceived as an AML measure to provide greater clarity on ultimate beneficial ownership. In the UK, the entity with responsibility for the Trust Register is the UK Tax Authority (HMRC). Trust Register has assumed a hybrid purpose where it is now used, in effect, as a digital mechanism for capturing and storing information on trusts for tax purposes in UK. Going forwards, it seems likely that, alongside CRS, trust registers will be used by tax authorities for their own purposes even though initial intent was AML-related.
Conclusion Development of Trust Register will significantly expand scope of disclosure compared with CRS in some respects Limited public access on trust registers in EU is a positive outcome but for how long? Potential for this AML process to also influence extent of tax information exchange under CRS