Open Ownership response to the FATF consultation on draft amendments to Recommendation 25

IV. Obstacles to transparency

10. What features of legal arrangements do you see being used for obscuring ownership? Are these linked to their involvement in the creation of broader complex structures or inherent to legal arrangements?

There is no registration requirement for trusts in many countries, to have legal validity or otherwise, as is the case with legal entities. In cases where there is a requirement to register information, there is little or no way to check what compliance rates are, to verify information given or to know whether information is up to date, or if the conditions of a trust change. As stated in the June 2022 Cullen Commission of Enquiry into Money Laundering in British Columbia report, with respect to trusts which need to be reported where they hold property:

The [...] Study suggests there is an under-reporting of [...] trusts for several reasons, including a lack of understanding of the meaning of a [trust] and difficulties in identifying [...] trusts, as they can exist with no formal agreement or documentation of any kind.

Unlike legal entities, trusts can be formed, exist and be legally valid without the knowledge and awareness of competent authorities. The conditions of the trust are often opaque and have many varying complicated control structures due to the flexibility afforded to them by the law. For example, a settlor might still be retaining control over a trustee (or the trust) through a letter of wishes, by appointing a protector, or by giving power of attorney to a close associate to either veto or remove the trustee. These issues are inherent to legal arrangements. Because trusts can own assets such as company shares and bank accounts, this is an unacceptable blind spot for competent authorities. To illustrate, 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 to disguise ownership. This not only obscures the ownership of assets, which in many cases are not legally by any natural person involved in the trust, but directly undermines all of FATF’s efforts towards better visibility of the ownership of legal entities under Recommendation 24.

11. What are the legitimate uses of flee/flight clauses? What are the challenges associated with these clauses?

The main obstacle to transparency is detailed in question 10. Efforts to address that, for example by centrally registering trusts in order to have legal validity in all jurisdictions to which is has a “sufficient link” as outlined in the answer to question 2, would also address problems around flee/flight clauses, and this would require deregistration if a trust were to be moved to be governed by the laws of a different jurisdiction.

12. What are the key obstacles to transparency of trusts and other legal arrangements?

See answer to question 10.

Next page: V. Approach in collecting beneficial ownership information