In March 2024, the The Financial Action Task Force (FATF) released risk-based guidance to support the implementation of Recommendation 25 on Beneficial Ownership and Transparency of Legal Arrangements. Its aim is to support stakeholders across both the public and private sectors in implementing the new requirements more effectively.
Who needs to read and comprehend the guidance
Professionals in the legal, financial, and compliance sectors, as well as entities involved in trust and company services, would greatly benefit from understanding and implementing the updated requirements outlined in the guidance. This guidance is designed to complement existing guidelines related to Recommendation 24 concerning legal persons.
To start, let's examine some specific types of trusts: Express Trusts, Charitable Trusts, Legal Arrangements similar to Express Trusts .
1. Express Trusts
Express trusts, often referred to simply as "trusts," are precisely defined in the Glossary to the FATF Recommendations. These trusts are clearly established by the settlor, typically through a documented instrument outlining the terms of the trust. Unlike other forms of trusts, express trusts are not formed by legal operation but rather by the deliberate intent of the settlor to create a trust or similar arrangement.
In essence, trusts govern the relationships between parties involved, primarily including the settlor, trustee, and beneficiaries, concerning assets held within the trust. It's important to note that trusts themselves do not possess legal personality; instead, the trustee assumes legal ownership of the assets and acts on behalf of the trust in various transactions and agreements.
1.1 Purpose and Function
The primary function of express trusts is to manage and distribute assets or income generated from asset management in accordance with the trust instrument's terms and the trustee's fiduciary obligations. These arrangements are typically categorised as trusts for individuals (beneficiaries) or trusts for specific purposes, such as charitable or non-charitable endeavours.
1.2 Reasons for Establishment
Express trusts are established for a multitude of reasons, each serving specific economic or personal objectives:
- Asset Protection: Trusts are often utilised to shield assets from potential external risks, such as creditor claims or the threat of bankruptcy.
- Asset Management: They facilitate effective asset management, ensuring business continuity and stability.
- Privacy: Trusts offer a layer of privacy, particularly crucial for safeguarding the security and confidentiality of high-profile individuals.
- Overcoming Legal Hurdles: In cases where legal requirements or restrictions pose challenges, trusts provide a flexible solution to navigate such obstacles.
- Tax Planning: Trusts may offer tax advantages in certain jurisdictions, providing opportunities for tax optimisation compared to other entities or beneficiaries.
- Estate Planning and Succession: They play a vital role in estate planning, ensuring smooth succession and providing for vulnerable beneficiaries in the event of the settlor's demise or beneficiary misconduct.
- Investment Holding: Trusts serve as efficient vehicles for holding investments, including pension funds and other commercial assets.
In summary, express trusts play a multifaceted role in asset management and wealth preservation, offering flexibility and strategic advantages for various economic and personal endeavours.
2. Charitable trusts
These types of trusts can be set up for an interest to be directed at a particular charitable purpose, rather than a group of people. As such, there are no identifiable beneficiaries.
Charitable Purpose: All charitable trusts are established to benefit the public in some manner.
Indefinite Beneficiaries: Since no individual beneficiary can claim the trust, it is enforced by the Attorney General (or equivalent) of the state where the trust is located, or by a court or other statutory authority as appropriate within the jurisdiction of the trust.
Duration: The Rule Against Perpetuities does not apply to charitable trusts, allowing them to continue as long as the charitable purpose exists.
3. Legal arrangements similar to Express Trusts
The goal is to clarify the process of recognising legal arrangements resembling express trusts. In the FATF Glossary, legal arrangements are defined to encompass express trusts as well as other comparable legal structures. These may include fiducie, specific types of Treuhand, fideicomiso, and Waqf.
When it comes to determining if a legal arrangement resembles an express trust, there's no one-size-fits-all definition. It's more like solving a puzzle, taking into account various factors such as its structure and purpose. What's interesting is that these similar arrangements can exist regardless of whether a country adheres to the Hague Convention or has specific regulations for express trusts.
Fatf advises that countries can take several steps to identify similar legal arrangements within their jurisdiction:
- Firstly, they should examine whether their laws explicitly acknowledge express trusts or similar legal setups. This evaluation involves considering the likeness between arrangements, which may benefit from insights from contract law experts and trust professionals.
- Secondly, countries should delve into the structure and objectives of all legal arrangements present within their jurisdiction. This process may entail analysing relevant case law, which reflects previous judicial decisions and the recognition of specific arrangements. For instance, certain agreements evolving within the realm of contract freedom might have gained recognition even without explicit legal regulation.
Parties involved in a trust can vary, but typically include:
- The settlor(s)
- The trustee(s)
- The protector(s), if there are any
- Each beneficiary, or in some cases, groups of beneficiaries and individuals designated as objects of a power
- Any other individuals who ultimately control the arrangement.
Countries should ensure that trustees collate and maintain precise, current, and sufficient beneficial ownership details for all these parties. However, for beneficiaries categorised by traits or as part of a group, trustees aren't required to obtain exhaustive information. Understanding the distinct roles and responsibilities of settlors, trustees, and protectors is essential for effective trust management, compliance with legal requirements, and mitigating risks associated with money laundering and terrorist financing. Furthermore, the guidance delves into the roles of different parties involved in legal arrangements and examines sector-specific issues, such as those concerning trust and company service providers and the legal profession, offering insights on regulatory actions necessary to address these challenges.
4. Understanding Roles and Responsibilities
Key parties in a trust typically comprise those listed below to whom various responsibilities and functions are assigned, as follows:
Settlor: The settlor, whether a natural person or a legal entity, initiates the trust or similar legal arrangement by transferring ownership of assets to trustees through a trust deed or similar documentation. They may also provide property or funds for the trust, with an intention to benefit the trust in some way.
