Consultation on the Fifth Money Laundering Directive – Changes to Trust Registration Service to include all charitable trusts

HM Treasury has published a consultation on the transposition of the Fifth Money Laundering Directive (5MLD). Responses to the consultation are due by 10 June 2019 and comments should be sent to [email protected]

The Fourth Money Laundering Directive (4MLD) had placed a requirement on the UK to create a register for all express trusts that incur a UK tax consequence. As a result, HMRC set up the Trust Registration Service (TRS), which went live in 2017. Detailed information on the current implications of TRS for charities can be found here.

As expected, 5MLD expands the scope of this register by requiring trustees or agents of all UK and some non-EU resident express trusts to register those trusts with the TRS, whether or not the trust has incurred a UK tax consequence. The consultation indicates that charitable trusts are likely to fall within the definition of an express trust and therefore will have to register. For those unregistered trusts already in existence on 10 March 2020, the government proposes a deadline of 31 March 2021 for them to register on TRS.  For trusts created on or after 1 April 2020, the government proposes that the trust should be registered within 30 days of its creation.

5MLD also requires the government to share data from the register with a range of persons under certain circumstances. There is a legitimate interest requirement, however, which may mean this does not affect most charities in practice.

The consultation document indicates that a more detailed technical consultation run by HMRC will be published later this year. This will include additional information on the proposals for data collection, data sharing and penalties, taking into account responses to this consultation. It is noted that the Government recognises that the National Risk Assessment (NRA) concludes that UK trusts present a low risk of money laundering and terrorist financing, and is keen to ensure that the registration process – and any associated penalty regime – is applied proportionately.

CTG would welcome feedback from members on the proposals in this consultation to [email protected]. It would also be very useful to receive comments from those that have experienced using the TRS under the current rules.

The section of the consultation relevant to TRS is outlined below.

Chapter 9: Trusts Registration Service

What changes does 5MLD introduce?

9.7 The legislation currently requires the trustee of any express trust that is liable to pay one or more of six specified taxes to register that trust on TRS. 5MLD expands the scope of the register, and the following trusts will have to be registered:

  • all UK resident ‘express trusts’ – as opposed to only those express trusts with UK tax liabilities as at present. (UK resident for this purpose is where (a) all trustees are UK resident or (b) where there is a mixture of UK and non-UK trustees and the settlor is a UK resident)
  • non-EU resident express trusts that acquire UK land or property either on or after 10 March 2020
  • non-EU resident express trusts that enter into a new business relationship with an obliged entity on or after 10 March 2020

9.8 Under 5MLD, the government will be required to disclose specific data about a trust and the ‘beneficial owners’ of it held on the register to law enforcement agencies in line with existing requirements under 4MLD. In addition, data on specific trusts will be shared under three circumstances:

  • with obliged entities that enter a business relationship with a trust
  • with persons who can demonstrate a ‘legitimate interest’ in access to information on the beneficial ownership of a specified trust
  • with persons who want to know about trusts with a controlling interest in a non-EEA company

9.9 The above terms, and the parameters for these data sharing obligations will be set out in this chapter. The government does not envisage changing any of the existing registration requirements on trusts which incur UK tax consequences – the additional requirements set out in this chapter will apply to trusts which are not already subject to a registration obligation.

Potential issues

Who is required to register UK resident express trusts

9.10 5MLD requires the UK to register all UK resident ‘express trusts’ and does not provide scope for carve outs, exemptions, or de minimis thresholds. The term ‘express trust’ is generally defined as a trust that was expressly (i.e. deliberately) created by a settlor, as opposed to being created in other ways – for example, through a court order or through statute.

9.12 We have set out below examples of the categories of UK trusts that are likely to fall within the definition of an express trust and therefore will have to register:

  • discretionary trusts
  • interest in possession trusts
  • many types of bare trusts
  • charitable trusts
  • employee ownership trusts

9.15 The government is also considering whether there are other registration services already in existence for particular trust types that could fulfil the 5MLD registration requirement, to avoid duplicate registration wherever possible.

9.16 Trusts within the EU are only required by 5MLD to register once. Therefore, EU resident express trusts that have an entry on a register in another Member State do not need to register on the UK’s Trust Register. Trustees of trusts in this position should be prepared to provide written proof of registration in the relevant EU Member State if requested.

