In recent years, much of the world’s attention has focused on anonymously owned companies – with demonstrable progress. Now, the time has come to address another highly secretive and complex vehicle that the corrupt favour to cover their tracks – trusts. (Jump straight to our recommendations.)
Just like anonymous companies, trusts feature extensively in corruption, money laundering and tax abuse schemes – including in the recent Pandora Papers investigations. These cases have shown how trusts are used as part of complex ownership structures – often with multiple layers of subsidiary trusts and companies – purposefully obscuring the identity of the individual who really owns the assets.
Disturbingly, they are even more secretive than companies: trusts are created between private individuals and, if countries do not require their registration, authorities may not even know of their existence.
What's a 'trust'?
In a trust, the original owner (the “settlor”) transfers assets into a trust, to be held and managed by the “trustee” or trustees for the benefit of the “beneficiaries”. Trusts allow for property or assets to be managed by one person on behalf of another.
Trusts are commonly used as a way to hold and legally protect assets of many types, particularly family assets. This includes homes for the benefit of future generations, estate planning or, even more dubiously, protection against claims by creditors or in the event of relationship breakdowns.
One of the challenges in preventing the misuse of trusts for corruption and financial crimes is that control and ownership are explicitly separate. This means multiple individuals with different statuses (settlor, beneficiary, trustee, for example) could qualify as beneficial owners, making it even more difficult for law enforcement to follow money trails if not all relationships are captured.
Another challenge is that, in most cases involving trusts, trustees are given detailed instructions on how to manage the assets or distribute income, such as through a letter of intent. These letters are usually private documents and do not need to be deposited or registered with any government authority, adding a significant layer of secrecy to this type of legal arrangement.
Trusts are so secretive that there are considerably less revelations when compared to companies’ involvement in corruption schemes; but this does not mean that they are used any less frequently. Authorities have underscored that cases involving trusts are so much more difficult to investigate and prosecute that they seldom prioritise them in corruption investigations. At the same time, some service providers and banks continue to recommend the use of stand-alone trusts or a combination of a company and a trust for holding assets if the real owners want to remain anonymous or distance themselves from the assets.
Photo: Ryutaro Tsukata/Pexels
Recognising the financial crime risks they pose, the global anti-money laundering watchdog Financial Action Task Force (FATF) in 2012 adopted Recommendation 25 – a global standard on trust ownership. It sets out that countries must ensure that competent authorities – such as law enforcement, financial intelligence units and tax agencies – have timely access and are able to collect adequate, accurate and up-to-date information on the real owners and control structures of trusts. However, it does not prescribe the means to guarantee access to beneficial ownership information for trusts.
Following Transparency International’s campaigning, FATF revised the same flexible approach that previously applied to companies. Now, countries are explicitly told that they need to set up registers to record companies’ real owners.
Encouragingly, FATF is looking to revise the standard on beneficial ownership of trusts as well. As Transparency International continues to study these vehicles, we are urging the international community to develop, debate and agree on strong measures to stop the abuse of trusts for corruption and other financial crimes.
This cannot be a rushed decision; any loophole that remains will continue to undermine the global fight against corruption – possibly for another decade.
Suspect Russian trusts
Since the Russian invasion of Ukraine, the international community has become more acutely aware of the complexity of cross-border financial schemes – and how they make tracing suspect assets a Herculean task.
Sanctioned Russian billionaire Suleiman Kerimov first came to the forefront of international attention in May, when there was a legal scramble over his US$300 million superyacht docked in Fiji. Just a month later, a US government investigation uncovered – and blocked – a Delaware-based trust that held US$1 billion in assets for Kerimov.
Another sanctioned Russian billionaire Alisher Usmanov has allegedly relied on trusts administered by a lawyer in Cyprus to manage his wealth. When investigating Usmanov, journalists uncovered complex corporate structures that make it extremely challenging to connect him to assets he reportedly owns. According to media reports, an ongoing German investigation into potential money laundering led authorities to search superyacht Dilbar and a lakeside villa allegedly connected to him last month. Confirming his ownership of trusts would likely aid these investigations.
When we examined the availability of information on trusts owners in countries committed to tracking down the assets of sanctioned Russians, we found that only Germany, France and the United Kingdom have registers for trusts – and even they restrict access by “legitimate interest” or registration requirements. Australia, Canada, Italy, the Netherlands and the United States have no registers for trusts at all, meaning Italy and the Netherlands have not yet complied with the EU requirements that mandated the creation of such registers.
