“Ambiguous and unenforceable” – Should Europe trust trusts?

29th June 2016 / EU

By Tax Justice Network – Trusts, in the popular imagination, are mostly for family matters, such as a rich father deciding how his offspring will divide the inheritance. But they are far more widely used: not just for multiple commercial purposes, but also, as the Panama Papers reminded us, to commit crimes and abuses such as tax evasion, money laundering, corruption, defrauding creditors, and more. Trusts are in many ways a greater threat to democracy than opaque shell companies – yet also harder to crack. The accompanying Tax Justice Network briefing exposes shortcomings in current international frameworks for dealing with trusts, and explains what international bodies such as the Financial Action Task Force (FATF,) the European Union, and major countries, could do to pierce trust-related secrecy and prevent their misuse.

Our new report Drilling down to the real owners – Part 2, following our earlier report on shell companies, analyses the language around trusts, in both the FATF[1] global recommendations on Anti-Money Laundering, and the fourth European Anti-Money Laundering Directive[2]. The Directive opens for amendments from July 5, and it comes into force by mid-2017 across the European Union.

For example: the EU Directive’s Article 31 on trusts, in contrast to a much more robust article on shell companies, suggests a deliberate intent not to regulate trusts properly. Its scope is at best ambiguous, limited and rather unenforceable: the definition of beneficial owners is weak; requirements to hold information in a central registry are undone by an undefined term (there must be “tax consequences” – which in any case is irrelevant in money laundering cases) and it provides no public access to information.

This second report focuses on a major, barely addressed issue: lack of effective registration of (let alone public access to) trusts’ beneficial owners: the real persons who own, control or benefit from trusts.

Drawing on TJN’s Financial Secrecy Index and covering more than 100 jurisdictions, we find trust regulation is full of holes. We argue that every jurisdiction should require registration in a central and public registry of the beneficial owners of (a) all domestic law trusts and (b) all trusts with any connection point to a jurisdiction[3].

Given the complex ownership structures of trusts and the potential for subterfuges, their “beneficial owners” should include all related persons: all settlor(s), protector(s), trustee(s), beneficiary(ies), and any other person mentioned in a trust document. This comprehensive list of beneficial owners is based on standard provisions required by the OECD

On the launch of the report Andres Knobel, co-author of the report said:

“Trusts are the new elephant in the room. Unless they are properly covered by new beneficial ownership requirements, they will become the vehicle of choice of tax evaders, money launderers and other criminals who are escaping the new transparency provisions that apply to companies”

Markus Meinzer, co-author of the report said:

“Trust laws around the world have become the playground of unscrupulous lawyers whose livelihoods depend on helping shady clients escape accountability for their actions elsewhere. Democracies have a duty to protect their citizens by ensuring that laws and regulations can be enforced – so they must urgently get to grips with trusts.”

Naomi Fowler, producer of the Tax Justice Network monthly podcast, the Taxcast, said:

“We have always said that any registry of beneficial ownership must include offshore companies, trusts and foundations. To fail to do that would simply result in a stampede towards any vehicles not included in a public registry. It’s not rocket science.”

[1] Updated (and published) in 2012 by the FATF, an Inter-governmental body.

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[2] A common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime. (2015/849).

[3] A “connection point” would include having any of a trust’s related person resident in such jurisdiction (a settlor, protector, trustee, beneficiary, etc.) or where trust assets are located there.

[4] Specifically, the OECD’s Common Reporting Standard (CRS) for Automatic Exchange of (bank account) Information which will be implemented by more than 90 jurisdictions, including all EU countries.

The full report can be downloaded in PDF format here.

By Tax Justice Network