The EU’s Fifth Anti-Money Laundering Directive (5MLD) is the next stage of the EU’s campaign against terrorist financing and money laundering. 5MLD comes hot on the heels of the Fourth Anti-Money Laundering Directive (4MLD), which enhanced transparency in financial systems across Europe. It also resulted in the UK establishing the Trust Registration Service (TRS) which is administered by HMRC and has been live since 2017.
It is possible that all charitable trusts will have to register with the TRS following the implementation of 5MLD. Further detail on the implementation of 5MLD is awaited from government, but trustees of charities established as trusts (or corporate charities that administer trusts) should be aware they may become subject to registration with TRS once 5MLD is implemented.
5MLD came into force on 10 July 2018 and must be implemented by EU member states by 10 January 2020. As detailed in the Treasury’s consultation paper on the transposition of 5MLD into UK law, the UK government continues to be committed to preventing money laundering and terrorist financing. The government is therefore likely to implement 5MLD whatever the outcome of the Brexit negotiations.
Trust Registration Service
Under 4MLD, EU governments have been required to implement a system to register express trusts that incur a tax liability. The UK achieved this through the TRS. Charitable trusts with no tax liability have not been required to register at the TRS under 4MLD. 5MLD expands the trust registration requirements of 4MLD and now all express trusts will be required to register at the TRS, regardless of whether or not the trust incurs a tax liability. There are no de minimis thresholds, exemptions or carve outs which means that all express charitable trusts, regardless of size, will be required to register.
The government has proposed a deadline of 31 March 2021 for the registration of express trusts already in existence on 10 March 2020. For express trusts created on or after 1 April 2020, the government proposes that these should be registered within 30 days of creation.
All express trusts will need to provide information on their "beneficial owners", including information on the settlor, the trustee(s) and the beneficiaries of the trust. For individuals this will mean providing the individual’s full name, date of birth, nationality, country of residence and role in relation to the trust. For corporate entities this will mean providing the entity’s name, registered office and role in relation to the trust. The government has said that it may choose to collect additional information such as National Insurance or passport numbers’ of relevant individuals but this approach has not been confirmed.
4MLD already requires EU governments to share registered trust data with law enforcement agencies when requested to do so. 5MLD increases the data sharing requirements, so that data on specific trusts will be shared with obliged entities (ie regulated businesses subject to the Money Laundering Regulations) that enter a business relationship with the relevant trust. This will affect tax advisers, auditors and lawyers taking on charitable trusts as clients.
Moreover, 5MLD requires the government to consider requests to share trust data with persons who can demonstrate a "legitimate interest" in access to information on the beneficial ownership of a trust. "Legitimate interest" is not defined in 5MLD and so it is for the UK government to determine what it means. This remains unclear as at the date of writing.
Potential impact on charities
The new obligations will apply to all "express trusts". It appears that the onus will be on trustees to determine whether their trust is an express trust. This will not be simple.
In the context of charities, it is currently unclear whether unincorporated associations, special trusts within the meaning of the Charities Act 2011 or linked charities would be deemed to be express trusts. Therefore, a potentially huge number of charitable entities could be swept up in this broad definition and be required to register.
Many charitable trusts are already required to register with the Charity Commission and HMRC and so introducing yet another registration requirement seems disproportionate and unduly onerous. The government is aware of the burden of duplicate registration and it is considering whether other registration services could fulfil the registration requirement.
For smaller charities that are not required to register with the Charity Commission (ie those with an income below £5,000), duplicate registration is clearly not a concern but the obligation to register will be burdensome nonetheless. These charities are often run by volunteers without professional advice and the registration obligations of 5MLD seem disproportionate to the size of these charities.
The requirements of 5MLD seem particularly disproportionate in light of the UK government’s acknowledgement that trusts present a low risk of money laundering and terrorist financing and also the findings of the Financial Action Task Force (which stated in a 2018 report that charities in particular are at low risk of terrorist abuse).
The Treasury closed its consultation on the government’s proposed transposition of 5MLD on 10 June 2019 and is currently considering responses. Whilst it is therefore to be hoped that the final arrangements may change, the current proposals give cause for concern. Trustees of charities established as trusts should watch this space closely.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2019