DON’T TAKE IT ON TRUST The case for public access to trusts’ beneficial ownership information in the EU Anti-Money Laundering Directive 23 FEBRUARY 2017 Trusts provide an unparalleled degree of secrecy, making them an ideal getaway vehicle for money launderers. The European Commission’s proposed revision of the Anti-Money Laundering Directive is positive in extending the scope of ownership transparency for companies and some trusts. Yet to be effective these measures need to go further to make sure they do not allow easy escape routes for criminals. The Panama Papers shone a light on the Making beneficial ownership information abuse of corporate secrecy and led to a publicly available should be the cornerstone public outcry for government action that of the response to these challenges. The catalysed reforms around the world, creation of public registers of beneficial including the Commission’s proposals. The ownership is rapidly emerging as the new revelations demonstrated how secrecy global standard to remove that veil of facilitates money laundering, tax evasion secrecy. The UK, Nigeria, Kenya, Ghana, and the financing of terrorism, with Europol Ukraine, the Netherlands, France and many identifying that over 100 names in the papers other countries have already committed to were connected with “Islamist” terrorism.1 It or have introduced public company is vital that the political momentum from the registers. Now the EU should do the same for Panama Papers is not lost and that reforms companies and trusts. meet the scale of these challenges. This briefing examines three examples of While the role of companies in facilitating how trusts are used in EU Member States financial secrecy is well documented, often which illustrate the need to strengthen the as a result of action by law enforcement or European Commission’s proposals. This other authorities, the secrecy trusts provide paper shows how: is a major hurdle to law enforcement. This A Lichtenstein trust linked to Victor means that the extent of their use is critically Yanukovych hid who benefitted from the underreported. controversial privatisation and secretive multi-million dollar renovation of Ukraine’s Investigators and prosecutors tend presidential palace. not to bring charges against trusts, because of the difficulty in proving their A Brunei prince who stole billions from his role in the crime…. As a result, even if country may have prevented an exclusive trusts holding illicit assets may well have London property from being rightfully been used in a given case, they may not returned to Brunei using a Jersey trust to actually be mentioned in formal charges hide his ownership. and court documents, and consequently European politicians have sought to use their misuse goes underreported.” trusts to keep their business interests secret World Bank Puppet Masters report on the use of 2 from their constituents and the public. legal structures in corruption cases GLOBAL WITNESS 2 DON’T TAKE IT ON TRUST FEBRUARY 2017 SUMMARY & Exemptions for disclosing the identities RECOMMENDATIONS of “minors or people otherwise incapable” should be removed, as these provide a Trusts should be included in registers loophole that could be exploited. where they have a connection to a Member State, not just when they are administered there, including where the settlor or beneficiary is resident in a Member GLOSSARY State, or where the trust owns shares in a company or property in a Member State. This Trust – a legal arrangement where an would remove a major loophole and individual, the settlor, divests assets to be significantly increase the scope of coverage. managed by a trustee, for the benefit of another individual or individuals, the Proposals for a ‘legitimate interest’ test beneficiaries. for access to beneficial ownership information do not work and should not Settlor – also known as a grantor or be included. They allow some Member trustor, establishes and transfers assets States to deny access to parties that should into a trust. have access such as journalists or NGOs, Trustee – administers and manages the create an uneven regulatory playing field and assets of the trust for the benefit of the undermine the proposal for the trusts’ beneficiaries, as set out in the interconnection of registries. terms of any trust deed. Trusts’ beneficial ownership Protector – protects the interests or information should be made public to wishes of the settlor, providing influence support the work of law enforcement, to and guidance to the trustee. Not all trusts deter money laundering, to support non-EU have a protector. countries in tackling corruption and to improve data quality. Publishing trusts’ Beneficiary – receives the benefits of the beneficial ownership information is asset held in trust, including the use of legitimate and proportional to its impacts assets held in trust, receiving an income on citizens’ right to privacy and to family life. from the trust assets, or receiving