European Union: MLD V And Its Implactions For Wealth Managers

Last Updated: 27 July 2018
Article by David Dorgan

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions