The Law Society and the Society of Trust and Estate Practitioners (STEP) are engaged in intensive lobbying of members of the European Parliament amid fears that the proposed third money laundering directive will have a 'fundamental impact on trusts, far beyond the objectives of combating money laundering'.

In a letter to MEPs following consultation with STEP, the Law Society argued that the directive - which imposes a new requirement to identify the beneficiaries of a trust, rather than just the settlor or the trustees - fails to distinguish between the risks involved in complex offshore trusts and trusts used in everyday life. Low-risk situations where trusts are used include wills, charities, pension funds, the holding of joint property, employee savings products and insurance products.


The Society warned MEPs that if the directive is implemented in its current form, 'UK consumers will be faced with additional costs and inconvenience which is not justified. Equivalent products from other member states will not be subject to the same obligations [because they are not based on trusts], thereby creating competitive distortions.'


Hurst: effect on protection

It also suggested that applying trust regulation to international corporate bonds - where trusts are used as a vehicle to allow a large number of creditors to hold security over an asset - would be 'a tremendous blow' to the City of London and the UK economy.

The Society called for any legislation to be risk-based and proportionate in its impact on business and practitioners. 'Our impression is that some other member states are openly hostile to trusts, mistaking them as vehicles for tax evasion rather than legitimate succession planning,' it concluded, adding that it feared that the UK and Ireland will be out-voted in the process of comitology - the EU's committee stage for assessing draft legislation.


Richard Bark-Jones, partner at Merseyside firm Morecrofts and a member of the Law Society's wills and equity committee, said it is important to influence the drafting of the directive, rather than waiting until it is implemented in the UK. The government went further than the second money laundering directive strictly required when it was implemented through the Proceeds of Crime Act 2002, he noted.


Mr Bark-Jones said: 'Our bitter experience is that the government will "gold-plate" the legislation, rather than water it down.'