Beneficial ownership transparency of trusts

Emerging best practice and policy considerations

Operationalising the BOT of trusts and the related data requires making decisions about a number of things, including: which data should be collected; how and when to collect it; how to verify it; how the data is integrated (where applicable) with BO registers of legal entities; and whether and how data should be published. These aspects will all have an impact on data quality and usability. The format in which the data is collected will also affect its ability to be linked to other datasets, which may allow for specific types of analysis.

Most countries are still at too early stages of reforms in the BOT of trusts to learn much from their practical experience. Nonetheless, on analysing the information above, some of the most effective legal and regulatory approaches to the BOT of trusts can be identified. Additionally, the experience and lessons learned from establishing public BO registers for legal entities – how best to ensure comprehensive data collection, verification, data quality, accessibility etc., captured in the OO Principles[44] – can also provide a framework of guiding principles in this area of the BOT. The section below outlines some key policy considerations for implementers, using the OO Principles for effective disclosure of BO of legal entities as a framework.

Clear and robust legal definitions

To underline the relevant data that should be collected on beneficial owners of trusts, it is important to ensure that the BO of trusts is clearly and robustly defined in law. Robust and clear definitions of BO should state that a beneficial owner should be a natural person. The definition of beneficial owners of trusts should be comprehensive enough to include all parties to a trust within its scope – settlor(s), trustee(s), protector(s) (if any), and beneficiaries or class(es) of beneficiaries, as well as any natural person exercising control over the trusts. This is the approach that has been adopted by Belgium, Bulgaria, Cyprus, Luxembourg, Malta, and the UK, although some use the singular “settlor” or “protector” in their BO definition of trusts, following the FATF standards.[45]

Comprehensive coverage

At a minimum, trustees of express trusts or similar legal arrangements that are created or governed by the domestic law or administered in the jurisdiction should be required to obtain and maintain adequate, accurate, and up-to-date BO information of trusts. Ideally, governments should ensure that their disclosure regimes should comprehensively cover both domestic law trusts and foreign law trusts having any connection with their jurisdiction – whether it be that the settlor(s), trustee(s), protector(s) if any, or beneficiaries are resident in the jurisdiction or the trust holds assets or establishes any business relationships in the jurisdiction.

In addition, as a starting point, all relevant types of trusts and categories of people should be comprehensively covered in the disclosure regimes. It should be subsequently assessed as to which trusts and people can be excluded, for instance, on the basis of lower risk. If any jurisdiction provides any exemptions from the disclosure requirements, they should be clearly defined and publicly justified. Any exemptions provided should be re-assessed on an ongoing basis.

Sufficient detail for users to understand and use data

BO disclosure of trusts should collect sufficient detail to allow users to understand and use the data. Key information should be disclosed to authorities about the beneficial owners and all the relevant information on trusts that have any connection with the registration jurisdiction, including the means by which beneficial interest is held in the trust and the related trust documents. If the BO of trusts is held indirectly through multiple legal entities, sufficient information should be gathered to understand full ownership chains. It should be possible to unambiguously identify trusts and their BO.

When beneficiaries of a trust are named in the trust deed, collecting and providing sufficient information about them in the register might not be that difficult. However, an issue arises when there is a class of beneficiaries who are not yet known or named individually in a trust deed. For example, future grandchildren of Mr X. In such instances, the approach taken by the UK is to include “grandchildren of Mr X” in a class of beneficiaries because they are not specifically known or their names are not known. However, only when a member of a class of beneficiaries benefits from the trust, and so becomes known, the beneficiary’s details must be recorded in the register. It is important to emphasise here that in the UK the requirement to register a member of a class of beneficiaries is when that member (for instance, a grandchild) benefits from the trust and not when they were born.

However, how and when specifically this information is to be recorded in the UK’s BO register for legal entities – the PSC register – when trusts feature in the ownership of a legal entity is not clearly specified anywhere. The PSC register does not require all parties to a trust to be reported, but rather only persons “who influence or control the trust”. This seems to contradict leading definitions of the BO of trusts which state that all parties to a trust are taken to be beneficial owners. Therefore, whether such an approach is sufficient to ensure the BOT of trusts is debatable.

On analysing the information above, the following data should be disclosed to a central register at a minimum.

