Beneficial ownership transparency of trusts in South Africa
Overview
Trusts have a long-standing history of legitimate uses in South Africa, and they are widely regarded as one of the most efficient and useful legal arrangements for managing assets and financial affairs. Trusts are most commonly used to manage the assets of one party, the founder, [1] for the benefit of another, the beneficiaries. Beneficiaries are identified by the founder, which often includes their spouse and children. [2]
However, trusts can also be used to hide the identities of the natural persons who own or control assets, including companies, sometimes as part of complex ownership chains. Such obfuscation can, in turn, be used to facilitate criminal activities, including corruption, money laundering, tax evasion, and the financing of terrorist activities. According to a World Bank study, complex ownership structures designed to conceal the identity of individuals are present in 70% (150 of 213) grand corruption cases surveyed. [3] Furthermore, trusts were used in 15% of the identified cases, of which the overwhelming majority of abusers were government officials seeking to obscure their identities. [4]
Despite slow adoption, countries across the world are increasingly implementing measures aimed at allowing better visibility of the individuals who ultimately own and control corporate vehicles, known as beneficial ownership transparency (BOT), to help counter such illicit financial flows (IFFs). Significant progress has been made in various jurisdictions with regards to making beneficial ownership (BO) information of companies available. However, the discussion on the BOT of trusts remains limited.
Financial crimes remain a cause of serious concern in South Africa, damaging business confidence and economic growth. [5] At the time of writing, South Africa is at serious risk of being grey-listed by the Financial Action Task Force (FATF) for not doing enough to prevent money laundering and terrorist financing. [6] BOT in general, and particularly the BOT of trusts, is a crucial tool in any nation’s approach to combating IFFs, as it allows authorities to identify the individuals behind nefarious transactions.
There is widespread agreement amongst industry experts consulted in the preparation of this report that improved disclosure requirements that enhance the BOT of trusts in South Africa will have a significant positive societal impact. As such, support for reforms is high within relevant industries and government agencies, but there is an understanding that implementation will be challenging. [7] On 29 August 2022, the Minister of Finance introduced the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill to South Africa’s National Parliament. At the time of writing, the Bill was still being considered by Parliament’s Finance Standing Committee. It was signed into law in December 2022. Whether the Bill will cover all legislative gaps has not been considered for this briefing. However, as many of the implementation details will be covered by secondary legislation, this briefing still provides relevant insights for drafting regulations.
As the considerations discussed in this briefing will outline, the regulatory and institutional environment applicable to the BOT of trusts provides a strong foundation for implementing reforms in South Africa. By using the Open Ownership Principles for effective beneficial ownership disclosure (OO Principles) as a framework, this briefing aims to contribute to the ongoing dialogue on the BOT of trusts in South Africa. [8]
In this briefing, the unique circumstances of the legal regime applicable to trusts will be discussed within the framework of BOT. Due to the novelty of the topic, this document’s purpose is not to provide concrete solutions to the challenges identified, but rather to contextualise the considerations applicable to the BOT of trusts.
This briefing will describe the background applicable to the BOT of trusts; identify key trends emerging from international best practice; discuss the context of the BOT of trusts in South Africa; and explore the various considerations applicable to designing an effective BOT of trusts regime. South Africa’s BOT of trusts regime will also be discussed through the framework of the OO Principles, before concluding with final remarks.
Reform considerations checklist
This briefing provides key insights into the challenges facing regulators and policymakers implementing reforms for improving the BOT of trusts in South Africa. The following is a checklist of key considerations for reforms. It is not comprehensive, nor is it intended to be prescriptive. Rather, it is a tool for policymakers and regulators to consider next steps using the OO Principles as a framework. It is also envisioned that these recommendations will be considered by a collective of individuals and officials responsible for implementing reforms, rather than specific individuals. The recommendations are discussed in more detail throughout the rest of the document.
Definition
- Agree and adopt a legal definition of the beneficial ownership of trusts, which should cover all the natural persons who are party to a trust. This should include the founder(s); trustee(s); administrator(s) of the trust (where different from the trustee); (discretionary) beneficiary/ies and class(es) of beneficiaries; and any other natural person exercising ultimate effective control over or benefiting from the trust (including through a chain of control/ownership or through a nominee arrangement).
- Consider adopting explicit definitions for the legitimate purposes of trusts, which will empower financial institutions and designated non-financial businesses and professions (DNFBPs) to identify any transactions that fall outside the regular use of trusts.
Coverage
- Conduct a risk assessment to identify types of trusts that might be exempted from BO reporting requirements, which may include Special Trust Type A and B. [9] If such exemptions are granted, clear justification for the exemptions must be published.
- Additionally, the risk assessment should identify any types of trusts that create a higher risk of abuse, and special BO reporting conditions for such trusts should be considered.
Detail
- Clearly define, in legislation, which data fields will need to be disclosed to authorities for all of the following: 1) the trust; 2) the beneficial owners; and 3) the corporate trustees or other legal entities involved in the ownership structure, and what events should trigger the requirement for a disclosure.
- Determine how additional documents, such as the trust deed and identity documents, are to be disclosed, and what information from such documents should be disclosed.
Central register
- South African policymakers will have to make decisions about whether to create a centralised register for trusts, and whether to do so by requiring financial institutions and DNFBPs to collect and store this information.
