The latest publications from HMRC on the Fifth Money Laundering Directive (‘5MLD’) contain welcome clarifications for practitioners and provides responses to a number of concerns. Launched in January of this year, HMRC’s technical consultation sought views on the amendments to the UK’s Trust Registration Service (‘TRS’), required to transpose the 5MLD into domestic law (which we cover in our previous article here). Having published their formal response to the consultation on 15 July 2020 (the ‘Response Document’), together with a Statutory Instrument known as The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 (the ‘Regulations’), we look at this in detail and ask where this leaves us now.
Expansion of out of scope list
Many commentators highlighted that the government’s approach to the revised TRS should be risk-based and proportionate, in line with that of the Financial Action Task Force and the 5MLD itself, which states that measures taken to ensure the increased transparency of trusts “should be proportionate to the risks.” There was wide spread concern that the proposed amendments to the TRS regime were untargeted, would be difficult to manage for many involved, and would require enormous numbers of low risk trusts used in a variety of ordinary areas of personal and commercial life in the UK to be registered. Practitioners and trustees alike will therefore be glad to see that the government now recognises that, in certain areas, there is good justification for expanding the categories of trusts that are not required to register on the TRS (either because they are regulated elsewhere, or the risk of the trust being used for money laundering and/or terrorist financing is minimal). Further details of the parameters of these exemptions is expected to be provided in guidance shortly. In the meantime, the Regulations set out an expanded list of ‘out of scope’ trusts which now includes, in addition to those trust arrangements already covered in the previous draft regulations, the following:
1. Trusts imposed by court order
2. Trusts holding property with a value not exceeding £100 created before the date on which the Regulations come into force (so called ‘pilot trusts’)
3. Trusts taking effect on death where (i) the trust is holding property comprised in the deceased’s estate, and less than two years have passed since that person’s death, or (ii) a trust holding only death benefits from a life insurance policy, and less than two years have passed since that person’s death
4. Trusts for vulnerable beneficiaries or bereaved minors
5. Co-ownership trusts, where the trustees and beneficiaries are the same persons
6. Certain trusts used as part of financial markets infrastructure
7. Certain trusts incidental to commercial transactions
8. Personal injury trusts
9. Save as you earn schemes and share incentive plans
Although the responses to the technical consultation suggested that bare trusts should be generally excluded on the basis that there is no substantial difference between holding assets using a bare trust arrangement and by way of direct ownership, the government felt that a blanket exclusion of bare trusts would not be appropriate; however it has recognised that certain ‘bare trusts’ (such as bare trusts used when setting up bank accounts for minors or used for travel deposit payments) should be included in the ‘out of scope’ list (and has indeed done so – see 6 and 7 above).
Clarification provided on ‘business relationships’
Whether or not the existence of a UK business relationship would trigger a requirement to register on the TRS was a point of contention. The provision of services to overseas trust structures is a key part of the work of many service providers in the UK. Commentators highlighted that the previous proposals would likely result in offshoring and potentially increase anti-money laundering (‘AML’) risks as non-EEA trusts would be dis-incentivised from engaging UK advisers (or UK investment managers or custodians). The proposals were also seen to be harmful to the businesses of UK lawyers, tax advisers and accountants, bankers, investment managers and other financial service providers, who otherwise help apply one of the most stringent AML compliance frameworks in the world.
The Response Document confirms that, for TRS purposes, ‘business relationship’ means a business, professional or commercial relationship that arises out of the professional activities of the obliged entity and that is expected, at the time the relationship is established, to endure for a period of time – in the government’s view, at least 12 months. The government has opted to take a measured approach and will only require non-UK trusts to register on entering a business relationship with a UK obliged entity if the trust has at least one UK resident trustee. Importantly, this means that non-UK trusts will not be required to register if their only link to the UK is through a business relationship with a UK based adviser. This will be music to many people’s ears. However, to correspond with changes planned to be introduced under the Registration of Overseas Entities Bill, any non-UK trust that acquires land or property in the UK will be required to register. These trusts will be listed on the TRS, but will not be subject to the third-party data sharing provisions unless they are required to register under one of the other categories.
Confirmation of registration deadlines and penalties for non-compliance
The government believes that the registration deadline of 10 March 2022 (applicable to many trusts) will be sufficient to allow existing trusts to register on the TRS for the first time, or update their records if they have already registered. It also believes that the 30-day deadline for new registrations and updating of information is sufficient (being comparable with reporting deadlines imposed on companies for reporting details of “People with Significant Control” to Companies House). It is not, however, deemed appropriate to require trusts created by Will to be registered within 30 days of the date of death. These trusts will not be required to register on TRS provided that they only receive assets from the deceased’s estate and are wound up within two years of death.
Recognition is given to the need for effective and proportionate penalties for failures to register and keep information up to date on the TRS. There is also an acknowledgement that the penalty regime needs to reflect the extensive use of trusts throughout the UK and the fact that, initially, many lay trustees may not be aware of their new obligations. We understand that the government is considering how best to raise awareness. There will be no changes to the proposed penalty regime for now, although the government is reconsidering how to address deliberate failure to meet TRS reporting requirements.
Further thought given to the need to balance transparency and disclosure
Under the new TRS regime, data will be shared via three different channels. First, an application process for ‘legitimate interest’ and ‘third country entity’ requests. Second, a mechanism for obliged entities to receive certain information, namely proof of registration, or an extract of the register. Thirdly, the existing and continuing arrangements for law enforcement agencies.
Many commentators sought further reassurances regarding access to information held on the TRS. The Response Document recognises the need to balance the right of privacy for those who have their personal information held on the register with the need for transparency in order to address money laundering and terrorist financing. The government believes that the legitimate interest application process strikes the right balance between these conflicting demands (and this certainly appeared to be the opinion adopted by a number of commentators).
Non-UK trusts which are registrable under the 5MLD will be required to provide additional information, at the time of registration, if they hold a controlling interest in a non-EU entity and, more importantly, information on the relevant Trust and non -EU controlled entity will be more easily accessible through the so called ‘third county entity request’, which does not require the ‘legitimate interest’ hurdle to be overcome. There have been discussions as to the percentage threshold relating to the ‘controlling interest’ and, after much debate, the Regulations indicate that this should be 50% (as opposed to 25% which was initially suggested). This change of heart is also very welcome.
The government intends that information will not be shared where doing so would lead to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation; or where the beneficial owner is a minor or otherwise legally incapable. We await further details on the process the government will introduce to scrutinise access requests (both in respect of the legitimate interest and third country entity application processes). The exact costs of the administration fee applicable to both these applications will be confirmed at a later date.
Where does that leave us?
The responses to the January 2020 consultation have clearly informed the Regulations, which have been laid before the Parliament for consideration. The effect of the expanded TRS will be felt by many – thousands of trustees (often lay, and likely to be unaware of their new obligations) will be obliged to collect details for the UK’s revised trust register. Practitioners and professional bodies have already stressed to HMRC the importance of a fully functioning, user-friendly TRS in time for the commencement of the expanded registration requirements under 5MLD. The Response Document acknowledges that trustees, professionals and other stakeholders will need clarity on the registration requirements of the trusts they are responsible for and has confirmed that detailed guidance will be provided to assist in the registration process in advance of the point at which the register is ready for use. There is no suggestion in the Response Document that commencement dates will be delayed due to COVID-19 despite earlier confirmations that HMRC was “carefully considering” representations it had received on this point earlier in the year.
Hopefully we are nearly there and good preparation cannot go amiss. Trustees and their agents should continue to watch this space, whilst taking steps to collect the information required under the new regime.