• For the trust:
  • the full name of the trust;
  • the type of trust;
  • the place where the trust is resident for tax purposes;
  • the place where the trust is administered (where the trustee resides);
  • the law of the country that governs the trust;
  • the date when it was created;
  • the trust’s tax identification number(s) (if any);
  • the trust’s Legal Entity Identifier (LEI), if any, or other identifier;
  • information about the trust assets at the time of registration, including their estimated value;
  • trust-related documents (such as the trust deed, letter of wishes, or power of attorney, etc.).
• For beneficial owners: sufficient identifying information on individual beneficial owners, e.g.:
  • full name;
  • date of birth;
  • date of death (in case of deceased settlor);
  • country of residence;
  • nationality;
  • national identification number and address (if registered country’s national) or passport details and address (if not a national in the registration country);
  • the existence of and details of any classes of beneficial owners;
  • the means by which beneficial owners of trusts exercise control within the trust, i.e. their role in the trust.
• For companies or other legal entities involved in the ownership structure:
  • corporate or firm name;
  • company incorporation/registration number and registering body, jurisdiction of registration, and LEI (where applicable);
  • registered or principal office address;
  • role in the trust;
  • the start date from which either the trust controls the company or company controls the trust.

Central registers

Lessons from BO registers of legal persons identified by the FATF[46] suggest that establishing a central register of the BO of trusts is the best approach to deter and prevent the misuse of trusts. It will be a more efficient and cost-effective process for the relevant authorities and the public to access (or request to access) information through one central location in a standardised format.

Public access

Similar to legal entities, public access to the BO data of trusts would stimulate broader data use and scrutiny that is likely to increase impact. The publication of data can also have a deterrent effect on wrongdoing and misuse. Therefore, an argument could be made that in order to get the maximum benefit and impact from BO data in preventing the use of trusts for illegitimate purposes, the BO of trusts should be collected centrally, verified, and published. Nonetheless, this approach has so far been taken only by a handful of countries (e.g. Austria and Germany).

As discussed earlier in this briefing, whilst there is a case for making data public to maximise the effectiveness of BO data for trusts, there can be legitimate privacy concerns over making the BO data available to the public. The majority of countries and the AMLD5 have taken the approach of making the BO data on trusts available to third parties only if they demonstrate a legitimate interest – although this term has not been defined in the AMLD5. As a principle, governments should collect all relevant BO data on trusts in the register, then decide on the approach that is best suited to achieving their policy aims. At a minimum, BO data on trusts should be available to members of the public demonstrating legitimate interest, which should be defined by the countries,[n] whilst keeping in mind the significance of ensuring the adequacy and accuracy of the data held in the register. Where jurisdictions are implementing BOT of legal persons, and when trusts feature in the ownership structure of a legal person, the BO information of these trusts should, at a minimum, be made available to the public. Exceptions to public disclosure should be considered on a case-by-case basis, similar to the case for legal entities, where credible threats to an individual emerge from the publication of data. Only the authorities need access to the full set of data fields specified above. Where information about the BO of trusts is made public, a subset of the data containing sufficient details to be able to use the data should be made available, and sensitive data such as national identification numbers and passport details should be excluded from publication.

Structured data

Operationalising the use of BO data for trusts could be best achieved through integrated digital technologies to collect, store, and publish data as structured and machine-readable. Structured data can be analysed and cross-referenced easily and cheaply, which helps provide insights into the activities and operations of trusts and their beneficial owners.

It should be possible to unambiguously identify trusts. When combining datasets, it is key to be able to identify individuals, trusts, and companies across them. Data that is easy to link with other datasets can be described as interoperable. Matching people, trusts, and entities across datasets by using identifiers such as names is unreliable and labour intensive, and not viable for larger datasets. A better approach is to use unique identifiers. Some trusts will have LEIs, but many will not. This is important for implementers to consider, as existing regulations will lead to trusts being represented in multiple registers.

Combining datasets allows for analysis that would otherwise not be possible. For instance, linking the BO trust data with the birth and death register would be useful to update and verify the relevant parties of the trusts, even when new beneficiaries (e.g. newly born grandchildren of the settlor, etc.) are identified in the trust register.

Verification

To maximise the impact of BO data, it is important that data users and authorities can trust that the data contained in the register broadly reflects the true and up-to-date reality of who owns or controls a particular trust. This can be done through verification (defined as the combination of checks and processes that a particular disclosure regime opts for in order to ensure that the BO data is of high quality, meaning it is accurate and complete at a given point in time[47]). This can include checking that data conforms to known and expected patterns; cross-checking information against existing authoritative systems and other government-held datasets (such as the tax authority, BO register for legal persons, or charity register); and regularly checking that data is correct.