Trusts are so secretive and problematic that the EU’s Russia-Ukraine sanctions include a prohibition of trust services to all Russian nationals, instructing providers to dissolve and return assets to the owners – unless they are sanctioned, in which case the assets are to be frozen. A curious exemption to this rule has been made for dual Russia-EU citizens and for those who hold a residence permit in the EU, who are allowed to retain their trusts across the bloc. With everything we know on golden visas and passports, and the Commission’s own recommendation in relation to Russian nationals benefitting from these schemes, this exemption raises serious questions.
Photo: Yoruk Isik/REUTERS
What needs to change
As scrutiny over anonymous companies is increasing worldwide, the international community has a crucial opportunity to end rampant secrecy in trust ownership.
Due to trusts' complex nature, FATF members must be prepared to address manifold issues.
1. Trusts should be registered to have legal validity.
FATF standards require the recording of all the basic information of legal entities in a company register. There is no such requirement when it comes to trusts and other legal arrangements. As they are usually governed by private law, a simple agreement signed by the parties may suffice – without the need for a government body to attest its validity. As a consequence, in many countries authorities do not know how many trusts exist, how they operate and which assets they hold. This significantly limits their ability to understand, detect and investigate potential crimes using trusts and similar legal arrangements.
In the last years, some countries have taken steps to mitigate the money laundering risks posed by trusts and started requiring the registration of trusts, under certain circumstances. But there are still three main problems with the current approach to registration implemented by most countries:
- the conditions that trigger registration might not cover all relevant connections of a trust in a given country;
- registration only applies to certain types of trusts and legal arrangements, leaving other types open to abuse; and
- the current registration approach also fails to ensure that information about the real individuals in control and benefitting from trusts is available.
Back in 2016, the Panama Papers revealed how New Zealand foreign trusts were being used for money laundering and tax evasion. In response, New Zealand led an inquiry and implemented reforms, including establishing a register of foreign trusts. Following the reform, the number of foreign trusts decreased by 75 per cent, from nearly 12,000 foreign trusts in 2016 to just under 3,000 in 2020. Domestic trusts, however, are not subject to registration. Nobody knows exactly how many domestic trusts currently exist in the country (though it’s estimated to be between 300,00 and 500,000), making investigations difficult and cumbersome.
The obligation to register all trusts with a government authority and condition its legal validity to registration is the first step to ensure countries can understand the risks posed by trusts, supervise those with anti-money laundering obligations, and ensure law enforcement and tax authorities, among others, have timely access to information.
2. A multi-pronged approach to trust ownership transparency should be required.
There are insufficient mechanisms for authorities to obtain adequate, accurate and current beneficial ownership information in a timely manner. Currently, in the vast majority of countries, trust beneficial ownership information can only be accessed from trustees themselves or from obliged entities, such as banks, trust and corporate service providers (TCSP) or lawyers, if a trust maintains business relationships with one of these professionals. Furthermore, authorities can only request such information if they can identify the trustee or entity where the information is kept. In FATF mutual evaluation reviews, authorities noted that they often face challenges identifying which obliged entity holds the beneficial ownership information. Moreover, the use of informal nominee trustees – such as family members and proxies – creates a further obstacle for authorities to access beneficial ownership information.
Relying solely on the beneficial ownership information collected by trustees and obliged entities has proven ineffective for both legal entities and arrangements. The recent FATF review of Recommendation 24 on beneficial ownership transparency of legal entities reached the same conclusion.
The standard should require a multi-pronged approach to access beneficial ownership information of legal arrangements, including a trust register as a required component. Information held by trustees, obliged entities and in asset registers should be used as supplementary sources of information.
3. All parties to the trust and their beneficial owners should be recorded and disclosed.
In a trust relationship, different parties hold interests and could be in control of the assets. While the concept of beneficial ownership of a legal entity or a trust does not differ, the categories of individuals who should be identified in the case of trusts are much broader. This includes:
- protectors (if any)
- beneficiaries or discretionary beneficiaries (objects of power)
- any other natural person exercising ultimate effective control over the arrangement
It is critical that listed beneficial owners be natural persons. In the case another trust or a legal entity is party to a trust, their beneficial owners should be established and listed, independently of whether or not that person (usually a trustee or trust administrator) is currently benefiting from the assets held by the trust. Otherwise, complex structures could continue to be used to obscure real owners.
4. Adequate, accurate, up-to-date information on trusts should be collected.
For information to be adequate, a strong and clear definition of who should be named as beneficial owners of legal arrangements is crucial. At a minimum, the following information should be collected of each beneficial owner and the trust itself:
- trust deed
- date of birth
- identification number
- place of residence
- role within the trust of each party
- name of the person making the declaration
In case the beneficiary of a trust is a minor, measures should be taken to establish (and record) a relationship with the legal guardians, particularly when the trustee is a nominee.
