FATF invites STEP to discuss potential revision of Recommendation 25

The Financial Action Task Force (FATF) is conducting a review of Recommendation 25, which covers the transparency and beneficial ownership of legal arrangements. The FATF’s objective is to improve Recommendation 25 and its Interpretive Note to meet its overall objective of preventing the misuse of legal arrangements for money laundering or terrorist financing.

The FATF recently invited STEP and other stakeholders to attend a private sector engagement forum in early November to understand their views on several key areas.

The forum participants discussed the definition of trusts and equivalent legal arrangements in common/civil law systems. The discussion focused on whether a common definition could be introduced in order to clarify where the law is unclear.

This section also covered the key challenges of understanding the nature and structure of common law express trusts and civil law legal arrangements.

The key challenges in understanding and verifying beneficial owners in the context of trusts, and how the concepts of ‘ownership’ and ‘control’ would apply to them, were also discussed. The types of information collected to establish beneficial ownership of trusts, and the challenges of collecting this information of foreign legal arrangements operating in countries without the necessary legal framework, were also covered.

The FATF also raised how it wished to establish to what degree identification of beneficial owners should be inherently part of a trustee’s duties and asked whether this should be an explicit obligation.

One of the major focuses of the forum was to examine some of the ways that trusts and other legal arrangements can purposely be used to disguise ownership and evade transparency. Discussion also focused on complex ownership structures and how they could be defined and identified more clearly. Challenges can arise in existing multi-layered structures where the legal entity being identified is lower down the chain of ownership and in some cases, verifying the beneficial ownership of the ultimate holding entity, can be unclear.

The FATF stated that it would welcome any written proposals with suggested amendments for Recommendation 25 until the end of the year. The next step would be a planned public consultation in Q3 2022: however, this will be open to change if necessary.

In parallel with this review of Recommendation 25, the FATF are also reviewing amendments to Recommendation 24, which focuses on the transparency and beneficial ownership of legal persons. The FATF is consulting on suggested amendments to Recommendation 24 and STEP is planning on responding.

Robert Carington is Policy Executive at STEP

EU announces Anti-Money Laundering (AML) Package 2021

Money Laundering and the efforts of governments to combat it and increase transparency and reporting of ownership globally continue to be a hot topic.

One body that has been looking at this area is the European Union, which is in the process of launching its new Anti-Money Laundering (AML) Package 2021.

This package was explored in detail at a recent webinar hosted by Anti-Money Laundering Europe (AME). The main objectives of the Package are to support:

  • Greater harmonisation of transposing EU AML and countering the funding of terrorism (CFT) law into national law,
  • Greater supervision at EU level, and
  • Better coordination of financial intelligence units (FIUs).

Paolo Panico TEP, Chair of STEP Europe, chaired the panel, which comprised:

  • Steve Ryan, Deputy Head of Unit D2, DG FISMA at the European Commission
  • Endija Springe, Policy Expert at the European Banking Authority (EBA), and
  • Anabela Santos, Technical Consultant at the Portuguese Chartered Accountants Association.

The panel discussed the European Commission’s new AML Package 2021, which delivers on the Commission’s action plan of 7 May and was put forward on 20 July for discussion by the European Parliament and Council. The EU’s intention is to achieve the Package through regulation, a new directive and a new AML authority.

These rules will include customer due diligence, harmonised beneficial ownership requirements and clear reporting obligations. There would be further alignment with the Financial Action Task Force (FATF), with the EU also creating a black list and grey list (as FATF does). A listing by FATF will also now trigger an EU listing and obligatory enhanced due diligence (EDD) and countermeasures proportionate to risks stemming from the relevant country.

The announcement of the Sixth Anti-Money Laundering Directive, ((EU) 2018/1673) or AMLD6, is another part of the Package. The Directive will have stronger mechanisms at national level and will:

  • Govern the tasks and powers of supervisors
  • Give public oversight over self-regulatory bodies
  • Have joint analysis of Financial Information Units (FIUs), and
  • Grant powers for beneficial ownership registers to carry out checks and issue sanctions.

The other part of the Package was the new AML authority (AMLA), which aims to transform the landscape of AML/CFT supervision in the EU and will come into force in 2024. It will do this by:

  • Establishing a single integrated system of AML supervision across the EU based on common supervisory methodologies
  • Directly supervising some of the most risky institutions, and
  • Supporting cooperation and joint analyses by national FIUs and facilitating communication among them.

It was reported that the new regulations and AMLD6 will only start to apply in 2026 as the AMLA needs to be up and running to prepare regulatory technical standards that will complete the single rule book.

The EBA gave its support for the new framework and proposal, and asked that the Commission try to avoid silos, balance greater harmonisation with a risk-based approach and ensure effective and efficient governance of the AMLA.

