On 11 March the European parliament voted in favour of revisions to the European Anti-Money Laundering Directive. The new directive, known as the 4th Anti-Money Laundering Directive, will be the subject of negotiations with the European Commission and Council of Ministers in the second half of 2014.
The draft rules introduce far-reaching changes to the requirements for due diligence and, in particular, to the regulation of trusts by member states. Perhaps the most controversial of the new rules is the obligation of member states to set up public central registers listing information on the ultimate beneficial owners of various legal arrangements, including companies, foundations and trusts.
This is in an effort to combat the widely acknowledged (and accepted) view that anonymous shell companies and other corporate vehicles are commonly used to conceal the proceeds of corruption, tax evasion and other crimes. These new rules are a further step to toughen up the current anti-money laundering rules in the EU to make such actions more difficult.
Register of beneficial owners
Under the new rules, EU member states would be required to create central public registers specifying who is behind a given trust or corporate entity in the EU. The central registers will be interconnected throughout Europe so that any individual can access this information, subject to identifying themselves, via an online registration form.
In order to comply with data privacy laws, the information available on these registers would be basic, including full name, birth date, business address and a description of how the ownership or control is exercised. Details of the subject of the trust would not be available.
Rationale behind the proposals
Economic and monetary affairs committee rapporteur Krišjanis Karinš commented: ‘For years, criminals in Europe have used the anonymity of offshore companies and accounts to hide their financial dealings. Creating an EU-wide register of beneficial ownership will help to lift the veil of secrecy from offshore accounts and greatly aid the fight against money laundering and blatant tax evasion. Today is a good day for law-abiding citizens, but a lousy day for criminals.’
The directive’s proposed changes to the regulations governing trusts have raised concerns over privacy and security. To date, such information has remained private, and no EU countries have allowed such information to be disseminated publicly, on the basis that (among other reasons) trusts may often be used to hold money for family members and for estate planning purposes.
Furthermore, critics have argued that the 3rd Anti-Money Laundering Directive (2005/60/EC) is already sufficient to prevent wrongdoing because, for example, article 2 stipulates that the ‘directive shall apply to… notaries and other independent legal professionals when they participate… in any financial or real estate transaction, or by assisting in the planning or execution of transactions for their client concerning… the creation, operation or management of trusts, companies or similar structures… .’
Article 39 of the 3rd directive sets out guidance for member states to impose their own punishments for infringements.
Moreover, article 8(1)(b) of the 3rd directive specifies that ‘customer due diligence’ shall comprise ‘identifying, where applicable, the beneficial owner and taking risk-based and adequate measures to verify his identity so that the institution or person covered by this directive is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts and similar legal arrangements, taking risk-based and adequate measures to understand the ownership and control structure of the customer’.
Many professionals concerned with the establishment of UK trusts believe that those existing regulations are fit for purpose. On 14 November 2013, David Cameron (pictured) wrote a letter on the subject to the president of the European Council, Herman Van Rompuy.
In the context of preventing ‘abuse of trusts and related private legal arrangements’, Cameron acknowledged that it is clearly important we recognise the differences between companies and trusts. He suggested that the solution used to protect companies such as central public registries ‘may well not be appropriate generally’.
Perceptions of trusts do, of course vary between member states. Trusts are used far more extensively in the UK than in jurisdictions such as Germany and France. A lack of familiarity with trusts has, it has been argued, led to hostility towards them among some member states, where trusts are automatically associated with tax evasion and illegitimate concealment of assets.
However, advocates of the new measures have insisted on the inclusion of trusts in the new directive. Judith Sargentini, a Green Dutch MEP, has been one of two MEPs to facilitate the European parliament’s response to a 2012 European Commission proposal that introduced the public registers scheme.
Sargentini has said that if trusts had been excluded from this legislation, ‘it would immediately have made them a perfect vehicle for criminals wishing to avoid taxation or launder their illegal money into the financial system’.
Nonetheless, misgivings persist. There is little doubt, in the UK at least, that the new regulations will result in higher costs for investors and settlors of trusts. The process of establishing a trust will become more expensive and time-consuming, and less flexible. Although the legislation contains safeguards, there have been objections on the grounds of privacy. Protection ought to be offered, it is argued, to those who for legitimate reasons do not want details of their assets (such as family assets) to be publicly available.
The implications of the incorporation into national law of the proposed regulations approved by the European parliament on 11 March are far-reaching.
Anyone advising those setting up a trust would have to consider registration obligations for beneficial ownership in the context of both trusts and corporate structures. This may not be entirely straightforward. Complications may arise, for example, when a company’s shares are themselves held in trust, and the beneficial owners of the trust and the company are identical.
The number of active trusts in the UK is believed to exceed 1.5 million. The implications for the protection by advisers of client confidentiality are considerable.
The new regulations may place significant extra burdens on legitimate companies, particularly those with complex corporate structures. The Law Society has cautioned that subsidiaries may have to be updated daily on share ownership changes across groups of companies.
For both claimants and defendants, the conduct of certain types of commercial litigation will be affected.
For those issuing multi-jurisdictional claims involving tracing and the imposition of constructive trusts, the new measures may make the conduct of such litigation easier. Within the EU at least, the scope to conceal assets behind trust structures should be reduced.
Claimants may well be in a better position to judge which entities and assets to pursue. An unintended consequence of the 4th Anti-Money Laundering Directive may therefore be to further encourage the establishment of trusts in jurisdictions beyond the new measures.
The UK government-led research published by the Society seems to suggest that the most vocal opposition within the EU will come from the UK. Only time will tell how effective the proposals are, and what they will cost.
Rebecca Meads is an associate (employed barrister) in the business crime department and Emma Jarvis an associate in the civil fraud, commercial litigation and asset recovery department, at Peters & Peters, London