The accuracy of the information on the parties and beneficial owners of trusts and similar legal arrangements should always – not only when based on risks – be attested against official identification documents (such as digital IDs and passports). Additional checks using reliable and independent sources can then take place on a risk basis.
In addition to an annual declaration, changes to legal arrangements’ control structure should be communicated to authorities in charge of the register, as well as to the obliged entities with whom they might have relationships, within 14 calendar days.
5. Trustees should always disclose their status.
Trustees, who are essentially managers and should manage the trusts according to the instructions provided during the establishment of the trust, are not always required to disclose their status to obliged entities when forming a business relationship or carrying out an occasional transaction. For instance, if the trustee opens a bank account or buys a property on behalf of the trust, they are not always obliged to disclose that they represent a trust, being registered as the owner of the asset. This limits the ability of obliged entities to properly identify risks and suspicious transactions as well as to understand and record all those in control and benefitting from a trust.
Trustees should be obliged to always disclose their statuses when engaging with obliged entities and disclose information on all parties to the trust.
6. Trustees should be subject to anti-money laundering obligations.
Trusts may be managed by professional or non-professional trustees. Professional trustees are often lawyers or trust service providers and non-professional trustees may be family members, associates or proxies. Professional trustees are usually, but not always, regulated – meaning they need to be licensed, comply with anti-money laundering obligations and recordkeeping obligations, and are subject to sanctions. Non-professional trustees normally fall outside of the scope of regulations.
The global standard should ensure that all individuals or companies acting as trustees are subject to anti-money laundering and record keeping obligations. In particular, they should be required to collect information of all parties to the trust, including their beneficial owners, ensuring the information is adequate, accurate and current. Equally important is that they have a good understanding of the assets held by the trust, the activities of underlying legal persons as well as the source of wealth of the settlor. They should also report suspicious transactions to financial intelligence units. All trustees should be subject to sanctions if they fail to undertake checks and dissuasive penalties if they facilitate money laundering and other financial crimes.
7. Conduct a comprehensive assessment of risks.
An adequate assessment of risks is the cornerstone of effective anti-money laundering regimes. In the case of trusts, however, the lack of registration requirements and secrecy of trust arrangements make detection and investigation more difficult and resource-intensive – so the adequate identification of risks is not easy. This leads to a perception that trusts are not an issue as they rarely feature in uncovered money laundering cases.
To better understand the risks posed by trusts, countries need to take a broader approach. They must assess the types of services and products advertised by the trust industry as well as look into connections with foreign trusts, including assessing asset ownership through trusts and potential risks this may pose. It is not uncommon for trusts to be added in corporate structures to create another layer of complexity and secrecy – and having a better understanding of these relationships will help establish adequate mitigating measures.
8. Access to beneficial ownership information should be direct and unfiltered.
The current standard requires countries to ensure that competent authorities have timely access to information on the beneficial ownership of trusts. As discussed above, this does not currently happen as authorities often do not have access to a register and have to rely on information collected by obliged entities, frequently in a third country. For example, the latest FATF review on Canada highlights that there have been several cases under investigation involving Canadian companies owned by foreign trusts in which it was not possible for law enforcement authorities to identify these arrangements’ beneficial owners. Authorities said they sent information requests to foreign jurisdictions that went unanswered.
The new standard should clarify that authorities need both timely, as well as direct and unfiltered access to the information so that they can detect and investigate corruption, money laundering and other crimes. Domestic and foreign competent authorities must be guaranteed direct access to registers of trusts and their beneficial owners so they can cross-check the data against other government databases.
Extending this access to the public and in particular to the private sector, academia, civil society organisations and journalists will allow further scrutiny of the data, supporting due diligence processes and revealing conflicts of interest and wrongdoing. It can also improve accuracy of the data with more sources reviewing it and even deter criminals from abusing legal arrangements – as we’ve seen with publicly accessible beneficial ownership registries – which would improve the marketplace integrity of any economy. Across the European Union, access to beneficial ownership information of trusts is available to those who can prove legitimate interest. However, eight EU countries (Austria, Bulgaria, Croatia, Germany, Poland, Portugal, Slovenia and Sweden) have opened their trust registers to the public.
9. Trusts should not be above the law.
As identified by FATF, certain countries have encouraged the development of so-called “asset protection trusts”, which can “protect the settlor from the freezing, seizure, or confiscation of the assets, even though the settlor is able to keep control over their management”. Many countries promote firewall clauses to protect against foreign court orders and decisions. Such clauses should not prevent or stop the investigations of corruption, money laundering and other financial crimes. It should also not restrict or cause delays to the sharing of information requested by domestic and foreign law enforcement authorities, financial intelligence units and tax agencies. Otherwise, those with money and power – and the right help – will continue to find themselves above the law.
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