QUESTIONS: Box 9.A: Definition of express trust

  • Q 64 Do respondents have views on the UK’s proposed approach to the definition of express trusts? If so, please explain your view, with reference to specific trust type. Please illustrate your answer with evidence, named examples and propose your preferred alternative approach if relevant.
  • Q65 Is the UK’s proposed approach proportionate across the constituent parts of the UK? If not, please explain your view, with reference to specific trust types and their function in particular countries.
  • Q66 Do you have any comments on the government’s proposed view that any obligation to register an acquisition of UK land or property should mirror existing registration criteria set by each of the UK’s constituent parts?
  • Q67 Do you have views on the government’s suggested definition of what constitutes a business relationship between a non-EU trust and a UK obliged entity?
  • Q68 Do you have any comments on the government’s proposed view of an ‘element of duration’ within the definition of ‘business relationship’?

Data collection

9.21 Article 31 of 4MLD says that for every trust which a Member State is required to register, information should be collected on the ‘beneficial owners’ of the trust. This includes information on:

  • the settlor
  • the trustee
  • the protector(s) (if any)
  • the beneficiaries or class of beneficiaries
  • any other natural person exercising effective control of the trust

9.22 5MLD requires the UK to share, and therefore first collect, certain information on each person listed in the above paragraph:

9.23 in relation to an individual

  • the individual’s full name
  • the individual’s date of birth
  • the individual’s nationality
  •  the individual’s country of residence
  •  the nature of the individual’s role in relation to the trust

9.24 in relation to a corporate entity:

  • the legal entity’s corporate or firm name
  •  the registered or principal office of the legal entity
  • the nature of the entity’s role in relation to the trust

9.25 The government may choose to collect some additional information with which to establish the legal identity of individuals; for example, National Insurance or passport numbers. Similarly, the government may collect some additional information in respect of non-EU trusts required to register to determine whether or not a trust is subject to some of the data sharing provisions set out in 5MLD. The government will confirm its approach on these points later in 2019 through the technical consultation.

9.26 The government expects to continue to collect more information on trusts which generate tax consequences than on trusts that do not generate such consequences, in line with HMRC’s tax collection responsibilities. Even in relation to trusts with tax consequences, however, the government is not currently minded, to continue to collect the full range of information currently required within the existing version of TRS. The government appreciates that some of information required has been found to be onerous for customers, and we will take this opportunity to review and ideally reduce information collected.

QUESTIONS Box 9.B: Data collection

  • Q 69 Is there any other information that you consider the government should collect above the minimum required by 5MLD? If so, please detail that information and give your rationale.
  • Q70 What is the impact of this requirement for trusts newly required to register? Will there be additional costs, for example paying agents to assist in the registration process, or will trustees experience other types of burdens? If so, please describe what these are and how the burden might affect you.
  • Q71 What are the implications of requiring registration of additional information to confirm the legal identity of individuals, such as National Insurance or passport numbers?

Existing trusts

9.27 The current TRS registration deadline of 31 January was based on the link to submitting a tax return. Given that this link is broken by 5MLD, the government no longer considers this deadline to be appropriate. We have therefore considered alternative options for existing and new trusts.

9.28 For those unregistered trusts already in existence on 10 March 2020, the government proposes a deadline of 31 March 2021 for them to register on TRS. This gives a long lead in time given the greater number of trusts that will need to be registered.

New trusts

9.29 For trusts created on or after 1 April 2020, the government proposes that the trust should be registered within 30 days of its creation. The government envisages that this approach would be the most straightforward, as registration can occur as part of the set-up process, when the required details should be readily available to trustees/agents.

9.30 The proposal for registration within 30 days for new trusts means there is no single deadline each year and it seems sensible to register the trust at the same time it is created.

9.31 It is also intended that this 30 day deadline will be used for any amendments to be made to the TRS data in due course: that is, when any of the required information changes, such as the name or contact details of a trustee or beneficiary, trustees/agents will be required to update TRS within 30 days of becoming aware of the change, once the facility to do so is available. Late registration

9.32 For late registration on TRS there are currently set penalties based on the self-assessment penalty regime due to the link between registration and taxable activity. However, as 5MLD extends registration to non-taxpaying trusts, this link is no longer appropriate. Therefore, the government considers that the self-assessment penalty regime is not a suitable basis for any future TRS penalty framework. 9.33 The government will consult on a suitable replacement penalty framework within the later technical consultation. In the interim, we would be interested in views on the format such a framework might take.

