Making Trusts Transparent: the implications of the Fifth Money Laundering Directive for charities

On 10 June 2019 the Treasury closed its consultation in relation to the Government’s proposed steps to transpose the Fifth Money Laundering Directive (‘5MLD’) into national law.

Like its predecessor, the Fourth Money Laundering Directive (‘4MLD’), the objective of 5MLD is to enhance transparency in financial systems across the EU in order to strengthen the defence against money laundering and terrorist financing.

Amongst other things 4MLD required the UK to implement a system where all express trusts that incurred a tax liability were registered. The UK implemented the Directive through The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and HMRC set up the Trust Registration Service which has been live since 2017.

5MLD expands the scope of the requirement for trust registration to all ‘express trusts’ regardless of whether or not they incur a tax consequence. This brings all charitable trusts, irrespective of their size, within the scope of the requirement to register.

But, as we explained in our firm’s consultation response and in more detail below, it is not only charitable trusts which will be impacted by the new rules – incorporated charities should also keep an eye on them as they evolve.

What will be required?

Registration with the Trust Registration Service

For existing trusts, the Treasury has proposed a deadline of 31 March 2021. For trusts created after 1 April 2020, the government proposes that the trust should be registered within 30 days of its creation.

The government intends to consult further on a penalty framework for trustees who are later to register. In our view, a light touch approach is warranted for charities which are, for the most part, run by volunteers, acting in their spare time.

In our consultation response we suggested extending these deadlines to allow the Treasury sufficient time to analyse the results of its consultation and engage further with the charity sector to properly and fully inform the transposition of 5MLD and detailed sector guidance.

We also pointed out that very few trustees will be aware of the new requirement (as we expect is also the case with the existing requirement for taxable charitable trusts to register under 4MLD). Charity trustees will need time to learn of and familiarise themselves with the legislation. The vast majority are not professionally advised and so will need to find out from other sources.

In the absence of any significant awareness-raising exercise, it is likely that many charity trustees will not find out about the new regime and so will fail to comply with their obligations.

Provision of information on the trust’s ‘beneficial owners’

A trust’s beneficial owners include the trust’s settlor, trustees, protector (if any), the beneficiaries or class of beneficiaries and any ‘other natural person exercising effective control of the trust’.

As with the Common Reporting Standard, the terminology in 5MLD is not easily translatable into a charity context and so clear legislation and supporting guidance will be essential to enable trustees to understand how to identify their beneficiaries, the settlor when there is no such person named on the face of the trust document and whether there are any other persons ‘exercising effective control of the trust’.

The information requirements differ depending on whether the person is an individual or corporate entity. For individuals, the information required to be collected is the individual’s full name, date of birth, nationality, country of residence and role in relation to the trust, although the government may choose to collect some additional information (for example National Insurance or passport numbers). For corporate entities, the corporate or firm name, registered or principal office and nature of its role in relation to the trust will be required.

5MLD requires the information provided on the beneficial ownership of a trust to be ‘up-to-date’. To this end the Treasury has proposed that when any of the required information changes, such as the name or contact details of a trustee, the trustees will be required to update the Trust Registration Service within 30 days of becoming aware of the change.

Data sharing obligations including:

  • When undertaking a new business relationship with an express trust, regulated businesses will be required to collect proof of that trust’s registration with the Trust Registration Service.

This will affect, for example, tax advisers, auditors and lawyers taking on charitable or other trusts as clients.

  • The government must consider any request to share beneficial ownership information with anyone who claims to have a ‘legitimate interest’ in accessing the information.

The Government considers that someone who has a ‘legitimate interest’ will have active involvement in anti-money laundering or counter-terrorist financing activity but it is unclear from their proposals whether this would extend beyond an investigator or prosecutor to, say, an investigative journalist seeking to expose a charity for alleged money laundering or terrorist financing activities.

  •  A right for any legal person to access data on an express trust that owns or controls a corporate or other legal entity based outside the EEA.

This would include, for example, a UK charitable trust which has formed a subsidiary or sister charity in a non-EEA country to carry out charitable activities there. There is no requirement for such an access request to have an anti-money laundering or counter-terrorism financing aspect to it and clarity is needed from the Treasury as to why this is the case.

How will charities be affected?

The government is not currently intending to specify a full list of the types of trusts that will fall within the scope of the requirement. It is clear that charitable trusts will be caught however, in spite of the government’s findings in the 2017 National Risk Assessment that the risk of charities being used to launder money or fund terrorism is low.

Charitable trusts are established in a wide range of ways and so this requirement could have a broad reach, affecting charitable trusts, unincorporated associations, and incorporated charities which hold charitable trusts such as restricted funds and endowments.

For example, when a donor makes a donation to charity for particular charitable purposes (for example, a donation to a charitable school to award an educational prize or to a charitable society to establish a lecture series) a charitable trust will often be created. If restricted and endowment funds held on trust are caught by the new registration requirement, very many charities, including incorporated charities, will be affected in respect of an enormous number of funds.

If this is the case, it would not be proportionate for charities to comply with the trust registration requirement in relation to each and every restricted fund and endowment it holds. In our consultation response, we have suggested instead that a single registration mechanism is provided for this purpose.

Although there is limited scope to alter the trust registration requirement in 5MLD, it is possible that it could be met for charities through existing registration services such as the Charity Commission’s register of charities to avoid charities having to register with both the Trust Registration Service and the Charity Commission and the government has indicated that it is open to such an approach.

While this could reduce the impact of the new requirement on registered charities, with no scope for carve outs or de minimis thresholds, it is clear that trustees of small charitable trusts which are unregistered will need to get ready for a significant new layer of regulation.

This article was written by Lucy Rhodes, Associate at Bates Wells and Laura Soley, Partner at Bates Wells.

Join the discussion

Your email address will not be published.