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Trusts and the new Fifth Money Laundering Directive

23 December 2019
This note provides an update on the Fifth Money Laundering Directive (MLD5) and in particular it focuses on the impact on trustees in the UK, their reporting obligations and the Trust Registration Service (TRS).

Impact of MLD5

At the end of December 2019 the UK government enacted regulations to bring into force MLD5. Most of those regulations will come into effect on 10 January 2020, the EU's deadline for member states to transpose MLD5 into local law. Notwithstanding Brexit, the UK has agreed to introduce MLD5 into its national legislation. 

MLD5 makes it a requirement for any express / charitable trust to be registered on the TRS, regardless of whether or not there is a tax consequence and (at present) there appears to be no carve outs, exemptions or de minimis thresholds.

MLD5 is expected to expand the scope of the TRS by requiring trustees of all UK express trusts (and some non-EU express trusts) to register those trusts with the TRS and provide information on the settlor, beneficiaries and trustees.

However, the provisions relating to trust registration (and its compliance with MLD5) are not included in the recent regulations. These changes, and how they impact the registration of trusts in the UK, will be subject to a more detailed technical consultation on implementation. This means that it will not be until later in 2020 that we discover the impact on UK trusts and the TRS. The Society of Trust and Estate Practitioners (STEP) estimates that the changes required by MLD5 would increase the number of registrable trusts from around 200,000 to two million.

HMRC have confirmed that the consultation will contain information concerning specifically which trusts will be required to be registered; data collection and sharing provisions; and penalties.
Under MLD5, the following types of trust will apparently require registration on the TRS:

  • A trust holding the family home;
  • Discretionary trusts (including presumably pilot trusts), life interest trusts, charitable trusts, employee ownership trusts and even bare trusts;
  • Non EU express trusts acquiring UK land or property either on or after 10 March 2020;
  • Non-EEA express trusts entering a new business relationship with a UK entity on or after 10th March 2020; and
  • Overseas and non-express trusts that are eligible for UK tax (whether or not they are express trusts or have UK trustees).

MLD5 also requires the government to share information about a trust registered on TRS with anyone who claims to have a 'legitimate interest' in accessing that information.   'Legitimate interest' is not defined within MLD5 and it will be up to individual states to determine their own definition.   Currently the UK seems to be taking a narrow approach to what constitutes a 'legitimate interest'. The TRS Register is not accessible by the general public but it is accessible by law enforcement and Financial Intelligence Units (FIUs). The Register was introduced in 2017 in response to MLD4.

On the positive side, there will apparently be a reduction in the amount of information collected through the TRS with a more 'light touch' approach being taken with regards to non-taxable trusts. 
Practically, where financial institutions deal with a trust or trustees, they will, in future, want to see evidence that the trust in question is registered on the TRS, further increasing the administrative burden on trustees. 

Timetable

  • For unregistered trusts in existence on 10 March 2020, the government  proposes a deadline of 31 March 2021 for them to be registered on the TRS;
  • For trusts created after 1 April 2020, the government proposes that the trust should be registered within 30 days of its creation.

The government will consult further in relation to a proposed new penalty regime for late registration.

Although there is a long lead in time for existing trusts to register, a 30 day period for new trusts (potentially including bare trusts) coupled with a new (as yet unannounced) penalty regime seems particularly onerous.

The MLD5 – further background

MLD5 has been introduced as a follow up to its predecessor, the 4th Money Laundering Directive. The UK Treasury published a consultation on implementing MLD5 on 15 April 2019 indicating the UK's commitment to introducing MLD5.

The Treasury consultation document says that the UK is to register all UK resident express trusts. It also says that 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. 

Perhaps unhelpfully, the government does not intend to specify a full list of the types of express trust which will need to be registered and the onus will be on trustees to determine whether their trust is an express trust or not.

The consultation document gives examples of the categories of UK trusts that are likely to fall within the definition of an express trust and that will therefore have to register. The list includes discretionary trusts, IIP trusts, charitable trusts, employee ownership trusts and many types of bare trusts. The fact that there is no de minimis threshold also suggests that pilot trusts (including perhaps for insurance policies) will also need to be registered.

The final wording of MLD5 was agreed by members of the EU in April 2018 and will give the public access to information relating to the beneficial owners of firms operating within the EU. 

The key objectives of MLD5 are to improve the transparency of information relating to ownership of a number of different types of entity and asset, facilitating firms' due diligence on their customers and to disrupt the finances of money launderers by hindering their capacity to raise and transfer funds.

The MLD5 extends MLD4 as follows:

  • Extension of various entities that become subject to European Anti-Money Laundering (AML) legislation.  This includes entities such as providers of exchange services between virtual and standard currencies (i.e. cryptocurrency);
  • Increasing the requirement for entities to apply "client due diligence" (CDD) measures in a similar way to that of banks;
  • Expanding the requirement for enhanced CDD in particular to the following:
    • Countries that are deemed 'high risk' countries by the European Commission; and
    • Politically Exposed Persons (PEPs).
  • Improving and maintaining adequate co-operation between FIUs in the EU Member States; and
  • Increasing transparency of information and understanding beneficial ownership of firms / companies / certain trusts / bank accounts.

For more information on how MLD5 may impact on you or your trusts, please get in contact with your usual contact in DWF's Private Capital Team.