The Fifth Anti-Money Laundering Directive

Last quarter we wrote about the enactment of the Sanctions and Anti-Money Laundering Act 2018 by the UK Government, which purportedly attempts to legislate for the British Overseas Territories requiring them to introduce public beneficial ownership registers for companies, click here to read this article.

This quarter saw the coming into force (9 July 2018) of the EU’s Fifth Anti-Money Laundering Directive (“5AMLD”), the latest piece of legislation in the EU’s fight against money laundering and terrorist financing, and with it a new set of requirements for the publication of beneficial ownership information for companies and trusts.

Member States have 18 months to implement 5AMLD (until the end of December 2020 – although later transposition deadlines exist for certain of the provisions). There had been some doubt as to whether the UK would transpose the legislation due to the transitional period ending after it formally leaves the EU next March. However, in a letter dated 16 July 2018 from the department for Business, Energy and Industrial Strategy it has been confirmed that the UK Government will be adopting 5AMLD.

We take a look at what 5AMLD is and what impact it will have on offshore trusts.

What is 5AMLD?

5AMLD is the successor to the EU's Fourth Anti-Money Laundering Directive ("4AMLD") which has been operative since 26 June 2017. 5AMLD is perceived as being the EU's reaction to, among other things, the terrorist attacks which occurred across Europe in 2016. 4AMLD required EU Member States to implement a central register of beneficial ownership for companies and other legal entities . In relation to trusts, the UK's response was to create the UK Trusts Register which is operated by Her Majesty's Revenue and Customs (HMRC). Click here to read our previous article on this.

Under 4AMLD, a trust is required to register its information in an EU Member State in which it has "tax consequences". In practice, this catches trustees resident in a Member State or trusts held by non-EU resident trustees which are liable to tax in a Member State (for example, a Guernsey law trust with a Guernsey trustee which has UK source income).

Under 4AMLD, the information contained on the central register is only accessible to tax and law enforcement authorities. In the UK, the UK Trusts Register is accessible by HMRC only with HMRC having the ability to share this with other UK law enforcement authorities.

What changes does 5AMLD introduce to the register of trusts?

5AMLD makes a number of changes to the register of trusts requirements contained in 4AMLD.

The first key change is the extension of persons able to access information on the register of trusts. 5AMLD introduces two more categories of persons able to access such information.

The first category requires that any person that can demonstrate a "legitimate interest" must have access to the information. The definition of the "legitimate interest" test is to be determined by each Member State. The UK Government has confirmed it will consult with key industry stakeholders on who should be considered to have a "legitimate interest" taking into account the fact that many trusts are established for personal and family reasons.

The second category requires that any person that files a written request, in relation to a trust which holds or owns a controlling interest in a corporate entity incorporated outside of the EU, must have access to the information.

For both categories, the data which will be accessible is limited to certain essential data of the beneficial owner, for example, their country of residence and nationality. 5AMLD does provide for an exemption if public access would expose beneficial owners to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation.  

The second key change is an extension of the scope of trusts which are required to register information. 5AMLD extends the registration obligation to trustees of all express trusts, regardless of whether they have taxable consequences (which is the current requirement under 4AMLD). For trustees based outside of the EU, they will likely need to register beneficial ownership information where they enter into a business relationship in a Member State, whether that relationship incurs a tax consequence or not.

The third key change is the requirement that each EU Member States' central register of trusts will have to be connected via the European Central Platform. This will facilitate the sharing of beneficial ownership information amongst EU Member States.   

What impact will 5AMLD have on offshore trusts?

5AMLD has the potential to touch offshore trusts in two ways.

Firstly, offshore express trusts with a tax consequence in a Member State are already required to register in that Member State under 4AMLD. 5AMLD now extends to express trusts without a tax consequence and now makes that information more widely available (subject to a legitimate interest test).

Secondly, whilst 5AMLD currently only applies to EU Member States there is the potential for the UK to follow the stance taken in its enactment of the Sanctions and Anti-Money Laundering Act and enact UK legislation which attempts to extend a requirement for beneficial ownership registers relating to trusts to the Crown Dependencies and the British Overseas Territories.

Until draft legislation is tabled in the UK Parliament, it is difficult to predict the extent of the impact 5AMLD will have on offshore trusts. We wait to see the terms of that draft legislation and the response from the Crown Dependencies and the British Overseas Territories to it.