The Fourth Money Laundering Directive is more likely to provide paperwork than protection from abuse of trusts for tax evasion and terrorism says Jenny Cutts
Headline grabbing scandals on the use of trusts, companies and other structures to shelter ill-gotten gains and, at worst, fund terrorism, have contributed to an international effort to clamp down on money laundering, terrorist financing and tax evasion.
The EU’s latest legislation comes in the form of the Fourth Money Laundering Directive. This requires EU states to establish a central trusts register and comes hot on the heels of compliance imposed by the U.S Foreign Accounts Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standard (CRS).
The Money Laundering Directive requires trustees of all express trusts governed under UK law to obtain and hold information on its beneficial owners, make this available to competent authorities and financial investigation units, and submit it to a central register where the trust generates ‘tax consequences’.
Trusts that will be affected will be those administered in the UK but also offshore trusts with a UK source income, like a UK rented property or shares in UK companies. ‘Tax consequences’ broadly means trusts that are required to submit tax returns to HMRC. Beneficial ownership information includes the identities of the settlor, the trustee(s), any protectors, the beneficiaries or class of beneficiaries, and any other natural person exercising effective control over the trust.
Despite previous drafts of the directive, the central register will not be accessible to the general public (unlike the present UK regime for beneficial owners of UK companies), something the trusts industry will be celebrating. However, there are proposed amendments to the directive pending at EU level (introduced following the Paris attacks and Panama Papers scandal) which are designed to make trust registers publically accessible in certain circumstances; notably where the trust is ‘business-type’.
Questions have to be asked whether this extra layer of compliance duplicates much of the information already collected via a trust’s annual tax return and other existing HMRC forms. It would reduce trustees’ mountain of compliance paperwork if this could also be done with the information required for FATCA and the CRS.
It must also be queried whether this regulatory work to assist in the fight against criminals and tax evaders is proportionate to the role the UK trust plays, or not, in this murky world.
UK trusts have been used for centuries to preserve family wealth. Historically, trusts were used to pass family assets down to the first male heir and keep landed estates intact. In the present day UK trusts continue to be used as a way of controlling access to family wealth over the generations and keeping assets ‘in the family’. They're also used as a protective tool for those who cannot, or are not in a position, to manage or generate assets themselves due to mental disabilities, underlying health or addiction problems.
All of this is not achieved by UK trusts stealthily hiding assets from the taxman or embarking on criminal activities. A UK trust is a recognised legal structure with its own tax regime and reporting requirements to HMRC, often paying tax at higher rates than an individual.
Given all of this, and the administrative burden the register would create for trustees, it is difficult to see how the expense of resourcing and policing it can be justified for the public purse. As the debate on Brexit rages, we cannot help but think that this is one EU directive the UK should consider carefully about implementing in full.
Jenny Cutts is a partner in the Private Client Team at Wedlake Bell LLP