Trustee: Trustees, whether professional or non-professional, are entrusted with the legal authority to manage trust assets. They derive their powers and obligations from the trust instrument, as well as relevant case law and legislation. Trustees play a central role in trust transactions, overseeing and scrutinising dealings with trust property, and ensuring compliance with legal requirements.
Protector: The role of a protector, appointor, or guardian varies across jurisdictions and trusts. Generally, these individuals are appointed to oversee the actions of trustees and ensure they act in the best interests of beneficiaries. Protectors may have the authority to approve or revoke trustee decisions, remove or appoint trustees, or change the jurisdiction of the trust.
Natural Person Exercising Effective Control: Apart from the parties explicitly mentioned in the trust, other natural persons may wield effective control over the legal arrangement. This includes situations where control is exercised through a chain of ownership/control, or by individuals who have the power to determine who can exert control over the trust.
5. Understanding Trust Beneficiaries
Understanding the concept of beneficiaries in the context of trusts is fundamental, as are the discretionary powers granted to trustees. Below we outline key elements:
Definition: Beneficiaries of a trust are individuals or entities who either currently hold or may potentially acquire the benefits of the trust arrangement, whether directly or indirectly. Beneficiaries can encompass natural persons, legal entities, or arrangements. While most trusts must have ascertainable beneficiaries, exceptions exist for charitable or statutory permitted non-charitable trusts.
Identification: Beneficiaries may be explicitly named in the trust instrument or clearly identifiable based on the trust's provisions. Additionally, beneficiaries may include individuals who become entitled to benefits upon the occurrence of specific events, such as trustee discretion or the end of an accumulation period.
Discretionary Powers: Trustees may be granted varying degrees of discretionary power in selecting beneficiaries or determining the extent of benefits. This flexibility allows trustees to adapt distributions according to the trust's objectives and circumstances.
6. Adequate, Accurate, and Up-to-date Information
Countries must guarantee the availability of sufficient, precise, and up-to-date data concerning trusts or similar legal arrangements, accessible promptly by competent authorities. This encompasses details about the settlor, trustee, and beneficiary, and the obligation to gather and maintain this information falls upon the trustee or its equivalent position holder, as outlined in INR.25.
In Cyprus, the Cyprus Securities and Exchange Commission (CySEC) has established a platform called CYTBOR. This platform offers easy and immediate access to up-to-date information on the beneficial owners of express trusts and similar legal arrangements. CYTBOR provides details such as the identities of the settlor, trustee, protector (if appointed), beneficiary, and any other individuals with ultimate control over the trust through direct or indirect ownership or other means.
The creation of CYTBOR is significant because it grants access to all supervisory state authorities, including the Customs Department, Taxation Department, MOKAS, and the Police, enabling them to access the register without hindrance as part of their responsibilities. According to the Directive, trustees of express trusts or equivalent persons established or residing in the Republic must submit an application for registration to CYTBOR, including the required information, within fifteen (15) days of their appointment.
6.1 Information Requirements
Trustees are obligated to obtain and maintain accurate and up-to-date information about all current beneficiaries, with exceptions for certain classes of beneficiaries identified by the trust instrument. The information provided in CYTBOR is in line with the FATF requirements and Section 61C(5)(b)(i) and Section 61C(5)(b)(ii) of the AML/CFT Law.
- name
- country and date of incorporation and/or establishment,
- applicable law,
- termination date (if any),
- information on the country of establishment or residence of the trustee or other equivalent person as well as their residential address etc.
Importance: Identifying beneficiaries is crucial for trustees to fulfill their duties effectively and ensure that beneficiaries' interests are adequately considered. Trustees must have awareness of beneficiaries' identities to administer the trust properly.
Discretionary Trusts: In cases where trustees have broad discretionary powers, it may not be necessary to identify all potential beneficiaries explicitly. The trust's language may encompass future or unidentified beneficiaries, and trustees have a duty to assess beneficiary eligibility before making distributions.
7. Record Retention Requirements for Trustees
Countries should mandate that trustees retain beneficial ownership records for at least five years after their involvement with the trust or legal arrangement ends. This timeframe represents a minimum requirement. Trustees may, however, choose to keep records for longer periods to comply with other legal obligations or to manage liability. For example, extended record-keeping may be required by trust law or necessary for trustees to account for their actions.
8. Sanctions for Non-Compliance with R.25: Accountability for Both Natural and Legal Persons
Regarding this guidance, sanctions must extend to individuals and entities, both natural and legal, who fail to adhere to the requirements of R.25. Depending on their legal frameworks, countries may hold legal entities accountable and impose penalties, especially if breaches stem from the deliberate or negligent actions of senior management or authorised representatives acting within their professional capacities. Additionally, in instances where employees breach requirements, senior management responsible for overseeing these employees could also be held liable.
During its forthcoming round of mutual evaluations, the FATF will evaluate the implementation of these requirements by countries.
In summary, the FATF's recent release of risk-based guidance on beneficial ownership and transparency of legal arrangements is a significant milestone in bolstering global efforts to combat financial crime. Legal, financial, and compliance professionals, as well as entities involved in trust and company services, are urged to familiarise themselves with the updated requirements outlined in this guidance. The guidance not only clarifies essential concepts such as express trusts and charitable trusts but also provides practical insights into identifying legal arrangements resembling express trusts. Moreover, it emphasises the importance of maintaining accurate and up-to-date information on beneficiaries, underscores the record retention requirements for trustees, and outlines sanctions for non-compliance with Recommendation 25. By adhering to these guidelines, stakeholders can enhance transparency, mitigate risks associated with money laundering and terrorist financing, and contribute to a more robust global financial system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.