13 June 2018
On Thursday, 20th February 2014, the European Parliament voted on amendments to the 3rd EU Money Laundering Directive. An important feature of the current proposals is the suggestion to establish a public register for all trusts held in the EU. If this is implemented, it will be the first time that a lot of information about assets held on trust will be made publically available.
The traditional approach to Anti-Money Laundering
Until recently, anti-money laundering initiatives have about compelling financial intermediaries to hold information about their clients. Traditionally, this has also applied to trusts. Thus, under the 3rd Money Laundering Directive (2005/60/EC), any professional ‘assisting in the creation, operation or management of trusts, companies or similar structures’ is covered by the EU money laundering requirements (Art. 1(3) of the Directive).
Accordingly, these professionals must identify the beneficial owners of trusts, which extends to beneficiaries of discretionary trusts, i.e. trusts where the individuals that benefit from the arrangement have not yet been determined (Art. 3(6)(b)). As the Directive also requires identification of any person exercising control over a structure (see Art. 3(6)(a)), most financial institutions and the legal profession routinely identifies protectors, appointors etc.
As professionals acting in breach of these rules face steep penalties, including jail, the existing rules are adequate to prevent money laundering.
Transparency – a separate front
Since at least 1998, the focus of the international community has been on transparency and the exchange of information. Over the years, this has led to the adoption of tax information exchange agreements and the end of banking secrecy as we knew it. More recently, the Swiss courts have allowed a so-called ‘group request’, i.e. a request of information covering unnamed taxpayers who satisfied certain patterns (such as the use of offshore companies and trusts).
This means that a tax authority that has legitimate concerns about the affairs of any taxpayer, now has the tools to pursue them. This is a good thing.
The novel use of Money Laundering legislation to further transparency
What we are witnessing is a shift in focus. It seems fairly clear that Money Laundering Legislation is no longer used to protect the financial system from the infiltration of illicit funds (including the proceeds of tax evasion) by putting the burden on financial intermediaries, but as a new tool for the collection of publicly available data.
By way of illustration, Italy has recently widened its tax reporting obligations to trusts by introducing a cross-reference to the EU money laundering legislation. This means that going forward it will not be sufficient for a bank/lawyer/notary to keep details of the relevant trust and notify any suspicious transaction to the authorities (which has been the traditional anti-money laundering approach). Instead, the taxpayer will need to report his/her interest in a trust on his/her tax return, even where no tax is due.
The proposal to introduce a register of trusts has wide implications for clients who use lawyers and bank to plan their family affairs through the creation of trusts and other legal mechanisms to smooth the transfer of assets to the next generation and the creation of governance rules around their businesses.
The new legislation, if adopted, would mean that these families’ affairs would become public knowledge, regardless of any tax angle and notwithstanding the enforcement of any regulatory requirements imposed on the families’ bankers and advisers.
What this means is a crass intrusion into the private sphere and family life of common citizens (something that is protected by the European Convention on Human Rights), without any public interest and in violation of the principle of proportionality, which means that a measure should only be adopted if there is not a less intrusive measure that may achieve the same objective.
At a time where citizens fight for their privacy against internet giants and government have been chastened for their indiscriminate collection of date, the new use (or abuse) of money laundering legislation must leave many a European citizen worried.
Recent history has shown that when the political establishment wants to challenge civil liberties (including one’s right to private life), recourse is made to a perceived threat. In the case of surveillance and extraordinary rendition, the threat was terrorism. When it comes to transparency, trusts offer a good example of a perceived threat.
Trusts are not widely known in the continental European constituents of the EU and are automatically associated with elusion and abuse. However, under English law, trusts are part of everyday life. So, for example, under English law the assets of a deceased do not pass automatically to the heirs (as is the case in most continental European countries). Instead, the assets are ‘parked’ with an executor or administrator who is subject to the same rules that apply to trustees and very often wills contain lasting trust provisions. In addition, whenever UK land is held by more than one person, English law imposes a trust.
In other words, trusts are part of the legal mainstay of the UK and any common law countries, but as there are only two common law countries within the EU, there is bound to be unfamiliarity. As the German historian Otto von Gierke said in a 19th century conversation with an English lawyer, ‘I can’t understand your trust’. On the other hand, a French comparative law professor who wrote a book on trusts in 1932 acknowledged that ‘the trust is the guardian angel of the Anglo-Saxon. Impassively he follows him from the cradle to the grave’. What he meant by that is that trusts pervade the English legal system.
However, the continental European constituents of the EU continue to struggle with the trust concept. This has been evident in previous EU work, such as the Brussels Convention of 1968 on the jurisdiction in civil and commercial matters (now replaced by the EU Regulation 44/2001) and the Wills and successions regulation (EU Regulation 650/2012), where famous English lawyers struggled to put the point across their continental European audience.
In a letter dated 14 November 2013 to the President of the European Council, PM David Cameron recognised that ‘I know some want Europe to (…) prevent the abuse of trusts and related private legal arrangements. It is clearly important we recognise the important differences between companies and trusts. This means that the solution for addressing the potential misuse of companies – such as central public registries – may well not be appropriate generally’.
We agree with Mr. Cameron’s position. Companies were created to take part in business life. As such, they interact daily with the market and the public (suppliers, employees, creditors, shareholders, etc.). Accordingly, a public register is an appropriate measure to protect the public. On the other hand, a private family arrangement does not necessarily interact with third parties. This being the case, the rationale of publicising them is questionable.