Technical hitches remain for access to UK Trust Registration Service

Simon HodgesAgents remain unable to access the Trust Registration Service (TRS) after technical errors were identified in the system, HMRC has confirmed. However, the deadline for completing the register of a trust for self-assessment and providing beneficial ownership information remains 5 December 2017.

This news comes shortly after HMRC published its comprehensive guidance for the new online register of trusts on Monday 9 October, following the launch of the service in July 2017. This was to be the first phase, allowing trustees to access the TRS, and so ensuring that HMRC met with the basic legal requirements of the EU Fourth Anti-Money Laundering Directive.

The second phase, allowing agents to access the TRS on behalf of trustees, was to be delivered in October. However HMRC has notified STEP that it has identified technical errors in the course of testing this phase. HMRC reassures us that it is resolving these issues as quickly as possible, so that the system works from the moment it is released.

HMRC has also reiterated the timeline, noting that there will be no penalty imposed where registration is completed after 5 October 2017 but before 5 December 2017.

HMRC has said it will provide STEP with an update next week. We will keep members informed.

Simon Hodges is Director of Policy at STEP

STEP in Brussels to discuss money laundering and terrorist financing risks

bank notes, laundered

STEP was invited by the European Commission to attend a second private sector consultative meeting on Wednesday 5 October to discuss the supranational risk assessment of money laundering and terrorist financing risk in the EU.

We represented the trust sector and legal professionals in the first consultative meeting with the Commission in March 2016.

The Commission presented the preliminary results of its risk analysis relating to the threat and vulnerability of certain sectors to money laundering and terrorist financing across Member States.

The initial results found that some sectors, including the real estate sector, legal professionals and trust company and service providers (TCSPs) are at significant risk to infiltration by money launderers and terrorist finance activities.

STEP was keen to provide feedback on the methodology of the assessment, the inconsistency of regulations by service providers across Members States, and the lack of understanding towards trusts in some jurisdictions. We will continue to provide feedback to the Commission until the end of the year, and a follow up meeting will take place in March.

• STEP would like to remind members that HM Treasury’s consultation paper on the Transposition of the Fourth Money Laundering Directive will be closing on 10 November. You may provide feedback directly to the Treasury or via ourselves, via emily.deane@step.org.

Emily Deane TEP, STEP Technical Counsel

Registers of beneficial ownership – the end game?

George_Hodgson-2016On Friday (22 April) HM Treasury announced that a further 19 countries have now joined the UK-led pilot project launched with Germany, France, Italy and Spain for the automatic exchange of information on beneficial ownership. These include the Netherlands; Romania; Sweden; Finland; Slovakia; Latvia; Croatia; Belgium; Ireland; Slovenia; Denmark; Malta; Lithuania; Cyprus; Bulgaria; Portugal; Estonia; Greece; and Czech Republic.

Following this, the Informal ECOFIN meeting of finance ministers of all 28 EU member states ahead of the Netherlands Presidency announced that they welcomed the fact that ‘all member states’ will enter into a pilot project for the automatic exchange of information on ultimate beneficial owners. In addition, they also announced that the Netherlands Presidency will take forward and broaden the work on the amendment to the 4th Anti-Money Laundering Directive (which will be submitted to the European Parliament and the Council in June). Ministers encouraged the Commission to ‘consider improvements to address certain issues linked specifically to money laundering, in particular to enhance accessibility of beneficial ownership registers on corporate and other legal entities, as well as on trusts and similar legal arrangements, to clarify the registration requirements for trusts, to speed up the interconnection of national beneficial ownership registers, promote automatic exchange of information on beneficial ownership between authorities, and strengthen customer due diligence rules.’

At the recent FATF meeting in Vienna that STEP attended there also growing pressure from the banks to allow them access to any beneficial ownership registers, even if the general public is not allowed access.

Add all this to the announcement from the OECD that the G20 has asked the Global Forum and the FATF ‘to make initial proposals by October 2016 on ways to improve the implementation of the international standards on transparency, including on the availability of beneficial ownership information and its international exchange’ and it is clear that international policy agenda has shifted fundamentally since the ‘Panama Papers’ story broke, and few would rule out it shifting further still as more leaks emerge.