Data on trusts should be verified on submission, including verifying relevant trust documents (such as the trust deed, letter of wishes, or power of attorney, etc.), and updated – or confirmed that it still holds true – on a regular basis. Due to the complexity in identifying the BO of trusts and their very nature as private arrangements, it is important that all relevant trust documents are uploaded and registered for authorities to verify that the BO information is correct.

Up to date and auditable records

Compared to legal persons, there might be less frequent changes to the BO information on trusts. Nonetheless, it is essential that initial registration – e.g. whenever trusts form a business relationship or carry out occasional transactions above a prescribed threshold – and subsequent changes to BO should be submitted in a timely manner. The information should be updated within a short, defined time period after the change occurs. In the UK, for instance, any changes in the registered information on trusts has to be updated within 30 days of the change.

Data should be confirmed as correct on at least an annual basis and all changes in BO should be reported. An auditable record of the BO of trusts should be created. Historical records with dates should be maintained, including changes to trusts, inactive trusts, and terminated trusts. For example, information should be stored about a previous trustee or a former beneficiary where the trustee has been replaced or the beneficiary is no longer able to benefit.

Sanctions and enforcement

Governments should ensure that effective, proportionate, dissuasive, and enforceable sanctions should exist in case of non-compliance with the disclosure requirements, including non-submission, late submission, incomplete submission, or false submission, in order to drive up compliance. Sanctions should cover the person making the declaration, the beneficial owner(s), the trustee(s), and the trust.[o] A number of countries have already implemented sanctions, both monetary and non-monetary, for failure to provide or for providing incorrect BO data on legal entities. For trusts, too, effective, proportionate, and dissuasive sanctions should be imposed to ensure compliance. In addition to monetary sanctions, these sanctions may range from preventing trusts from opening a bank account, acquiring property or assets, or preventing their entering into any business relationship with the reporting entities under the AML/CFT law.[48] Such a provision has been adopted in North Macedonia in the law relating to the central BO register of the legal entities.

Footnotes

[m] In the UK, for instance, the term “legitimate interest” has not been defined. However, a criteria to determine “legitimate interest” has been provided under Regulation 45ZB(11) of the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, which provides that a person may request to access the BO information of a trust if a person can demonstrate that the person is involved in an investigation into suspected money laundering or terrorist financing activity and there is a reasonable suspicion that the trust is being used for money laundering or terrorist financing (see also: Becky Bailes and Alexander Erskine, “The UK Trust Register – where are we now?”, Lexology, 27 October 2020), https://www.lexology.com/library/detail.aspx?g=38b87fca-4966-47d1-b9f6-2f54142b5388). Whether that includes non-governmental organisations and investigative journalists is not clear. The perception, however, is that criteria to demonstrate “legitimate interest”, as provided in the Regulations, is quite high for anybody to meet before the information can be accessed (see also: Sam Epstein, Jennifer Smithson, and Ethan Yu, “5MLD: major changes to the UK trust register”, Tax Journal, 6 November 2020, https://www.macfarlanes.com/media/3581/tax-journal-5mld-major-changes-to-the-uk-trust-register.pdf.

[n] In the UK, legitimate interest has not been defined. However, an example of legitimate interest includes: when an individual or organisation is conducting an investigation into suspected money laundering or terrorist financing activity involving a specified trust, they may apply for information from the register for that trust. To access information, applicants will have to give details which substantiate why they suspect that the trust may have been used for money laundering or terrorist financing and explain how they will use the trust data.

[o] Whilst trusts do not have a separate legal personality as companies do and should not be holding assets in their own name, in some jurisdictions, they are however classified as “entities”, recorded as owning assets in their own name, and even given a tax identification number. To deal with such instances, it is proposed that sanctions should also cover trusts.

Endnotes

[44] “Principles for Effective Beneficial Ownership Disclosure”, OO.

[45] “UBO Disclosure Requirements within the EU”, KPMG, April 2019, https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/07/gls-transparency-register-web.pdf.

[46] Maíra Martini, “Who is behind the wheel? Fixing the global standards on company ownership”, Transparency International, 2019, 3, https://images.transparencycdn.org/images/2019_Who_is_behind_the_wheel_EN.pdf.

[47] Tymon Kiepe, “Verification of Beneficial Ownership Data”, OO, May 2020, 2, https://www.openownership.org/uploads/OpenOwnership%20Verification%20Briefing.pdf.

[48] Knobel, “‘Trusts: Weapons of Mass Injustice?’ A response to the critics”, 19.

Next page: Conclusion