Delegates also heard that a lot of work needs to be done to create effective infrastructure and avoid it being seen as a burdensome bureaucracy.

Robert Carington is Policy Executive at STEP

The OECD reviews the Common Reporting Standard

Emily Deane TEPHM Revenue & Customs (HMRC) invited some of the UK’s financial industry experts, including STEP, to join an overview of the OECD’s current review of the Common Reporting Standard (CRS).

The OECD will launch a consultation later this year, but has requested early input from industry experts on the improvements and changes that they would like to see. The purpose of the review is to enhance the general efficiency and operation of the CRS, and especially the quality and usability of its data.

In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. Some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. HMRC intends to consult the crypto-asset industry on technical changes and improvements and e-money industry experts, an area which was previously excluded, but some countries have called for it to be included in order to reach a single and consistent view.

HMRC also discussed some trust related issues for consultation, including:

Rules on reporting of joint accounts

While each joint account holder is required to report specific information, the schema does not recognise the number of account holders. HMRC suggests developing an indicator or flag to identify each individual account holder.

Controlling persons of passive non-financial entities (NFEs)

The schema is currently unable to assess the identity of the controlling person (ie settlor, protector) making the data less useful for tax risk purposes. HMRC suggests introducing  a mandatory field to specify the role of the controlling person.

Account holder where a trust is a financial institution (FI)

HMRC suggests the schema should be able to identify the type of equity interest the account holder has for risk assessment purposes.

Other trust-related issues that will be addressed in more detail include:

  • the treatment of reporting in relation to trustees, protectors and controllers;
  • inconsistent value reporting on the value of trust accounts;
  • reporting of trust loans as payments and potential avoidance issues;
  • consistency over reporting of issues on protectors and other ‘controllers’ who have no financial interests in the trust;
  • cross-over issues on reporting controllers – AML principles and FATF guidance;
  • reporting on ownership of corporate trustees in the context of controlling persons/equity interest holders;
  • relevance of cash as an asset in the context of classifying entities, particularly in the financial institution/passive NFE distinction.

HMRC has confirmed that it will form a focus group to look at the CRS and specific trust aspects, and we will keep members updated as the consultation progresses. In the meantime if members have any additional trust-related feedback please email the policy team at [email protected] by 1 February 2021.

Emily Deane TEP, STEP Technical Counsel

STEP joins Anti-Money Laundering Europe webinar on the future of the EU’s fight against money laundering

Robert CaringtonOn 3 June, STEP joined a webinar hosted by Anti-Money Laundering Europe (AME) on the future of the European Union’s fight against money laundering.

John Riches TEP, Chair of STEP’s Public Policy Committee, was joined on the panel by Jérôme Deslandes, Cabinet of the Executive Vice President of the European Commission; and Piers Haben, Director for Banking Markets, Innovation and Consumers at the European Banking Authority (EBA). The chair was Mike Savarese, AME.

The webinar discussed the European Commission’s package on anti-money laundering (AML) published on 7 May.

Its main item was an action plan, accompanied by a list of high-risk third countries, and a methodology describing how these were chosen. The action plan aimed to address the weaknesses identified in research from 2019 and was based on the following six pillars:

  1. Better implementation of rules – This will be achieved by a number of tools particularly interconnection of beneficial ownership registers, more powers for the EBA and a focus on country-specific recommendations. The eventual aim is for an EU supervisory body responsible for conducting on-site examination on the effectiveness of the AML framework.
  2. Harmonised rulebook – This will be achieved by sharing information, integrating the latest Financial Action Task Force (FATF) standards and building on the good examples of member states.
  3. EU level supervision – This integrated AML system will need to be jointly run by the EU and national authorities.
  4. Coordination and support mechanisms for FIUs (Financial Intelligence Units) –Through common templates and tools, standards on feedback, support of joint analysis and training.
  5. Law enforcement and information sharing – New tools such as criminalisation of money laundering, a Directive on the use of financial information and rules on asset recovery (including mutual recognition of freezing orders) will be used.
  6. EU’s global role – This will be achieved through the new methodology and the list of high-risk third party jurisdictions that pose a threat to the EU’s financial system.

John Riches’ view on these developments from a private sector perspective, was that due to the rapid development of the EU’s AML framework, member states appear to have struggled to implement past incarnations of AML. He observed that there seemed to be an inconsistency in approach between states, resulting from a lack of clarity and practical guidance.

His main concerns were over beneficial ownership registers and transparency, and how this lack of clarity had made implementation of trust registers difficult, and also potentially unfair. He noted that the uncertainty over some of the provisions in the Fifth Anti-Money Laundering Directive showed a lack of understanding on how trusts work. He also voiced major concerns over the potential conflict of public registers versus privacy rights.

