European Union: MLD V And Its Implactions For Wealth Managers

Last Updated: 27 July 2018
Article by David Dorgan

Most Popular Article in Jersey, August 2018

Many EU countries have missed the deadline for the establishment of beneficial ownership registers for companies and trusts. When their teething problems are over, however, trustees and other wealth managers in the EU will have to cope with another set of obligations - this time from the fifth Money Laundering Directive.

The European Union's fifth Anti-Money Laundering Directive (5AMLD), which its member states rubber-stamped on 13th December, was adopted by the EU Council on 14 May this year and must be transposed into all national laws by the end of 2019. At the time of writing, it has been reported that twenty EU countries have either failed to bring the fourth Anti-Money Laundering Directive (4AMLD) into force, or are still doing so, and so an 18-month deadline for the fifth might be a trifle optimistic.

5AMLD concentrates on topics that the EU's Economic and Financial Affairs Council (ECOFIN) raised once 4AMLD had been adopted. In particular, the EU believes that public access to information about the beneficial ownership of trusts and companies is essential if governments are to trace the financial doings of terrorists and criminal organisations and disrupt their sources of funds and opportunities to raise funds.

This article will summarise the main changes that we can expect from 5AMLD in respect of trusts and companies and the implications of those changes for industry.

Beneficial ownership information

4AMLD currently sets out rules for the collection, storage and access of information about the beneficial owners of companies, trusts and other types of legal arrangement. It permits any person or organisation who can persuade his/its government that he/it has a 'legitimate interest' to see that information, but 5AMLD will amend the position.

Companies and other legal entities

Some facts (see below) about the beneficial owners of companies and other legal entities that take part in profit-making activities will be subject to public access on a central EU register.

Trusts and other similar legal arrangements

5AMLD makes a distinction between trusts and similar legal arrangements that are involved in: (i) commercial or business like-activities with a view to making profit; and (ii) other purposes such as charitable aims or the preservation of (or the setting of conditions on) the use of family assets. The former will be subject to public access on a central register and the latter will remain subject to a 'legitimate interest' test.

Trusts involved in commercial or business-like activities are defined as "trusts which comprise any property held by or on behalf of a person carrying on a business which consists of or includes the management of trusts, and acting as trustee of a trust in the course of that business with a view to gain profit." This language could change the circumstances in which public access to trust information is applicable. Regardless of the actual activities of the trust, every professional trustee who acts for professional fees may be obliged to disclose beneficial ownership information to a publicly accessible trust register. We have to see what happens next, but the UK seems to be proceeding on the basis that trust information will be subject to a 'legitimate interest' test.

The rationale for public access

The EU thinks that the public should be able to see beneficial ownership information for the following reasons.

Good corporate governance should make people accountable for their actions and promote integrity, and public knowledge about beneficial ownership is part of this.

People who want to do business with the companies in question (or minority investors/interested parties) will benefit.

Civil society, including the press, will be better placed to spot business transactions that lack integrity. The EU hopes that this will 'preserve' trust in the integrity of business transactions and of the financial system and eventually prevent people from 'misusing' legal entities/arrangements, especially for the perfectly legal purpose of avoiding tax.

Such access to information is bound to help investigations - not least on the part of potential customers and counterparties.

Financial institutions will be among the organisations that can look at the information in a quick and efficient manner.

Personal information on national registers

The personal information publicly available on a national register of trusts and of companies (and on the EU's interconnected platform of registers (as detailed below)) will, in the EU's parlance, be the 'minimum' data necessary for anti-money-laundering investigations. The EU says this because it purports to respect people's right to privacy and to want to 'prejudice' personal data as little as possible. This 'minimum' data will be a beneficial owner's:

  • name
  • month and year of birth
  • nationality
  • country of residence; and
  • the nature and extent of beneficial interest.

Data protection

Unscrupulous people might misuse this data and, the EU thinks, this in turn might flout the rights to private life enshrined in the Charter of Fundamental Rights of the European Union and the rules of the General Data Protection Regulation (GDPR). As a result, 5AMLD includes a re-written version of 4AMLD's exemption to disclosure and to people's access to beneficial ownership information on central registers. It says that EU countries may exempt all or part of the information about this-or-that beneficial owner from public access on a case-by-case basis in exceptional circumstances as long as such public access would expose him to the risk of fraud, kidnapping, blackmail, violence or intimidation. It might also apply if he is a minor or otherwise 'incapable.'

If a member state were to introduce such an exemption into national law, which it is not obliged to do, every wealth management firm within its borders will have to ask itself the following questions.

What evidence does it require if it wants to show the state that a beneficial owner is at risk? (For example, must he have already been kidnapped once before?)

Will public access to personal information put beneficial owners at risk who were not previously at risk?

The EU says that 5AMLD "respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the European Union, in particular the right to respect for private and family life, the right to the protection of personal data, the freedom to conduct a business..." However, there still seems to be the potential for a battle between Brussels (EU) and Strasbourg (European Court of Human Rights) on the issue of data protection and privacy. The minimum personal data to be placed on the national register is fundamental personal data and enough to steal an identity.