the assets at a specified date. The identities of all parties to a trust should be disclosed as beneficial owners, Beneficial owner - the individual(s) who including the settlor, trustee, protector and ultimately own or control a trust and/or beneficiary or class of beneficiaries. the individual on whose behalf a transaction is being conducted. It also Beneficial ownership should be includes individuals who exercise published as open data, in a machine- ultimate effective control over a trust. readable format without charge for accessing records, to allow systematic data analysis. GLOBAL WITNESS 3 DON’T TAKE IT ON TRUST FEBRUARY 2017 CONTENTS people in poorer countries are willing to take huge risks to flee to places such as the EU in Why trusts matter 4 search of a better life. How trusts are used to hide Corruption and money laundering are also identities and wealth 5 key facilitators of refugee smuggling and Disguising the owner of Yanukovych’s people trafficking, two of the fastest growing palace 5 and most lucrative international criminal Protecting the man who stole billions activities.4 The proceeds of these crimes can from Brunei 6 also be used to finance terrorism, with Hiding politicians’ business interests 7 terrorist groups increasingly turning to these Why all trusts connected to the EU forms of organised crime to fund their 5 need to be included 9 activities. Why trusts’ beneficial ownership Financial secrecy is a huge enabler of large- information should be made public 10 scale corruption. In a World Bank study of Public access is necessary 10 over 200 large-scale corruption cases over 30 Public access is proportionate 11 years, nearly 70% of them relied on opaque No exception for family trusts 12 corporate structures, such as trusts and ‘Legitimate interest’ does not work 13 anonymously owned companies.6 It is for this All parties identities should be made reason public registers of beneficial public 13 ownership for all EU companies must be introduced.7 Conclusion 14 Yet when individuals are trying to create WHY TRUSTS MATTER financial secrecy to hide their ownership of assets, trusts are often used as the final step The current EU Anti-Money Laundering in a complex chain of shell companies – the Directive recognises that flows of illicit ultimate entity that preserves their secrecy money can damage the integrity, stability and protects their assets. and reputation of the financial sector, threaten the internal market and Trusts provide unparalleled secrecy, 3 international development. These are very allowing individuals to disguise the real concerns. ownership of assets while still benefitting from them. This creates huge legal barriers Money laundering enables corruption that to creditors or anyone else seeking to make a deprives governments of money that could claim against these assets. These features be spent on public services like healthcare are significant additions to the simple and education. It undermines public trust in anonymity that can be achieved by setting governments and institutions – a level of up an anonymous shell company. This trust that is falling and can lead to the rise of secrecy is what makes them such effective populist movements and political instability. tools for money launderers, the corrupt and Corruption increases conflict and terrorist financers. perpetuates poverty, enriching an elite class while leaving the rest of the population behind. This contributes to a situation where GLOBAL WITNESS 4 DON’T TAKE IT ON TRUST FEBRUARY 2017 DISGUISING THE OWNER OF Trusts often constitute the final YANUKOVYCH’S PALACE layer of anonymity for those seeking to The Mezhyhirya mansion and estate, former conceal their identity.” President Victor Yanukovych’s home for over OECD - Behind the Corporate Veil8 a decade, has become a symbol of endemic One rationale provided for the secrecy that corruption in Ukraine. By the time trusts enjoy is that they exist to hold and Yanukovych fled Ukraine after the 2014 distribute assets to third parties, such as revolution, the estate included a 5-story children or vulnerable people. Yet as this palace, two 3-story guest houses, a golf paper demonstrates, all too often trusts can course, a yacht club, a helicopter pad and a simply be elaborate structures for the benefit racetrack with horse stables.9 of the individuals establishing them. Yanukovych is currently wanted in Ukraine to HOW TRUSTS ARE USED TO face accusations of having cost the country up to $100 billion, including allegedly taking HIDE IDENTITIES AND WEALTH $32 billion out of the country in truckloads of The degree of secrecy provided by trusts cash during his final days in power, means that there are very few examples in allegations which he denies.10 In comparison, the public domain that show how trusts are at that time Ukraine’s external debt was used to hide identities and wealth, despite it $131 billion.11 being widely recognised that trusts are frequently used to do this.