The panel heard that the EU is aiming to be assessed as a single jurisdiction, with a single supervisor and rule book, within five years, so will be recognised as such by FATF. This single approach is seen as being cheaper and more efficient, and a more effective way of achieving a stronger, more unified and robust system.

The event ended with John Riches stressing that the EC consultation should be much more than a box-ticking exercise, and something more meaningful, which will benefit everyone.

Robert Carington is Policy Executive at STEP

The new gatekeepers of the financial system

Houses of Parliament, London

Update: STEP News 1 Nov: UK revises anti-organised crime strategy to target professional ‘facilitators’

Original blog:

Ben Wallace MP, UK Minister of State for Security at the Home Office, has called for more to be done to make lawyers and accountants who facilitate money laundering recognise their responsibilities.

As part of a House of Commons Treasury Committee evidence session (pdf) on Economic Crime, Simon Clarke MP asked whether lawyers and accountants were failing to appreciate the seriousness of money laundering. He noted that this may be because they haven’t been faced with the same level of fines as the banking sector has been.

In response Wallace said: ‘I absolutely agree with the point that the facilitators have not had the same focus on them as they should have done. They have a responsibility that they need to live up to and I would like to see them being put under more pressure to comply.’

These words mirror recent moves from the international community towards viewing practitioners such as lawyers and accountants as the new gatekeepers of the financial sector and an integral part of combatting money laundering. Publications such as the OECD’s Model Mandatory Disclosure Rules place a responsibility on advisors to report schemes that may have the effect of circumventing the Common Reporting Standard. The EU’s DAC6 (pdf) put similar requirements on intermediaries who design or promote tax-planning schemes.

Underlining the discussion in the same Treasury Committee session, Robert Buckland MP, the Solicitor General, called the creation of a new corporate criminal offence of failing to prevent economic crime a ‘very important priority’ for him.

Perhaps summing up the changing approach towards lawyers and accountants, Wallace said the following after he was asked if there should be more of a focus on the accountancy world when it came to enabling economic crime: ‘In this half of the year, my message to the facilitators is this: we have had a lot of focus on banks; my investigators are going to be focusing on you.’

STEP will continue to monitor relevant developments both in jurisdictions and with international bodies, as well as providing updates where appropriate.

Daniel Nesbitt, Policy Executive, STEP 

 

Do UK money laundering regs extend to trusts in other jurisdictions?

departure board europeanSTEP’s Isle of Man branch has flagged potential issues raised by the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (the Regulations) which give effect to the requirement of the EU Fourth Anti-Money Laundering Directive to have a central register of trusts, and reporting obligations on trustees.

The branch has queried whether the Regulations (Part 5, the trusts register) only apply to persons acting in the course of a business carried on by them in the UK (Regulation 8(1)). If this is the case, then Part 5 would not apply to trustees in the Isle of Man and elsewhere outside the UK.

As the Regulations are not part of the domestic law in jurisdictions outside the UK, it is unclear whether trustees in these jurisdictions have a ‘legal obligation’ to comply with Regulation 45. If there is a legal obligation for them to report, then conflicting data-protection issues may be generated under the domestic law.

In addition, the Regulations contain sanctions (fines and imprisonment) for non-compliance that HMRC, which manages the UK’s central register of trusts, may be able to enforce against trustees who do not comply.

STEP has raised these ambiguous points with HM Treasury (HMT), which laid the relevant Regulations, in order to gain some clarity. HMT has confirmed that its interpretation is that the definition of ‘non-UK trust’ within Part 5 of the Regulations extends to all express trusts that receive income from a source in the UK, or have assets in the UK on which they are liable to pay a relevant UK tax, regardless of whether they are established outside of the UK.

In these circumstances, HMT asserts that the trustees will indeed be required to comply with the record-keeping and, where relevant, registration requirements within Part 5 of the Regulations.

STEP will keep members informed on any further developments.

Emily Deane TEP is STEP Technical Counsel

STEP Bahamas reports to the FATF Forum in Vienna

Vienna united nationsSTEP was invited to attend the Financial Action Task Force (FATF) Private Sector Consultative Forum in Vienna on 23-24 April.

The event consisted of several breakout sessions relating to FATF’s global priorities for Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) in 2018.

As part of the Forum, Cecil Ferguson TEP, Chair of STEP Bahamas and Bank Examiner of the Central Bank of the Bahamas, which is responsible for licensing, regulating and supervising financial institutions, was invited to report to attendees on the progress of the National Risk Assessment (NRA) in the Bahamas.

Cecil reported that the NRA process in the Bahamas had been very collaborative in nature, with participation from the public, private and NGO sectors. The country had embarked on a course to implement FATF’s Recommendation 1, with all sectors identifying key risk areas and resources allocated to the highly-exposed areas. A national co-ordinator was appointed to take responsibility for the process.