On 20 October 2016 the Constitutional Council of France held that public access to the French register of trusts was a disproportionate interference with the right to have one's private life respected. It said that public access to personal data must be justified by a "public interest reason and implemented proportionately with that reason." 5AMLD's preamble tries hard to justify public access to personal data on national central registers (e.g. good corporate governance, greater civil scrutiny and the fight against terrorism). Has anything changed legally since 20 October 2016? In principle, the GDPR and 5AMLD might seem in conflict; the GDPR protects personal data, unless you have an interest in a company or a trust in which case the same level of protection is not applicable. When two directives contradict each other, EU law does not give precedence to the more recent of the pair; there might therefore be a court case in future.

Adequate, accurate and current information

The EU has realised that central registers are only as good as the information they contain, so it obliges member states to include only information that is up-to-date and corresponds to actual ownership. EU countries will probably impose penalties (fines or imprisonment) upon wealth managers for not registering adequate, accurate and current information. Whether such civil or criminal punishments would deter terrorists or criminal organisations from providing false information is debatable, but they would inspire practitioners, acting as gatekeepers, to identify false, out-of-date or inaccurate information.

An Interconnected Central Platform of Registers

When 5AMLD comes into force, each EU country's central register of companies and of trusts will have to be connected to a European platform which holds information through a system of interconnected registers.

Public access, private angst

Every corporate and trustee service provider will have to identify each beneficial owner and collect information about him for the relevant register. This could be an onerous task in the case of a large number of companies and trusts that are under administration, but 5AMLD does not contain "grandfathering" provisions so all existing structures will have to comply. The severity of this problem will depend upon on the jurisdiction. For example, corporate and trustee service providers in Jersey have been collecting the required beneficial ownership information for years and it was an early adopter of the common reporting standard. Therefore, for Jersey service providers, 5AMLD will only shift existing information onto an EU central register.

Legitimate HNW clients have no crimes to hide, but they do care about privacy. The thought of public access to their personal data might dissuade them from investing in Europe. They may wish to accept personal ownership of this-or-that investment to avoid a central register of company ownership, but in doing so they will incur succession and/or asset protection problems. These are two fundamental reasons why clients use structures in the first place. If 5AMLD backfires, regulated industries that report information to authorities will suffer, clients will shy away from dealing with or investing in the EU, non-professional trustees will flourish and there will be no net effect against terrorist or criminal organisations. The best outcome will be the elevation of "public transparency" to the status of a global standard, required by all jurisdictions. In this case every jurisdiction in the world will impose the same onerous burdens on practitioners and no country will have a competitive advantage when attracting assets under management. A global 'transparency' standard, however, is some way away.

Other main changes for trusts

If a trust "generates tax consequences," 4AMLD states that an EU country must have a register in place that contains beneficial ownership information and grant access to it to anyone who can prove that he has a legitimate interest in seeing it.

5AMLD re-jigs the EU's registration requirements, ceasing to oblige a trust to register its information wherever it has "tax consequences" and obliging it instead to register wherever it is administered. The new directive considers a trust to be administered in each member state "where the trustees are established." The change is a result of certain EU states, which do not recognise trusts in their national laws, not being subject to any obligation to monitor and register trusts administered in their territories. This led to gaps in registration, but no longer.

If the trustee is established outside the EU, it is probable that registration will have to occur in any EU country in which its trustee strikes up a business relationship or acquires real estate in the name of the trust. For example, if a non-EU trustee purchases Italian realty, it will have to register the beneficial ownership of the trust on the Italian register of trusts.

Other main changes for companies

The currently applicable 25% shareholding threshold for the identification of beneficial owners will drop to a 10% shareholding threshold for passive non-financial entities (i.e. holding entities without active business or economic activity). The EU deems these entities to be especially useful for the purposes of money laundering and tax evasion. This is probably going to oblige passive, non-financial entities to update the information they have already submitted to various registers because all information must be up-to-date and accurate. This could be an onerous and costly exercise for "obliged persons" - the term that the Financial Action Task Force (and therefore the EU) uses for reporting entities.

Dates for your diary

5AMLD's introduction will be staggered over two or three years as follows.

The changes to registers of companies will probably have to take place by November 2019.

Law enforcers will be allowed to read the registers in January 2020 and the effective date for the register of bank or payment accounts is scheduled for June 2020. The EU's central platform of interconnected registers of companies and trusts is supposed to come online in early 2021.

In a nutshell

5AMLD has followed hot on the heels of 4AMLD. It is arguably the directive that 4AMLD was originally intended to be before the Constitutional Council of France made its fateful ruling on 20 October 2016.

The most onerous problem for wealth management practitioners - and the greatest source of worry about trouble with the authorities - will be their obligation to keep submitting up-to-date and accurate information about beneficial owners. This is likely to increase compliance costs. It also seems likely that new penalties for non-compliance will be in the offing. Many EU countries still have no registers, so the problem is not yet urgent.

First published in Compliance Matters, July 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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