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5th Money Laundering Directive (5MLD)

Just as the UK's Trust Register beds in and we get used to the anti-money laundering (AML) procedures required by the EU's 4th Money Laundering Directive, a 5th Directive has been passed which will introduce several important changes early next year.

The government is likely to implement this latest Directive whatever happens with Brexit, as the UK shares the EU's objectives on the prevention of money laundering and terrorist financing. To that end, the Treasury has recently concluded a consultation on how 5MLD should be transposed into UK national law. We concentrate here on the implications for Trustees.

Current obligations of Trustees

The 2017 Money Laundering Regulations introduced a threefold set of obligations on Trustees of relevant trusts:

  • Record-keeping: to undertake their own due diligence and record-keeping requirements in relation to "beneficial owners".
  • Disclosure: on request, to disclose and update beneficial ownership information to law enforcement authorities and "relevant persons" required to conduct AML procedures when Trustees enter into transactions or form business relationships with "obliged entities" (such as banks, investment managers, lawyers and accountants).
  • Registration: for relevant trusts that are taxable in the UK, a requirement to report beneficial ownership information to HM Revenue and Customs (HMRC) using their online Trust Registration Service (TRS) to be kept on a Trust Register. At present, the Register is only accessible to HMRC and law enforcement agencies and is not open to public inspection.

Who are "beneficial owners"?

The definition of beneficial owners of trusts is extensive and bears no relation to the true meaning of the term. Its scope goes further than that for other legal entities such as companies.

For these purposes, "beneficial owners" include the settlor, trustees, beneficiaries, any class of persons in whose main interest the trust operates (where not all of the individuals benefitting have been determined) and anyone else who has control over the trust. "Control" is widely defined and can include protectors as well as attorneys acting for trustees.

Other "potential beneficiaries" not included in the trust instrument (such as individuals referred to in a document from the settlor, e.g. in a letter of wishes) must also be disclosed on the Trust Register and on request to law enforcement agencies.

What is changing?

The definition of beneficial owners is not changing but we hope that the government might provide more guidance on whose details need to be disclosed, particularly in relation to the distinction between individual beneficiaries - who must be specifically identified - and those who are members of a class - where a class description will suffice. The principal changes are:

Expansion of the Trust Register

5MLD requires all express trusts to register, whether or not they are taxable trusts. In theory this could lead to a very significant increase in the number of trusts required to register. It would catch all UK resident express trusts including some fairly ordinary, everyday arrangements which many people may not realise involve a trust (jointly owned property, bank accounts for minors, pension death benefits and life insurance policies, for example). The government is aware of the scale of the issue and is looking at ways to limit the impact of this change.

Trusts resident outside the EU will need to register not only if they are taxable here (under existing rules), but also if they form a business relationship (expected to last for 12 months+) or acquire real estate in the UK on/after 10 March 2020.

HMRC are going to conduct a further consultation on the detail of the new TRS, including new deadlines (they are proposing just 30 days for new trusts or changes to existing trusts). This will also look at the data collected under TRS, which may be reduced, but for individuals will include their name, date of birth, nationality, country of residence and role in the trust. Further clarity is needed on how the business relationship rule will work because this will have significant implications for some trusts, as explained below.

Data sharing

The Trust Register is not being opened generally to the public but 5MLD requires the government to consider any request for information about a trust or its beneficial owners from anyone who claims to have a "legitimate interest" in the information. Legitimate interest is not defined in 5MLD and so the government has scope to determine its ambit. It is proposing to limit disclosure to those with an active involvement in AML or counter-terrorist financing who have evidence of money laundering or terrorist financing.

The requirement to demonstrate a legitimate interest will not apply, however, to trusts which hold a controlling interest in an offshore company (or other legal entity such as a charity) that is not registered on any EEA Member State's corporate beneficial ownership register. Controlling interests for these purposes are those holding 25% or more of the shares or voting rights or other significant influence or control. All of the beneficial ownership information about these trusts will be available to anyone in the world, with no requirement to demonstrate an interest in or suspicion of money laundering or terrorist financing. This change to the rules is a major concern, particularly for offshore trusts which often hold assets via offshore corporate vehicles. It remains to be seen how the government will implement this aspect and whether they will be mindful of the damage this may do to the UK's trust and financial services industries.

New obliged entities

Businesses required to conduct customer due diligence already include estate agents, lawyers, accountants, banks and other financial institutions but the scope is being expanded to include letting agents, tax advisers, and art intermediaries (e.g. galleries, dealers, auction houses).

This means trustees will need to disclose beneficial ownership information and changes to an even greater number of entities with whom they do business. There will also be a new requirement for Trustees to provide an excerpt of the Trust Register to obliged entities, but the detail on this is yet to be scoped out.

We continue to closely monitor developments and will report further once the precise changes are known.

July 2019

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DX 53 Chancery Lane

Telephone: +44 (0)20 7629 7411
Fax: +44 (0)20 7629 2621
Email: bh@boodlehatfield.com

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