There were two elements to the money laundering and terrorist financing risk assessment at the country level, as well as at the financial institution and Designated Non-Financial Businesses and Professions (DNFP) level. The Bahamas engaged with the World Bank’s technical risk-assessment expert to assist in the initial process.

The process served to enhance and deepen the understanding of the Bahamas’ money laundering and terrorist financing threats and vulnerabilities, and focus its resources to address gaps in its AML/CFT regime. This included amending primary laws, regulations and guidelines as well as supervisory enforcement and frameworks.

Cecil concluded that the Bahamas’ NRA was adopted by the Cabinet in December 2017 and it has established a working group meeting weekly to ensure that the outcomes continue to be addressed.

STEP representatives also attended a closed session drafting group for lawyers, accountants and trust and corporate service providers (TCSPs) to discuss FATF’s Risk-Based Approach guidance. The review included discussions around the sectoral guidance of 2008 and potential areas of improvement focusing on beneficial ownership, suspicious transaction reporting obligations, terrorist financing risk indicators, and ongoing customer due diligence measures.

STEP will continue to engage on these issues with FATF and report back accordingly.

Emily Deane TEP is 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.

Battle Over Exempting Trusts From Public Registry Continues Between EU and UK

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This article originally appeared at ACAMS moneylaundering.com 

On the eve of key behind-the-scenes talks on the Fourth European Union Anti-Money Laundering Directive, the rift over proposals for the public register of trusts has widened between the United Kingdom and Europe.

Officials from the European Parliament, Commission and Council are set to meet Tuesday to discuss the plans in a ‘trialogue’ meeting, according to a Brussels-based source close to the matter. Trialogues are informal and unpublicized discussions that play a key role in legislative proceedings.

It is expected that a formal EU announcement on the matter will be made by December, however, even that could be pushed back further as sharp divisions over the issue of public registers persist between leading member states.

The UK has embarked on plans to become the first country in the world to have a public register of ultimate beneficial ownership of companies, but it is vehemently opposed to one for trusts as proposed by the European Parliament.

On Friday it maintained its stance, with a Treasury spokesman saying that while British action to improve transparency remains ‘unmatched’ globally, trusts must not be treated the same as companies.

‘Trusts are widely used by many UK citizens, where there is often little or no risk of money laundering,’ he said.

Strong opposition against a register of trusts and companies is also brewing from legal professionals in London.

Publicizing ownership would be ‘intrusive’ into the financial affairs of individuals who wish to keep them private, lawyers argued last week during a debate on privacy and the government’s plans for public registers. Executives of companies targeted by activists could also be harassed or kidnapped if their personal information was publicity exposed, a senior practitioner said.

A private register accessible to law enforcement agencies and regulatory authorities is a better option, attendees said at the event, hosted at the London offices of Mishcon de Reya.

Beneficiaries of trusts would also be vulnerable if their identities were made public, including children or handicapped family members, according to George Hodgson, deputy chief executive of the Society of Trusts and Estate Practitioners.

‘To expose the names of such beneficiaries on a public register strikes us as having some obvious risks and dangers attached to that process,’ said Hodgson, who is also a former staff member of the Treasury Committee of the UK House of Commons.

Trusts are perceived as instruments for money laundering and tax evasion in continental Europe, whereas in England they are actually mainly family-oriented structures, British lawyers say.

Plans to publicize the owners of trusts are ‘very alarming’ and constitute a ‘considerable misunderstanding’ of the general use of trusts on the basis that most trusts are basically structures to let assets pass smoothly from one generation to another, Hodgson explains.

Still, a number of well-documented cases show trusts have been misused for illicit proceeds, so trusts are not only used for inheritance or for children but have been an integral part in money laundering and corruption, according to Christian Hallum, senior policy analyst at Eurodad (European Network on Debt and Development), which recently publicized a report outlining the varying positions of several EU states on the issue of public registers.

Some of the concerns the UK has voiced can, moreover, be addressed by the push within the European Parliament for member states to protect personal information, particularly of vulnerable individuals, and allow its disclosure on a risk-based approach, he added.

A UK HMRC study found that 15 percent of trusts have vulnerable beneficiaries, of which a third were minors and an additional 17 percent were elderly, he said.

‘As such, the vast majority of trusts are not used for truly vulnerable people,’ Hallum explained.

One way forward on the matter perhaps is that ‘serious consideration be given to adopting a licensing system of corporate service providers (including registration agents) which has been successfully utilized in a number of international finance centers,’ according to Ian Kirk, partner and head of commercial at Collas Crill, who also backs a registry only accessible to competent authorities.

Those corporate service providers would also be responsible for verifying beneficial ownership and source of funds, he said.

But given the appetite in the EU for a public register of trusts, politics rather than issues of privacy or practicality will win the day, Kirk states.