Andres Knobel ■ Trusts and the UK: half a step forward, three steps backwards

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Remember our paper calling for the registration of trusts? Back then the British government opposed this. During discussions related to the EU 4th Anti-Money Laundering Directive, Treasury spokesperson Lord Newby even said: “We consider registration of trusts to be a disproportionate approach and, in particular, one which undermines the common-law basis of trusts in the UK.”

It may be unfair to ridicule statements made in another era (2014), if it weren’t for the fact that they are still being made in the more modern times of 2017, such as when Jersey Finance claimed, in response to our trust paper, that “the requirement that all persons connected to a trust should be registered is unworkable, disproportionate, costly, and burdensome”.

Now, lo and behold, in 2017 the UK has approved registration of the beneficial owners of trusts…that meet certain conditions. Information will not be publicly accessible – but what were you expecting?!

We’ll go into all the loopholes in a second. But the fact that the UK now has a beneficial ownership (BO) register of some trusts should not be underestimated. Not because it is an example to the world – in fact, other countries in the EU already have BO registries that cover a wider range of trusts. However, the argument goes:

‘it’s easy for countries with a Civil Law legal tradition (like most countries in Europe) to create a register of trusts because their laws don’t allow the creation of trusts, and they don’t have large trust industries, so in the end there will be nothing to register, and no industry will be affected. However, for Common Law countries like the UK or the U.S., with domestic trust laws and large trust industries, registration of trusts would be impossible or too complicated’.

The main consequence of the UK BO register of trusts is to prove this argument wrong. Now that the UK, home of centuries-old trust law and with a large trust industry, has a BO register, it is no longer acceptable for other Common Law countries (the U.S., Australia, New Zealand, British dependencies), let alone for Civil Law countries in the rest of the world, to keep postponing registration of the beneficial owners of trusts.*

And for all, including the UK: if BO registration of some trusts is possible, there is no reason why the law cannot be widened to cover all trusts created according to the laws of the jurisdiction, or with a connection to the jurisdiction (e.g. a settlor, trustee, protector, beneficiary or asset located or resident in such jurisdiction).

End of the half-step forward.

The first step backwards: not public

The registry will not be publicly accessible. This is in stark contrast to the fact that the UK’s Companies House makes BO information of companies and LLPs publicly available online, for free and in open data format.

The request for public access to BO information is not just NGOs having a tantrum. In the UK alone, it was thanks to public scrutiny by civil society organisations that many inaccuracies were reported (and hopefully, amended) in relation to companies’ BO information registered in the UK’s Companies House.

The second step backwards: scope loopholes.

As described by KPMG, for a trust to be subject to BO registration in the UK, it has to be “relevant” and “taxable”.

The first condition is this: a trust is relevant if it is an express trust (meaning there was a deliberate intention by the settlor to create the trust – this is not a loophole), and whose trustees are:

-All UK resident; or

-At least one is UK resident and the settlor was UK resident and domiciled when the trust created funds added; or

-Not UK resident if the non-UK resident trustee receives UK source income or has assets in the UK on which it is liable to pay UK taxes.

In other words, the loophole is that as long as a trust doesn’t meet either of those three conditions (e.g. only one trustee is UK resident but the settlor wasn’t resident in the UK when the trust was created, or none of the trustees is UK resident and the trust has no income or assets in the UK), then the trust doesn’t have to register its BOs. Many local UK people and mostly small-timers will get caught. But big players won’t, simply by structuring their trusts to fall outside of the scope of the regulation.

But to be subject to BO registration a trust needs to meet a second condition. It also has to be a “taxable” relevant trust. This would be the case, if the trustees (not the beneficiaries) are liable to pay any of the following in the UK: income tax, capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax. (KPMG’s description is confirmed by Sections 42 and 45.(14) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.)

But why not register all trusts connected to the UK, if the trust BO register already exists?

One reason could be the 2014 fallacious argument by the UK Treasury that “trusts, unlike companies are used for a range of purposes, such as benevolence, inheritance, protecting vulnerable people and family support”. Even if someone could prove that most trusts are indeed used for those purposes, the same could be said for companies. Most of the millions of registered companies in the world are probably used for legitimate purposes. But this is irrelevant. This is like arguing that we shouldn’t have security checks before boarding an aircraft because most passengers aren’t terrorists. It’s a nonsense argument. The main point of public BO registration (or airport security) is to make it harder for the minority number of companies and trusts (or terrorists), to do harm. Nothing in trust law requires a trust to be used for benevolent purposes or for protecting vulnerable people. On the contrary, trusts have -in practice – been involved in many grand corruption cases as described here.

