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.

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

‘Moving Money’ – the cost of more onerous AML procedures

George Hodgson

George Hodgson

I attended a lively presentation today on the paper Moving Money: International Flows, Taxes, and Money Laundering by Professors Richard Gordon and Andrew P. Morris. They basically argue that the move to more onerous anti-money laundering (AML) procedures and the move to automatic information exchange are both going to significantly increase transaction costs for everyone, legitimate and illegitimate users of the financial system alike. This increase could have significant implications for economic growth, but with little evidence of any real benefit from the new measures in terms of improved tax revenues or reduced illegitimate funds flows. In spite of that, there was a general air of optimism about the outlook for international finance centres (IFC). The professors noted that the best IFCs already have very effective systems and skill sets in these areas. They may well be able to adapt to the new regimes more rapidly and with fewer costs than their on-shore counterparts — who also face huge compliance costs — hence preserving their competitive advantage. Indeed the rising cost of on-shore, rather than off-shore, compliance may well start to become a political issue in the major economies now pushing through such dramatic, and expensive, changes in tax reporting and the AML regulatory environment

We understand that the UK has decided not to adopt the proposed delay to the on-boarding of new entity accounts announced by the US in notice IRS notice 2014-33. Instead UK Financtaxh_2023675cial Institutions will be required to obtain self-certifications from new customers (both entities and individuals) from 1 July 2014. This will maintain consistency between Entity and Individual on-boarding processes, as well as between the due diligence obligations for US and CD/OT reporting purposes.

George Hodgson is STEP’s Deputy Chief Executive.  

Across the AML Divide: data sharing, de-risking and debate

George Hodgson

Having spent two days this week in Brussels at a meeting of the Financial Action Task Force’s (FATF) private sector consultation forum discussing international anti-money laundering (AML) regulations, it was striking how two or three strands are now starting to dominate the debate.

First is the growing divide between the big banks and what they looking for from governments to help with their AML obligations relative to how the legal and accountancy professions see the issues. The banks want lists – as many as possible – computerised and machine readable, with the aim of removing any human role in AML checks. With this in mind, we had a presentation of a major project the UN, US and the Wolfsberg Group of banks had been working on regarding sanctions lists. There was much talk of metadata, fuzzy logic and machine readable formats, but when asked if a sole practitioner would be able to use the list or if legal professionals had been part of the consultation process on this project there was a slightly awkward silence.

There was also a real clash of thinking around data protection and the human right to privacy. It is clear that those responsible for data protection are increasingly concerned at AML proposals that will make large amounts of personal information widely available to a range of governments and institutions. This data sharing is supposedly for AML purposes, but with relatively few checks in practice about how this data is really going to be used.  The gulf here is enormous; from the US Government’s representative who found concerns about the human rights of people who might be terrorists ‘bizarre’,  to those who feel there is now an urgent need for the FATF to bring data protection supervisors into their structure at the very top (given that the AML system FATF is building is in practice now major exercise in data exchange).

The other major theme that attracted intense debate was the way the banks are ‘de-risking’ in the face of huge penalties for any AML breaches. They are therefore increasingly pulling out of business with a range of clients or jurisdictions based on their perception of potential AML risks. The debate identified correspondent banking as an area where this was already having a major impact but it was widely felt to be a growing issue across all bank business lines.  I suspect STEP members may also have views on this too.

George Hodgson is Deputy Chief Executive of STEP.