QUESTIONS Box 9.C: Registration deadlines

  • Q72 Does the proposed deadline for existing unregistered trusts of 31 March 2021 cause any unintended consequences for trustees or their agents? If so, please describe these, and suggest an alternative approach and reasons for it.
  • Q73 Does the proposed 30 day deadline for trusts created on or after 1 April 2020 cause any unintended consequences for trustees or their agents? If so, please describe these, and suggest an alternative approach and reasons for it.
  • Q74 Given the link with tax-based penalties is broken, do you agree a bespoke penalty regime is more appropriate? Do you have views on what a replacement penalty regime should look like?

Data sharing

General

9.34 HMRC currently shares TRS data with law enforcement agencies when requested to do so, as specified in the MLRs. The government does not propose to change the type of information shared with law enforcement, nor the process by which it is shared.

9.35 5MLD introduces new data sharing requirements, in relation to obliged entities, those persons with a legitimate interest in specified information on trust beneficial ownership and those requesting information on trusts that hold a controlling interest in a non-EEA company.

Obliged entities

9.36 Article 14 of 4MLD as amended requires that, when undertaking a new business relationship with a trust, obliged entities have to collect proof of that trust’s registration on TRS in order to complete their due diligence obligation. Chapter 5 of this document sets out the government’s view that the onus should be on the trustee to provide the information to the obliged entity.

9.37 The alternative to this would be the obliged entity itself requesting information directly from the trust register. This option would put an obligation on the government to verify the identity of an obliged entity, and whether it has the right to the relevant information. This may be subject to a delay whilst the government verified the identity and credentials of the obliged entity. Therefore, the government proposes that the obliged entity who wishes to enter into a business relationship will be best placed to verify that the relevant trustee has registered the trust on TRS, through obtaining proof of registration.

9.38 The type of information required to be given by the trustee to the obliged entity to satisfy this requirement will be included in the scope of HMRC’s technical consultation later this year. The government envisages, however, that this information will be more than simply the trust registration number and will probably include information on the trustees including their names and contact details. This will assist obliged entities in complying with their CDD obligations.

9.39 The method by which the government will enable trustees to access proof of their trust’s registration on TRS is still to be determined, but is likely to involve the facility for trustees to print out an extract of their trust’s registration details in order to share that extract with any obliged entity of their choice. More detail on this requirement will be included in HMRC’s technical consultation.

QUESTIONS Box 9.D: Data sharing with obliged entities

  • Q75 Do you have any views on the best way for trustees to share the information with obliged entities? If you consider there are alternative options, please state what these are and the reasoning behind it

9.42 5MLD allows data sharing in the specified circumstances to combat money laundering and terrorist financing. It is aligned with other high priority initiatives and enhancements to these regimes. It is with this context in mind that the government believes that a definition of legitimate interest which is closely linked to this work makes the most sense.

Legitimate interest

9.43 Trusts are widely used across the UK for many ordinary purposes, including for charitable purposes; to protect assets for children and vulnerable adults; ring-fencing funds for consumer protection purposes; commercial purposes (such as providing security for contracts); or when structuring pension schemes. The government recognises the potential risks associated with sharing individuals’ and trusts’ data without due cause and considers it important that any definition of legitimate interest protects those persons whose data is held on TRS from purely speculative queries, and from requests made for any inappropriate reason.

9.44 Tying the definition to the original purpose of 5MLD in combatting money laundering and terrorist financing sets a suitable bar for requestors to meet, ensuring that trust users who are complying with the law and using trusts for legitimate purposes can have confidence that their privacy will be respected.

9.45 In this context, the government considers someone who has a legitimate interest in this data will:

  • have active involvement in anti-money laundering or counter-terrorist financing activity
  • have reason to believe that the trust or person that is the subject of the legitimate interest enquiry is involved with money laundering or terrorist financing: in other words, speculative enquiries into all or multiple trusts on TRS will not be deemed legitimate
  • have evidence underpinning that belief

9.46 It will be for the government to consider whether or not requests for data meet the definition of legitimate interest. We will set up a clear and robust system to ensure that data is only released when we are confident that a request meets the definition in full and that disclosure does not impede progress of ongoing law enforcement investigations. This process will be set out fully in due course, but is likely to include a requirement to see identification documents for the requestor, and evidence linking the trust or person about whom the request is being made to money laundering or financing terrorism. This will ensure that persons with legitimate investigative roles into money laundering or terrorism financing will be able to access information about trusts registered on TRS that are credibly associated with such activity.

9.47 5MLD allows the government to make a charge for the provision of TRS information for legitimate interest requests. The government expects to apply fees proportionate to the costs involved in checking and compiling the information. Furthermore, we believe a detailed internal assessment process, and potentially a right of appeal, may be appropriate. This will be covered in more detail in the technical consultation.