We suspect many people will be struggling to keep up with the sheer volume and speed of the announcements now coming out in the area of transparency. To this end we are therefore very fortunate to have the head of CRS implementation at the OECD and a leading spokesman from Transparency International, as well as leading practitioners, joining us for in-depth discussion on these issues at the STEP Global Congress in Amsterdam on June 30- 1 July. This will no doubt provide crucial insight into just what is the end game, and how we can move forward.

George Hodgson is Deputy Chief Executive of STEP

The 4th AML Directive Agreement – a pragmatic solution

George Hodgson

Reports suggest that late last night the EU Parliament and Member States finally reached an agreement on the 4th Anti-Money Laundering Directive. The agreement will see a  mandatory requirement for registration of beneficial owners for corporates, but is less than clear on the issue of public access to such a register, allowing access to be limited to those with a legitimate interest”.

On trusts the agreement calls for national registers to be established simply based on the information that will in any case be available to tax authorities. There is no requirement for public access or access by obliged entities, although obliged entities may be allowed access if a  Member State wishes. This looks like a pragmatic solution. Relying on tax information to compile the register should minimise bureaucracy and costs and the proposed access rules should help preserve legitimate confidentiality of trusts, many of which are established to protect the interests of vulnerable family members.

STEP has been proactively campaigning for some time on this issue and had recently provided a legal opinion to the Commission and others outlining that public access to any trust register was likely be in breach of the European Convention on Human Rights. We are pleased that our concerns on this point seem to have been recognised in the negotiations last night.

This is a great outcome and STEP will report more details of the arrangement, most likely in the new year.

George Hodgson is Deputy Chief Executive of STEP.

Family finances – a private matter?

George HodgsonIn a largely secret process, this autumn will see tense negotiations between Parliament and member states about the extent to which many hundreds of thousands, if not millions, of families should have intimate details about their financial affairs placed on public display.

The public are rightly outraged that criminals, including tax evaders, so often seem to be able to hide funds away beyond the reach of investigating authorities. To tackle this problem, the Financial Action Task Force (FATF), the worldwide inter-governmental body responsible for setting global anti-money laundering standards, has brought forward proposals for reforms designed to make it harder for illegal funds to flow through the financial system.

For the past two years the EU has been working on a revised EU Anti-Money Laundering Directive to implement the reforms put forward by the FATF. The EU Commission’s initial proposals closely followed the new international standards. After prolonged debate, however, member states  agreed a way forward which went well beyond the FATF’s recommendations in some key areas, with the focus on ensuring quicker and more effective access to information on who owns financial assets by investigating authorities.

In contrast, the EU Parliament has taken its own path on the new Directive. In a fundamental shift, MEPs are proposing the introduction of publicly accessible registers. The register will give full details to the public of all those who might benefit – the ‘beneficial owners’ in the jargon – from both companies and trusts. In the case of trusts the EU Parliament also calls for full details of the trust, including the assets held in the trust, to be generally made public.

These proposals from MEPs raise some fundamental problems when it comes to trusts.

In the popular view of those unfamiliar with them, trusts are used by the wealthy to evade taxes and hide money. This view seems to lie behind the pressure from the EU Parliament to open up trust details to the public.

The reality is very different. Trusts are very common in countries with an English legal tradition. In the EU this includes not just the UK but other Members States such as Ireland and Malta. Research by the UK tax authorities confirms that the majority of trusts are set up because a family wishes to help provide for a family member, often because the family wish to protect the long-term interests of a relative (a ‘beneficiary’) not currently able to look after their own affairs. As a result, one in four trusts have beneficiaries who are considered vulnerable.

Looking at trusts with vulnerable beneficiaries in more detail, the study found that in over a third of cases one or more of the beneficiaries were children aged under 18. In 17% of cases the trust beneficiaries were elderly and needed help running their financial affairs, in 15% of cases a beneficiary was mentally handicap and in 7% of cases they suffered from a physical disability.

Is it either fair, or safe, that the names of such vulnerable people should be freely available to the public as the EU Parliament proposes? Particularly if, as proposed, the details of the assets in the trust also appear on the register there would seem to be an all too obvious risk that this information will be abused.

The issue of compulsory registries open to public inspection is thus the key issue that will need to be hammered out in the negotiations that will get under way in a few weeks between Parliament and Member States. All sides expect this so-called ‘trialogue’ process to be even more than usually contentious.    Green-Money---Piggy-bank--001

It is worth bearing in mind that trusts are in any case not secret. Most trusts are potentially subject to tax and will be reported for tax purposes just like, for example, a bank account. Moreover trusts are subject to full anti-money laundering checks, so both the trustees and their bank will need to establish who the beneficial owners are and provide that information to the authorities if requested. The current proposals from member states would make this information even more easily available to investigating authorities, but crucially the general public would not be given access to such sensitive information.