- If establishing a central register, decide who the registrar will be.
- Should the registrar be the Master’s Office, develop a plan for using the records of the Master’s Office as a central register of information on the beneficial ownership of trusts. This plan should include details on the mandate of the Master’s Office as the custodian of the information, the functional and technical requirements, and budgetary implications for modernising current records into a usable register.
Access
- Determine the feasibility of adopting memorandums of understanding (MOUs) or service-level agreements between competent authorities and the Master’s Office for unfiltered access to trust information in a variety of ways, including per-record search and bulk access, and the conditions attached to access. Any such agreements must identify the specific authorities that are regulated by the agreement.
- Ensure efficient access for financial institutions and DNFBPs.
- Review and adopt a formal definition of legitimate interest for broader access to trust information. During this review, the various factors that may impact access to BO information, such as privacy, public interest, and protection of the interests of minors and mentally incapacitated beneficiaries, should be considered.
- Consider adopting specific access measures for investigative journalists.
- Determine and adopt sanctions for abusing access to information.
Structured data
- Consider publishing BO data for both legal entities and arrangements to the Beneficial Ownership Data Standard (BODS), and develop an implementation roadmap for structuring existing data.
- Determine how to make data interoperable with information about the beneficial ownership of legal entities, for instance, through the use of unique identifiers.
- Consider the use of application programming interfaces (APIs) as a potential option for data sharing between competent authorities, financial institutions, and DNFBPs.
Verification
- Create legal obligations to submit relevant supporting documents (such as the trust deed, letter of wishes, verified forms of identity documents, etc.) when BO information is submitted, and for the registrar to implement mechanisms to ensure the accuracy of information in the register.
Up-to-date and historical records
- Develop an action plan to ensure that all the information held by the Master’s Office is verified and updated within set timeframes, and historical records are kept.
- Consider whether any additional actions and stricter enforcement mechanisms are required to improve self-reporting of any changes to BO information.
- Consider transaction thresholds for trusts and the reporting requirements linked to transactions above such thresholds.
Sanctions and enforcement
- Establish sanctions in law for individuals and firms that fail to meet reporting obligations. Clearly define the competent authority responsible for enforcement of these sanctions and which parties can be held liable for not complying with reporting obligations.
Methodology
This briefing is based on a comprehensive literature review on the various considerations applicable to BOT and the legal considerations applicable to trusts in South Africa. As the literature on the BOT of trusts in South Africa remains limited, the focus of the literature review was on identifying the interaction between trust law and BOT.
This was complemented by interviews with expert stakeholders from government, civil society, and the private sector, providing practical insights into the challenges faced by practitioners that ultimately use BO information, and what kind of challenges the lack of BOT of trusts poses to the prevention of criminal activity, forensic investigations, and due diligence processes.
Finally, it was not possible to reach all the envisioned stakeholders to gather their inputs during the research process. Most significantly, the researchers were not able to elicit inputs from the Master’s Office or the Department of Justice and Constitutional Development. As the custodians of trust information, the Master’s Office’s views on the BOT of trusts are critical. Whilst effort was taken to gather insights from professionals who work with the Master’s Office regularly, the insider perspective from the Master’s Office is lacking in this policy briefing.
Endnotes
[1] The terms founder, settlor, and donor are used in different jurisdictions to refer to the same role in a trust. The South African legal context uses founder, but the term settlor is also used in this briefing.
[2] P.A. Olivier, S. Strydom, and G.P.J. van den Berg, Trust Law and Practice (Durban: LexisNexis South Africa, 2021). The Open Ownership briefing An introduction to trusts in South Africa: A beneficial ownership perspective was written as a background to this briefing, and contains more details on the registration, elements, classification, and potential abuse of trusts in South Africa: Johann Krige and Anneke Wolmarans, An introduction to trusts in South Africa: A beneficial ownership perspective, Open Ownership, November 2022, https://www.openownership.org/en/publications/an-introduction-to-trusts-in-south-africa.
[3] Emile van der Does de Willebois, Emily M. Halter, Robert A. Harrison, Ji Won Park, and J.C. Sharman, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It (Washington DC: The World Bank, 2011), https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf.
[4] Van der Does de Willebois et al., The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It.
[5] South Africa: Crime, Defence & Security Report, Fitch Solutions, 2022.
[6] Marianne Merten, “SA at 85% risk of being greylisted, so determined political will needed – and learning from Mauritius: report”, Daily Maverick, 12 October 2022, https://www.dailymaverick.co.za/article/2022-10-12-with-85-chance-of-greylisting-sa-needs-determined-political-will-report/.
[7] These insights were gathered through expert stakeholder interviews and during a BOT Conference held in Cape Town in May 2022, jointly hosted by Open Ownership, the Department of Public Service and Administration, the Financial Intelligence Centre, Open Government Partnership, and Corruption Watch.
[8] “Open Ownership Principles for effective beneficial ownership disclosure”, Open Ownership, updated July 2021, https://www.openownership.org/en/principles. The OO Principles were updated in January 2023. The changes do not affect their use as a framework for this policy briefing.
[9] For more information on types of trusts and the classification in South Africa, please see: Krige and Wolmarans, An introduction to trusts in South Africa: A beneficial ownership perspective.