I. Scope of Legal Arrangements, risk assessment and foreign trusts
1. In this context, are the following concepts sufficiently clear? If not, how could they be improved?
a “governed under their law”
b “administered in the jurisdiction”
c “trustee residing in the jurisdiction”
d “similar legal arrangements” (as compared with express trust).
OO welcomes FATF’s consideration to revise the definition of legal arrangements by referring to Article 2 of the Hague Convention on the law applicable to trusts and their recognition so that jurisdictions can use this as a basis of whether legal arrangements have a similar structure or perform a similar function to an express trust. However, Article 2 does not specify that there can be more than one settlor, and that all parties to the trust can also be legal entities.
We believe a clarification of all the concepts would be beneficial. For example, it is not fully clear what the difference is between “administered in the jurisdiction” and “trustee residing in the jurisdiction”. It suggests that “administers” refers to cases where a trustee is not administering the trust, for instance in the case of nominee trustees, although this is not clear.
The FATF proposal to define a “sufficient link” to trigger a requirement to capture BO information about legal arrangements is a step forward. OO would propose to expand this to jurisdictions where trust assets (e.g. real estate) are located, where trusts establish a business relationship (e.g. opening or maintaining a bank account) or have any other tax implication, and where beneficiaries are located.
The term “similar legal arrangements” is also insufficiently clear. This could specify that it should cover any arrangement that allows for the separation between the beneficial owner and the legal owner of assets, generally involving a mechanism where assets are entrusted by one or more parties to one or more other parties that manages the asset for one or more third parties, as done by the European Commission. It should also make clear that one party may have more than one role in the arrangement.
2. What could be the pros and cons associated with the new suggested risk assessment? What could be the potential “sufficient links” for foreign-created legal arrangements (e.g. residence of trustee, location of asset etc.) for the purpose of risk assessment?
The definition of “sufficient link” is too narrow in scope. Sufficient link should cover:
- The trust being formed under the laws of the jurisdiction
- Any party to the trust being resident in the jurisdiction, including nominees or anybody else who administrates the trust
- Any trust asset(s) (e.g. bank account(s)) being located in the jurisdiction
- Any service providers to the trust being based in the jurisdiction
It will be difficult for many countries to conduct risk assessments as in many jurisdictions there is no requirement for trusts to be registered. Therefore many countries have no overview of the size and scope of trusts with a sufficient link in their jurisdiction, and as such it will be difficult to conduct a useful assessment. All trusts pose a money laundering risk. Therefore, OO recommends that requirements apply to all trusts that have a sufficient link with the country, following an expanded definition of sufficient link. As in the approach in Recommendation 24, other aspects of the disclosure system (e.g. enhanced verification) can be based on risk.
3. Are there any other considerations with respect to scope of legal arrangements or risks posed by legal arrangements that FATF should factor into its review of R.25?
FATF should consider how revisions to Recommendation 25 will impact Recommendation 10. For example, there is already a definition of the beneficial owners of trusts in Recommendation 10 (see below). FATF should also pay particular attention to how its requirements will be met in non-trust law countries, as knowledge about trusts and other legal arrangements are likely to be lower. FATF should support non-trust law countries with specific and detailed guidance and consider providing dedicated training, as many jurisdictions have not yet had any cause to develop knowledge in and dedicate resources to this area. Consideration should also be given to how Recommendation 25 relates to Recommendation 24, as systems to address both may be developed simultaneously.