The second reason why the UK may be choosing a narrow scope of trusts subject to BO registration is a legal or even philosophical argument as to the legal nature of the trust. If a trust were a legal person, like a company, it would be harder to treat them differently to companies. In such a case, all trusts, instead of only “some”, would have to be registered. In addition, all trusts, just like all companies, would have to disclose their BOs (see the first step backwards above). Interestingly, the EU Court in 2017 considered trusts as legal entities when it comes to EU Freedom of Establishment in order to allow them to avoid UK capital gains tax — so one would think that the UK would take this case law into account and reconsider its approach towards the status of trusts (as legal persons) when it comes to their registration.

Unfortunately, in 2018 the UK Law Commission will deliberately not address whether trusts should be considered to have legal personality, but only ways to make UK law trust more ‘competitive’, similar to Jersey and Singapore (see third step backwards below).  This kind of “Competitiveness,” as TJN has pointed out many times, is a code word for giving wealthy people and large multinationals special rules that ordinary folk can’t benefit from, for fear they’ll flee. It damages democracy and boosts inequality.

By looking into other countries’ consultations as to whether trusts should be considered to have legal personality and register or not, we see that the arguments aren’t as philosophical, but rather money-driven.

The New Zealand 2012 Law Reform Report: it had a good start — but then you can see where the money entered the picture. [Some annotated comments in between]:

“It is possible that a register of trusts could have some advantages (…). By incorporating a regulatory element into the process for establishing a trust, (…) could mean more information is available about the number of trusts in existence and how they are being used. Government agencies, beneficiaries and potential creditors would all be likely to gain benefit from having information available about trust relationships. Registration and reporting requirements may be an additional tool to ensure that trustees retain the information they are required to in order to meet their duties as trustees. (…) The Inland Revenue was favourable towards the introduction of a register. It considered that the value of privacy in trusts must be balanced against the rights of creditors to know who they are dealing with in a commercial world. Its view was that in an open market economy like New Zealand’s the default position should be transparency in relation to business or asset holding entities unless there is a good reason why this should not be the case. It considered that compliance costs could be reduced by utilising an existing register, such as the Companies Register.

[… here comes the money!] We consider that the potential benefits are not sufficient to warrant such a change. (…) The costs of establishing and maintaining a register are likely to be large [Really? If you already have one for companies…]. It would be difficult to enforce the regulation of the hundreds of thousands of existing trusts. [Really? If you already require this from companies…]. The reduced privacy, confidentiality and anonymity of trusts could make trusts less attractive and shift demand to alternative private structures to meet this need. [This is like arguing against criminal punishment for mafiosi – they will commit crimes in other ways. Yes, but you’ll reduce the overall problem]. The comparison with companies does indicate that trusts are comparatively less regulated as companies must be registered (…) the nature of companies is that public registration is required in order establish their legal personality, however, something that is not applicable to trusts. [emphasis added]

Most submitters were opposed to the introduction of a register [and most turkeys are opposed to Christmas]. Ernst & Young considered that a register would result in increased compliance costs, particularly because it would require regular updating [just as it happens with companies!], and departure from overseas and historical norms with little advantage to be gained [oh, the “competitive” argument]. (…) The Trustee Corporations Association and Greg Kelly Law made the point that foreign trusts may not be settled in New Zealand if trusts become less private, something which may not be in the country’s interests” [emphasis added. For ‘the country’s – read ‘Greg Kelly Law’ and other narrow interests. The country’s interests include a stronger rule of law and less financial crime. This is exactly like a pro-Mafia argument.]”

Although Scotland’s Law Commission in 2006 also rejected the idea of trusts as legal persons that have to be incorporated on theoretical and philosophical grounds, they did acknowledge that in practice, trusts look a lot like legal entities (in the sense that in practice a trust creates a shield against creditors and it is as if the trust, and not the trustee, owns property):

“once the ownership of the property that constitutes the trust fund has been transferred from the truster’s private patrimony into the trustee’s trust patrimony, not only is it no longer vulnerable to the claims of the truster’s personal creditors but it is also immune from the claims of the trustee’s personal creditors. This is easily explicable by, and is, indeed, an inevitable consequence of, the dual patrimony theory. But we can readily see why there is a temptation to explain it on the basis that “the trust” owns the trust fund which is only managed by the trustees.

(…) there is again an understandable temptation to create a structure that appears better to represent the economic and social realities of how a trust operates in practice: namely, that it is “the trust” which owns the trust fund which is only managed by trustees. This is reinforced by the fact that trusts are treated as separate entities for most tax purposes. [emphasis added]”

The third step backwards: modernising UK’s trust law to be more ‘competitive’.

In an attempt to bring more trust business to the UK (due to Brexit, perhaps?) at the expense of the majority of the world’s population (including those in the UK), the UK Law Commission will start to analyse UK Trust law as an area for reform to make it more ‘competitive’, when compared to more “creative” regimes (e.g. Singapore and Jersey).  They will also consider more flexible structures, like Jersey Foundations and Cayman Star trusts.

Here are some extracts of the scary section called “Modernising Trust Law for a Global Britain”:

“Trusts are used by a range of people within the UK, but also by individuals and corporations internationally, many of whom choose our domestic law and courts to govern their arrangements. It is therefore an important global legal export bringing a range of business to the UK for lawyers, accountants, banks and trust companies.

[…] A reform project reviewing the law of trusts would consider an outdated area of the law, with a view to modernising trust law to enhance the competitiveness of this jurisdictions’ trust services in a global market. The general law of trusts has not been comprehensively reviewed since 1925. In contrast, many other “onshore” and “offshore” jurisdictions – including Scotland, Jersey, New Zealand and Singapore – have updated their trust law and been creative in maintaining a healthy trust market. As well as problems with the existing law, consultees have outlined the development of alternative, flexible trust and trust-like structures in other jurisdictions that are not available in England and Wales, such as Jersey Foundations and Cayman Star Trusts. Not all of these structures may be suitable for this jurisdiction, but there is a strong argument that their advantages and disadvantages should be evaluated. [emphasis added]”

This is just another example of the UK’s steady march towards tax haven status – something that will do the UK in aggregate no good at all, even while benefiting a few UK accountants and lawyers.

TJN has been questioning this ‘competitive’ argument. For instance, TJN’s Nick Shaxson recently wrote for The Guardian:

“The word ‘competitiveness’ sounds moderate, but in reality it is a code word for corporate tax-cutting and financial deregulation, routinely used by every tax haven in the world to defend questionable policies. It deliberately raises the spectre that the rich, banks and multinationals will flee – so as to justify handing them ever more goodies […].

A ‘competitive’ tax haven model also inflicts damage that can’t be measured, such as more corruption and criminality, and that harms democracy. Last week’s murder of Panama Papers journalist Daphne Caruana Galizia in the tax haven of Malta is just the latest violent reminder of this […].

Offering tax loopholes or financial laxity brings in, at best, exactly the wrong kind of investment – flighty, profit-shifting, wealth-extracting nonsense that hardly touches the sides – not the wealth-creating stuff Britain needs, rooted in its economy with local jobs and supply chains. If it’s well-embedded, a whiff of tax won’t scare it off. That good stuff needs infrastructure and a healthy and educated workforce – which means sufficient levels of tax.”

In conclusion, the fact that the UK has a BO register for (certain) trusts should be enough to disqualify any claim that trust registration is impossible. However, the UK is hardly an example to follow in terms of transparency, since not all trusts have to register and there will be no public access to the BOs of trusts that do have to register. On top of everything else, attempts to create more flexible structures to make the UK more ‘competitive’ (when compared to places like Jersey or Cayman), should raise alarm everywhere, starting with the EU.

The UK should commit to effective BO transparency for all legal entities and trusts, and then spread that to its Overseas Territories and Crown Dependencies. Up until now, the strategy has been to turn a blind eye to the British dependencies’ lack of transparency progress, claiming they were independent. Now, it seems that strategy is worryingly turning for the worse: the Law Commission is now suggesting the UK may copy some of the British dependencies’ worst legal vehicles. Brexit is becoming Brex-haven…

 

*Endnote: Trusts in Common Law and Civil Law countries

Trusts originated in the England of the Middle Ages and are now widely used in Common Law countries such as the UK, the U.S., Australia, New Zealand, etc. In addition, many related tax havens have developed their trust laws to master asset protection and tax planning features (e.g. BVI, Cayman, Cook Islands, etc.). In most Civil Law countries trusts cannot be created, although some have similar institutions (e.g. fiducie or fideicomiso) and some countries, e.g. Argentina, Dominican Republic, France or San Marino even changed their laws in recent years to allow or at least amend their trust-like fideicomisos or fiducies to make them even closer to the Anglo-Saxon trust. Arguably, trust regulations, case law and industries in Civil Law countries are not as developed as those of Common Law countries (especially for asset protection and tax planning purposes), except for “commercial” trusts used for securitization, financing or real estate development. In any case, regardless of the law governing it, a trust can have effects in any county. Therefore, all countries should require trusts connected to their territories to register their BOs in a public central register.

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