27 Sep 2016
As the EU forges ahead with a ‘fifth AML Directive’ requiring a public register of trusts, KYC360 considers what Brexit will mean for the future of the UK’s financial regulatory regime.
Brexit raises more questions than it answers. The UK has entered into a phase of comprehensive legislative uncertainty and in terms of its AML regime, the consequences of the referendum are yet to play out. What is clear is that until Article 50 is invoked, the UK is still fully a part of the EU and subject to the requirements of EU legislation, including the 4th Anti-Money Laundering Directive (4th AMLD).
The 4th AMLD, passed by European Parliament in May 2015, seeks to align EU member states’ legislation with FATF’s revised standards and the European Commission’s review of the implementation of the 3rd AMLD (passed in 2005). Member states have until 26 June 2017 to transpose the 4th AMLD into national law; in the case of the UK, the government has proposed to create a Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 to transpose the directive. The Brexit vote has come midway in the UK’s implementation of the Directive, and the assessments and conclusions of EU legal specialists in this regard (as in many other areas potentially affected by Brexit) seem a long way off.
In the meantime, in July 2016 the European Commission proposed amendments to the 4th AMLD, being described by some as the ‘5th AMLD’. The recent proposals not only urge EU member states to accelerate implementation of the 4th AMLD by six months (to 1 January 2017), but also set out more stringent AML/CFT requirements.
The Commission says that the proposals were issued in response to the evolving and growing threat of terrorism and because ‘significant gaps in the transparency of financial transactions around the world have been revealed’. Although not mentioned in the Commission’s proposal, it is hard to imagine that the revelations of the Panama Papers in April 2016 would not have been taken into consideration. At the very least, the Panama Papers clearly demonstrate why the Commission’s enhanced scrutiny of opaque ownership structures – on which the EU has taken the international lead – and its objectives with regard to information sharing are so important.
Arguably the most significant provision of the 4th AMLD is the requirement of member states to increase their efforts in identifying the beneficial owners/controllers of companies and other legal structures. Under the 4th AMLD, companies are required to disclose full legal name, month and year of birth, nationality, country of residence, and nature and extent of interests of their beneficial owners (initial ownership threshold for reporting is 25%). Member countries are required to make a central register of beneficial ownership available to, at the very least, competent authorities (e.g. financial intelligence units), obliged entities (e.g. banks, financial institutions), and any person or organisation that can demonstrate a legitimate interest. The relevant article (Article 30) also refers to the right to privacy – a key concern of critics – by stating that ‘access to the information on beneficial ownership shall be in accordance with data protection rules’.
Denmark was the first country to publish a register of company shareholders. As of 15 December 2014 Danish companies were required to register interests of 5% or more in the Danish Business Authority’s register of major shareholders; the register was made public in June 2015.
In accordance with the EU Directive, UK companies have been obliged to keep a register of their beneficial owners since April 2016. Since 30 June 2016, companies have been delivering this information in a ‘Confirmation Statement’, which replaces the Annual Return. These confirmation statements, available for free to members of the public via Companies House’s online database, list a company’s ‘People of Significant Control’ (PSCs). A PSC meets one or more of a five criteria set out by the Directive – for instance, a person who directly or indirectly holds more than 25% of shares in a company. The central register is expected to contain a full set of data on all UK companies in scope by July 2017 (whether this full set would need to be expedited if the ‘5th AMLD’ comes into force remains to be seen).
Certain types of trusts – specifically those which ‘generate tax consequences’ – also fall under the terms of the 4th AMLD. It is clear that the EU is broadening focus of corporate structures beyond limited companies and other similar legal structures, to trust arrangements, which have long evaded scrutiny.
Article 31 of the Directive (relating to trusts) requires trustees to ‘obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust’. That information includes the identity of the settlor, trustee(s), the protector (if any), beneficiaries or class of beneficiaries, and any other person exercising effective control over the trust. Similar to the requirements of companies, this information is to be included on a central register of trusts, available to ‘competent authorities’, such as HMRC in the UK – but, unlike its treatment of companies, the UK has no plans to make this information available to the public.
The UK is in the process of setting up a register of trusts with tax consequences, which will cover 170,000 trusts (and is expected to cost the UK government £10 million), which represents around a tenth of the total number of trusts registered in the UK. It was partially due to pressure from the UK that more types of trusts were not covered by the 4th AMLD: while the legislation was being drafted, the UK government opposed a central register of trust ownership. In November 2013 then UK Prime Minister David Cameron wrote in a letter to Herman van Rompuy, the then European Council president, that it was ‘clearly important we recognise the important differences between companies and trusts’. He said: ‘This means that the solution for addressing the potential misuse of companies, such as central public registries, may well not be appropriate generally’. This was echoed in an April 2014 House of Lords debate, when Lord Newby similarly contrasted companies and trusts: ‘trusts, unlike companies, are used for a range of purposes, such as benevolence, inheritance, protecting vulnerable people and family support. As such, the implications for privacy are far greater, and trusts therefore warrant different treatment.’ Lord Newby said that the government opposed the mandatory registration requirement for trusts, which he described as ‘a disproportionate approach and, in particular, one which undermines the common-law basis of trusts in the UK’.
