Beneficial ownership transparency of trusts

Overview

Trusts are widely recognised as asset holding vehicles that can be used for a range of legitimate purposes. For instance, planning an inheritance; controlling and protecting family assets for children or classes of family members; holding and managing assets for vulnerable adults; or holding assets on behalf of a charity.[a] However, various reports published by the World Bank,[1] the Organisation for Economic Co-operation and Development (OECD),[2] the Financial Action Task Force (FATF),[3] and several civil society organisations (CSOs)[4] have also revealed the illegitimate use of trusts to hide identities and ownership of assets, especially using trusts as a final step in a complex ownership chain of companies. A World Bank study across 30 years found that nearly 70% of more than 200 large-scale corruption cases relied on anonymously owned companies, including the use of trusts and shell companies to disguise ownership.[5]

Identifying the beneficial owners of trusts can help reveal a trust’s control and ownership structure, as well as any companies contained within it. As a part of their anti-money laundering and combatting the financing of terrorism (AML/CFT) policies, many governments have committed to beneficial ownership transparency (BOT) of legal entities – that is, collecting legal entities’ beneficial ownership (BO) data in a register and making it available to data users. There is a growing recognition of government-run central and open public registers as a primary source of BO data. Nonetheless, limited effort has been made so far to centrally register the BO data of trusts or similar legal arrangements, except when they might appear in the ownership structure of a legal entity. Even in the latter case, there appears to be limited understanding and knowledge of the BO of trusts, which, when trusts appear in the ownership structures of legal entities, can create a significant blind spot in disclosure regimes. Compared to the BO of legal entities, the literature on the BOT of trusts or similar legal arrangements is also limited, and the topic is yet to be researched in depth.

This policy briefing aims to contribute to filling this gap by analysing the existing policy and regulatory framework on the BOT of trusts at an international level, and highlights research and policy recommendations on the issue whilst identifying the gaps for further research. The aim is to help policymakers and those implementing or supporting BOT to think through various issues and approaches toward ensuring the BOT of trusts, as well as to outline considerations for operationalisation by identifying emerging best practice in legal and policy reforms. This briefing identifies the creation of central registers of BO of trusts as the best approach to regulate and prevent the misuse of trusts. So far, the EU’s fifth anti-money laundering directive (AMLD5) is the only international regulatory framework that requires this. The framework also has fewer loopholes with respect to when to disclose information and what information to disclose. Best practice in the in the disclosure of the BO of legal entities (as covered in the Open Ownership Principles (OO Principles)[6]) provides a framework for thinking about how best to implement BOT of trusts, although there will be some key differences in discussions on certain aspects, such as whether information should be made public. Where jurisdictions are implementing BOT of legal persons, and when trusts feature in the ownership structure of a legal person, the information on the BO of trusts should, at a minimum, be made available to the public.

For those with a limited understanding of the concept of trusts and how they function, it is recommended to read this policy briefing in conjunction with the Open Ownership (OO) briefing, An introduction to trusts,[b] which discusses in detail the history and various types of trusts, roles of trusts parties, the legitimate and illegitimate uses of trusts, as well as outlining examples of current practice on the treatment of trusts in a variety of countries.

Footnotes

[a] Broadly speaking, there are three main types of trusts: express trusts, implied trusts, and statutory trusts. This paper mainly deals with express trusts. The term “trust(s)”, as used in this paper, refers to express trusts or similar legal arrangements with express trust-like features. For more details on different types of trusts, their features, and the legitimate and illegitimate uses of trusts, see: Ramandeep Chhina, “An introduction to trusts”, OO, July 2021.

[b] Ramandeep Kaur Chhina, “An introduction to trusts”, OO, July 2021, https://www.openownership.org/uploads/OO%20Introduction%20to%20trusts%20briefing%20July%202021.pdf.

Endnotes

[1] Emile van der Does de Willebois et al., The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, StAR, UNODC, and World Bank, 2011, https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf.

[2] Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes, OECD, (Paris: OECD), 2001 https://www.oecd.org/daf/ca/43703185.pdf; A Beneficial Ownership Implementation Toolkit, OECD and IDB, March 2019, https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf.

[3] See: FATF, The Misuse of Corporate Vehicles, including trust and company service providers (Parise: FATF, 13 October 2006); FATF, Concealment of Beneficial Ownership (Paris: FATF, July 2018).

[4] See: Murray Worthy, “Don’t take it on trust”, Global Witness, 22 February 2017, https://www.globalwitness.org/en/campaigns/corruption-and-money-laundering/anonymous-company-owners/dont-take-it-trust/; Andres Knobel, “The case for registering trusts – and how to do it”, Tax Justice Network, 3 November 2016, https://www.taxjustice.net/wp-content/uploads/2013/04/Registration-of-Trusts_AK.pdf; Andres Knobel and Markus Meinzer, “Drilling down to the real owners – Part 2”, Tax Justice Network, 28 June 2016, https://www.taxjustice.net/wp-content/uploads/2016/06/TJN2016_BO-EUAMLD-FATF-Part2-Trusts.pdf; Andres Knobel, “‘Trusts: Weapons of Mass Injustice?’ A response to the critics”, Tax Justice Network, 25 September 2017, https://taxjustice.net/2017/09/25/response-criticism-paper-trusts-weapons-mass-injustice/; Naomi Fowler, “Trusts – Weapons of Mass Injustice: new Tax Justice Network report”, Tax Justice Network, 13 February 2017, https://taxjustice.net/2017/02/13/trusts-weapons-mass-injustice-new-tax-justice-network-report/; Andres Knobel, “Beneficial ownership verification: ensuring the truthfulness and accuracy of registered ownership information”, Tax Justice Network, 22 January 2019, https://www.taxjustice.net/wp-content/uploads/2019/01/Beneficial-ownership-verification_Tax-Justice-Network_Jan-2019.pdf; Riccardi Michele and Savona Ernesto U., The identification of beneficial owners in the fight against money laundering, BOWNET, (Trento: Transcrime - Università degli Studi di Trento), 2013, https://www.transcrime.it/wp-content/uploads/2013/11/BOWNET3.pdf.

[5] Van der Does de Willebois et al., The Puppet Masters: How the corrupt use legal structures to hide stolen assets and what to do about it.

[6] “Principles for Effective Beneficial Ownership Disclosure”, OO, n.d., https://www.openownership.org/principles/

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