What is the legitimate public interest in exposing the details of people who might benefit from a trust to the public gaze? The EU Parliament has never provided an answer to this key question, but it exposes a fundamental point of principle with implications that extend well beyond the issues surrounding trusts.

When the new global FATF standards which have prompted the revised EU Directive were drafted there was a lengthy debate on how to balance the need for investigating authorities to have effective access to information without losing core protections for the individual in terms of privacy and data protection. Reflecting this debate, the FATF standards do not require compulsory public registers for trusts. It is disturbing that there seems to have been little equivalent debate within the EU Parliament when it considered requiring details of all trusts to be placed on a publicly accessible register.

Families normally expect, quite legitimately, that their financial affairs will remain confidential. But the EU is now in real danger of stumbling into a situation in which large numbers of ordinary families will see their affairs opened up to the merely curious, the intrusive and the potential criminal alike. That should not happen without a very serious public debate about where the boundaries of any right to family confidentiality should be set.

George Hodgson is STEP’s Deputy Chief Executive

*This article originally appeared in Accountancy Live

The Risk Based Approach – implications for international business

George_HodgsonMany STEP members will have been on holiday over the past few weeks. If so, they may have missed some important indicators of how the authorities plan to use the Risk Based Approach in anti-money laundering regulations aimed at tackling illicit money flows.

One of the most significant technical developments in the revised FATF Recommendations published in 2012 was a new methodology formalising procedures regarding the so-called Risk Based Approach (RBA). As part of the RBA, all national governments are now required to conduct National Risk Assessments (NRAs) and STEP has been working closely with some of the teams putting together NRAs. All financial institutions are also expected to undertake their own risk assessment as part of the RBA.

Even before the UK NRA has been completed, a key UK regulator, the Financial Conduct Authority (FCA) has published a list of ‘high risk jurisdictions’ for AML purposes. The FCA is not suggesting that financial institutions it regulates should stop dealing with anyone from a jurisdiction listed as high risk. It is nevertheless making it plain that in supervisory visits, regulators will expect regulated entities to be able to demonstrate clear mechanisms for managing the risk in any business originating from such jurisdictions.

What is really striking, however, is the length of the FCA’s high-risk jurisdiction listing. While the inclusion of Cayman on the list has provoked a lot of comment – and talk of an application for judicial review from the Caymans, the real issue is that the FCA is deeming over 90 jurisdictions to be ‘high risk’. Among these are a string of major economies, including Brazil, India and China.

Alongside this development in the UK, and just as significant, is a powerful reminder from the US of the sort of penalties regulators can impose for perceived failures in applying the RBA. Standard Chartered recently reached a settlement with US regulators, which not only imposes a USD300-million fine, but also effectively bans the bank from acting for high-risk customers in Hong Kong and the UAE. The regulator’s allegation was that the institution had failed to demonstrate adequate risk management processes in the relevant jurisdictions, and in the wake of the bans it is now reported that the bank is looking to scale back its exposure to the UAE.

There could be some significant implications for STEP members. Recent years have been marked by strongly growing business flows from Brazil, India and China as the BRICs and other developing economies have boomed. Practitioners with clients from these areas should consider if their own risk management processes will be acceptable to regulators in their home jurisdiction if they were to follow the trend in the UK and US of deeming such economies ‘high risk’.

Just as importantly, it is worth asking how financial institutions are likely to respond to the new regulatory emphasis on the RBA. The penalties being imposed on banks for any breach of the regulations are now such that many banks are likely to take an extremely risk-averse approach. They may well seek, like Standard Chartered in the UAE, to scale back their exposure to business connected with any jurisdiction considered to be high risk. Others may continue to accept business from such jurisdictions, but will be looking at risk management plans that imply much tougher customer due diligence procedures in these areas. In addition, financial institutions that continue to do business in jurisdictions perceived as high risk will probably also be looking for wider margins to compensate.

Trustees focused on international business flows, particularly from developing economies, could therefore shortly see some interesting conversations with both their anti-money laundering regulators and their banks.

George Hodgson is STEP’s Deputy Chief Executive