The EU's Fifth Directive on Anti Money Laundering (AMLD 5) will take effect from 10 March 2020. The Directive aims to bring transparency requirements for trusts into line with corporate transparency initiatives, such as the register of persons with significant control (PSCs).
Information on the UK's trust register will become available to the public, but in some cases a legitimate interest must be established before access is granted. In other cases, there will be no legitimate interest requirement under AMLD 5. A particular concern is that if AMLD 5 is faithfully transposed into national law, there will be unrestricted public access to information on the register where the trust in question has a controlling interest in a company incorporated outside the EEA. This will be coupled with the introduction of additional "trigger events" that will require non-UK resident trusts to be put onto the register.
Among non-UK resident trusts, the use of a non-EEA company as a holding vehicle for investments is very common. The forthcoming changes create serious cause for concern about sensitive information about individuals becoming publicly accessible and being misused.
Triggers for trust registration: what's changing?
Under the current rules, only express trusts that have tax liabilities such as income tax, capital gains tax, inheritance tax, SDRT and SDLT are obliged to register. Non-UK resident express trusts are required to register if they have such liabilities in respect of UK situs assets or UK source income (but otherwise do not).
AMLD 5 will extend the trust registration requirements to:
- all UK resident express trusts,
- all non-UK resident express trusts that acquire UK real estate on or after 10 March 2020, and
- all non-UK resident express trusts that enter into a new business relationship with a UK "obliged entity" on or after 10 March 2020.
There is an exception for non-UK resident trusts that are included on the trust register, or equivalent register, maintained by another member state of the EEA.
"Obliged entities" include financial or credit institutions, lawyers, accountants and other professionals, trust or company service providers, estate agents and art trade intermediaries.
Regarding new business relationships with UK "obliged entities", HMRC have indicated in their consultation paper that registration will only be triggered by the entry into a new business relationship of more than 12 months' duration. It appears that an assessment will need to be made when the relationship commences of whether the relationship is likely to last for more or less than 12 months. It is clear that existing business relationships as at 10 March 2020 won't trigger registration, even where they have already lasted or are expected to last for more than 12 months.
The requirement for a trust to be "taxable" will fall away, so non-UK resident trusts acquiring UK real estate or entering into long-term business relationships with UK "obliged entities" will be required to register, regardless of whether they have UK tax liabilities.
What information is included on the register?
Where a trust is required to register, information must be collected regarding various key individuals, and this information must be submitted to HMRC for inclusion in the register. For each key individual, HMRC must be provided with the individual's full name, month and year of birth, and the extent of the individual's interest in the trust (discussed below). The key individuals are:
- the settlor;
- the trustees, insofar as they are individuals;
- individually named beneficiaries and in some cases beneficiaries within a class;
- protectors, insofar as they are individuals;
- other individuals with significant influence over or control of any companies held by the trust;
- individual providers of legal, financial or tax advice to the trustees.
The "extent of the individual's interest" is generally the entirety of the trust fund, and a value must be provided. However, current HMRC practice, in cases where the trust has been created with nominal initial capital, is to accept the value of that initial capital as the value of the trust fund. Often, therefore, the information on the register tells an interested party who can access it that the individual concerned is connected in some capacity with the trust, but it does not give him or her information about the current value of the trust fund with which the key person is connected.
It is possible however that under the revised regime, the trustees of a non-resident trust required to register after its creation will have to provide the value of the trust fund at the date on which a registration obligation arose.
Current HMRC practice is to require discretionary beneficiaries within a class to be included on the register if they have received a distribution (but not otherwise). Where a distribution has been received, HMRC expect the amount of that distribution to be stated as the "extent of the individual's interest". There is scant basis for this in the regulations.
Access to information on the register: the new regime
The UK government is consulting on the implementation of AMLD 5, and proposes that there should be three rules for public access:
(i) "Obliged entities" would be given access to carry out anti-money laundering checks;
(ii) A person who can prove a "legitimate interest" in the trust data, for the purpose of preventing money laundering or terrorist financing, potentially including an investigative journalist, would be provided access if they pay a fee and provide their details; and
(iii) A person who requests the data of a trust, which has a direct or indirect controlling interest in a non-EEA incorporated company or other legal entity would be granted this on payment of the required fee only.
A "legitimate interest" is established by the enquirer showing:
(a) that they have an active involvement in the prevention of money laundering or terrorist financing; and
(b) that they have reason to believe (not merely speculative) that the trust in question is involved with money laundering or terrorist financing and evidence to underpin their belief.
These appear to be reasonable safeguards. However, where the trust has a controlling interest in a non-EEA incorporated company there is no need to establish a legitimate interest.
The use of companies as holding vehicles beneath non-resident trusts is extremely widespread, and currently almost all such companies are outside the EEA. It is concerning that, if AMLD 5 is faithfully transposed into UK law, third parties will have a right to require the provision of information on the register where the trust in question has a controlling interest in such a company, without needing to demonstrate any legitimate interest in the information. This development may encourage the winding-up of trust-owned companies resident in traditional "offshore" territories.
The statement in the recitals to AMLD 5 that the transparency requirements of the EU anti-money laundering regime should be balanced with the right to personal data protection will be of little consolation to those concerned with this further encroachment on their privacy.