So it will come as unwelcome news to some in the UK that the revised 4th AMLD captures a wider range of trusts, and not just those that ‘generate tax consequences’. The Commission’s July 2016 proposal sets out that Article 31 should now apply to ‘trusts and other types of legal arrangements having a structure or functions similar to trusts, such as, inter alia, fiducie, Treuhand or fideicomiso.’ The proposed amendments also provide for access to information in respect of certain trusts by those who have a ‘legitimate interest’, and not just competent authorities and obliged parties. The information accessible to persons and organisations demonstrating a legitimate interest would be: name, the month and year of birth, and the nationality and the country of residence of the beneficial owner. The Commission has also been tasked with drawing up a report by June 2019 to assess the conditions and technical specifications and procedure for ensuring the interconnection of beneficial ownership registers of trusts (and companies) – a hugely complex task when confronted with data protection and privacy requirements.
The UK government wrote in its official response to the revisions on trusts that it had concerns over privacy, particularly in view of the family-oriented nature of most trusts. It said that would seek measures that were ‘deliverable, proportionate and risk-based’. A recent case in France highlights the conflict between data protection and privacy on the one hand, and the requirements of AML legislation on the other.
The case relates to the French register of beneficial ownership of trusts, which was created in December 2013, resulting from French legislation aimed at addressing tax evasion. The register required trustees to make annual or event-triggered reports to the French tax authorities if either the trustee, the settlor or one of the beneficiaries were French tax residents, or if any of the trust assets were located in France. In the wake of the Panama Papers scandal, legislation was passed in May 2016 which allowed for public access to this register; it was made available to anyone with a French tax identification number on 5 July 2016.
The information publicly available from the online database was: name and address of trust; date of constitution/termination of trust; identification of all settlors; beneficiaries of the trust; and, identification of the trustees. The database was searchable by name of the trust, or the name of one member of the trust. The French authorities retained the database user’s data for one year after each search (i.e. tax number of the user, the IP address and date/hour of the search). Users agreed not to share any information obtained from the registry, with criminal offences applying to those who breached the terms of confidentiality.
Immediately following public access to the register, an 89-year-old American national and French tax resident ‘Mrs B’, represented by the law firm Arkwood SCP Paris, challenged the legislation. She claimed that public access to her information breached Article 8 of the European Convention on Human Rights, and Article 7 of the Charter of the Fundamental Rights of the European Union – which both uphold the right to a private life. Article 2 of the Déclaration des droits de l’homme et du citoyen [France’s 1789 Declaration of the Rights of Man and of the Citizen] was successfully invoked by her lawyers in arguing that the publication of her personal data infringed on the right to a private life.
As a result, on 22 July 2016 France’s Council of State (the highest administrative jurisdiction) suspended the register, recognising that the publication of Mrs B’s testamentary wishes could expose her to ‘certain pressures’. It had ‘serious doubts’ as to the legality of the decree. The matter now rests with France’s Supreme Court, which is expected to issue a decision in the autumn. Possible outcomes include a wholesale abolition of the register, or a new requirement for those wishing to consult the register to demonstrate a ‘legitimate interest’.
It is not only France that keenly awaits the outcome of this case. There are between 1.5 million and 2 million trusts in the UK, many of which are will trusts, or used for single insurance policies or pension products. While French constitutional law clearly differs from the UK’s legal system, the arguments employed on both sides of the debate are likely to be rehearsed in other countries, including in the UK, whatever the outcome of Brexit.
In some respects, the UK has led the way in its AML regime, and urged other nations to follow its lead. In May 2016, for instance, David Cameron announced at the London Corruption Summit that the foreign companies owning around 100,000 UK properties would be obliged to disclose their beneficial owners. The details of enforcement are as yet unknown, but the principle has been welcomed by pro-transparency NGOs such as Global Witness and Transparency International.
In other respects the UK has resisted measures which would have a meaningful impact on the fight against corruption. During his time in office, Cameron was criticised for reneging on a commitment to introduce publicly-accessible registers of beneficial ownership of companies in the UK’s 17 overseas territories and crown dependencies. The government’s opposition of the Commission’s proposed treatment of trusts may also suggest that the more the EU moves beyond the original 4th AMLD, the less likely the UK is to sign up to its terms.
Given that there has been no clear statement made by the UK Government, HMT, HMRC, or the FCA to address the future of AML legislation in light of Brexit, professionals working in the AML/CFT field are left to speculate as to whether the UK will continue to follow the EU’s lead in a scenario where very little will change, or whether Brexit will see the UK preferring to tailor its own approach, disregarding the less convenient aspects of EU legislation.
Author profile: Colleen Stretch has over a decade of experience as a research specialist, working on regulatory, corporate and fraud investigations. She regularly works with law firms, business intelligence consultancies and financial institutions, and her jurisdictions of specialisation are Italy and the UK.
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