9.48 In addition to the evidence and processes used to determine whether or not a request for data constitutes a ‘legitimate interest’, the government will ensure that personal data on vulnerable individuals associated with any trust that is the subject of such a request will receive special consideration, in line with the provision in Article 30(7) of 4MLD as amended. In particular, we anticipate withholding information on any minors associated with a trust, even under circumstances where other data relating to that trust had been deemed subject to release.

QUESTIONS Box 9.E: Data sharing for legitimate interest requests

  • Q76 Do you have any comments on the proposed definition of legitimate interest? Are there any further tests that should be applied to determine whether information can be shared?

Information on non-EEA companies

9.49 5MLD provides the right for any legal person to access data on any express trust that ”holds or owns a controlling interest in any corporate or other legal entity” that is not registered on any EEA Member State’s corporate beneficial ownership register. In practice, this means any trust that owns or controls a corporate structure based outside the EEA.

9.50 The definition of ‘controlling interest’ should address issues of transparency and disguised ownership. The government proposes to use a definition in line with Article 3(6) of 4MLD as amended and with the 2016 regulations and 2017 guidance for the register of Persons with Significant Control (PSC). The government considers these existing regulations are sufficient for the purposes of 5MLD, and there is no merit in developing alternative definitions. Unlike the PSC register, the 5MLD includes public listed companies (PLCs) in scope of ‘corporate entity’. The government therefore plans to include PLCs in this requirement.

9.51 This means a trust will be deemed to hold a controlling interest in any corporate or other legal entity:

  • when the trust has 25% or more of either voting shares or some sort of equivalent voting rights in respect of that entity
  • where the trust has any of the other means of control over that entity as defined in the 2017 PSC statutory guidance on the meaning of ‘significant influence or control’

9.52 Utilising the 2017 statutory guidance, the definition of a trust having control via other means will include examples such as the trust being able to:

  • adopt or amend the company’s business plan
  • change the nature of the company’s business
  • make additional borrowing from lenders
  • appoint or remove the CEO
  • establish or amend any profit sharing, bonus or other incentive scheme of any nature for directors or employees
  • grant options under a share option or other share-based incentive scheme

9.53 The government considers that ‘corporate entity’ includes a body corporate incorporated under the law of a country or territory outside the EEA, but does not include a corporation sole, or a partnership that, whether or not a legal person, is not regarded as a body corporate under the law by which it is governed.

9.54 For the purposes of TRS, the government considers that ‘other legal entity’ would typically include charities, unincorporated associations and nongovernmental organisations (NGOs); collective investment schemes; trusts and their equivalents from other legal systems. However, the government would welcome views on whether the concept of ‘other legal entity’ needs to be specifically defined, and if so, in what way.

9.55 The government is considering different options for identifying trusts which fall within the definition in 9.48 above. Firstly, the government could require a simple self-declaration by the trustee as to whether or not the trust meets the definition above. Or alternatively, the government could ask trustees to provide detailed evidence demonstrating they hold or own a controlling interest in any corporate or other legal entity, as well as what that interest itself constitutes.

9.56 The government’s preferred approach is the option of a self-declaration by the trustee during the registration process, as we consider this to be the most efficient and least resource-intensive approach. Where a trust does have such an interest, the trustee will then be asked for some basic details regarding the corporate or other legal entity in question, still to be determined. Given that we expect trusts with this characteristic to be a relatively small subset of trusts as a whole, this approach will ensure that only trustees of trusts that do fall within this category are then asked to answer additional questions, rather than applying such questions to all registrants.

9.57 It is important to note that data held within TRS about these trusts can be requested by anyone. Requests are purpose blind: there is no requirement for an anti-money laundering or counter terrorist financing aspect to the request. The government is therefore interested in views on how this data is best shared.

QUESTIONS Box 9.F: Data sharing on trusts owning non-EEA companies

  • Q77 Do the definitions of ‘ownership or control’ and ‘corporate and other legal entity’ cover all circumstances in which a trust can indirectly own assets through some kind of entity? If not, please set out the additional circumstances which you believe should be included, with rationale and evidence.
  • Q78 Do you have any views on possible definitions of ‘other legal entity’? Should this be defined in legislation?
  • Q79 Does the proposed use of the PSC test for ‘corporate and other legal entity’, which are designed for corporate entities, present any difficulties when applied to non-corporate entities?

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