The EU Parliament has voted to introduce a trust registry as part of recent amendments to the Fourth Anti-Money Laundering Directive.
It is striking the amendments are included in legislation directed at tackling money laundering. Until recently, AML initiatives have been about compelling financial intermediaries to hold information about their clients – the well known KYC requirements.
Under the Third 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)). These professionals must identify the beneficial owners of trusts, including beneficiaries of discretionary trusts (Art. 3(6)(b)). The Third Directive also requires identification of any person exercising control over a structure (Art. 3(6)(a)) so most financial institutions and legal profession involved in trust work routinely identifies protectors, appointors etc.
On a separate but related front since at least the late 1990s, the focus of the international community has been on transparency and the exchange of information which this has led to the wide adoption of tax information exchange agreements and the end of traditional banking secrecy.
The focus of AML legislation appears now to be to protect the financial system from infiltration by the proceeds of crime and tax evasion but also as a new tool for the collection of data.
The EU’s proposal to introduce a register of trusts will have wide reaching implications for clients who use lawyers and banks to plan their family’s affairs through the creation of trusts. Trusts are often the vehicle of choice in order to smooth the transfer of assets to the next generation and the creation of governance rules around their businesses.
The proposed new EU legislation, if adopted, would mean that 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 amounts to in practice is an intrusion into the private sphere and family life of EU citizens without any case specific public interest. The proposal’s compliance with the principle of proportionality is also questionable. Could there be a more intrusive measure that could achieve the same object than a publicly open register of beneficial interests?
The proposed public registry also seems starkly at odds with EU citizens’ recent fight for their privacy against internet giants and government have been chastened (even by EU institutions) for their indiscriminate collection of data. The new use (some have said abuse) of AML legislation to let daylight in upon private financial arrangements might leave a European citizen at best confused, or at the very least unsettled.
Why have trusts attracted the ire of the EU? The answer may be at best a simple misunderstanding, at worst a wilful one. Trusts are not widely known in continental Europe and are often automatically associated with elusion and abuse. However, under English law – and Jersey law for that matter – trusts are part of everyday life and our rich and unique legal heritage. As there are only two common law countries within the EU, there is bound to be a degree of unfamiliarity and suspicion from the majority on the continent.
The continental European constituents of the EU continue to struggle with the trust concept. This has been evident in previous EU works such as the Brussels Convention of 1968 on the jurisdiction in civil and commercial matters (now replaced by the Brussels I Regulation (44/2001) and the Wills and successions regulation (EU Regulation 650/2012).
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’.
The distinction between companies and trusts is important– although in reality Mr Cameron and the governments of his predecessors have done little to see trusts thrive in the country that created them. Companies were created to participate in commercial life. They interact daily with the market and their suppliers, employees, creditors and shareholders. Accordingly, a public register is an appropriate measure to protect the public. On the other hand, a private family arrangement structured using a trust does not necessarily interact with third parties in the same way. This being the case, the rationale of publicising their beneficial ownership structure is not analogous to companies.
After the new EU parliament is elected in May, negotiations will begin on enacting the new Directive with the European Commission and Council of Ministers. Once passed, changes to domestic implementing legislation in individual jurisdictions will be required thereafter. It is worth stating that this is not an area in which the UK can exercise any veto if the shape of the legislation is not to its liking.