The Fourth Anti–Money Laundering Directive ((EU) 2015/849)

Lesley King provides commentary on the impact of 4ALMD on practitioners.

It’s unusual to feel real gratitude to a relatively unknown EU institution but private client practitioners should definitely give a vote of thanks to the European data protection supervisor who on 2 February 2017 issued an opinion strongly criticising proposed amendments to the fourth Anti–Money Laundering Directive (4AMLD).

What is 4AMLD?

4AMLD in its original form is not good news for practitioners. It was adopted on 26 June 2015 and EU states have two years from that date to implement the rules contained in the directive into national law. The stated objective of AMLD is to improve the tools to counter money laundering and terrorist financing.

One of the ways to achieve this goal is to improve the information available on beneficial ownership to prevent anonymous structures being used to finance terrorism and launder money. Trusts are amongst the structures targeted.

Under Article 31 of the 4AMLD member states must ’require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust. That information shall include the identity of:

the settlor
the trustee(s)
the protector (if any)
the beneficiaries or class of beneficiaries
any other natural person exercising effective control over the trust’.

If the trust generates tax consequences (and very few do not) the required information must be held on a central register which will be accessible by competent authorities, including government agencies.

If it does not generate tax consequences, the information must be held by the trustees and passed on to competent authorities, if required.

The UK is on the way to meeting this obligation. The December 2016 Trusts and Estates newsletter included the following item on the establishment of a trusts register:

’The trusts register will provide a single point of access for trustees and their agents to register and update their records online, replacing the current paper 41G form and the ad hoc process for trustees to notify changes in their circumstances.

The new service will provide a single online service for trusts and estates to comply with their registration obligations, will improve the processes around the administration of trusts, and allow HMRC to collect and hold adequate and up to date information in a central register.

This will affect customers who need to register new trusts and estates with HMRC and existing trustees who will need to provide and update their details.

As well as implementing the requirements of article 31 of the EU Fourth Anti Money Laundering Directive (4MLD), the register will be in line with HMRC’s digital strategy and provide greater tax transparency going forward.’

This is obviously going to increase administrative burdens on trustees and advisers but is not too worrying. There is already an obligation to provide details to a government agency using form 41G. The information about beneficiaries, settlors and trustees would have been made available to HMRC in any event so there is no change there.

However, recent financial scandals such as the Panama Papers have drawn the attention of the commission to the increased risk of tax evasion, which, under the current version of the directive, is just seen as a source of illicit funds, but not directly targeted. On 5 July 2016, the commission published a set of proposed amendments to the AMLD aimed at tackling tax evasion by both legal and natural persons. The proposals are particularly concerned with transparency

The amendments broaden the scope of the rules, by extending access to the register to the general public for companies and trusts involved in commercial or business-like activities.

In the case of non-business-type trusts access to the register is limited to members of the public with a legitimate interest. The definition of legitimate interest will be up to individual states but is clearly intended to be wide. It seems to extend to NGOs working on financial crimes and abuses, the press and investigative journalism which is alarming for those concerned with privacy. Recital 35, which is intended to clarify the meaning, says ’the legitimate interest with respect to money laundering, terrorist financing and the associated predicate offences should be justified by readily available means, such as statutes or mission statement of non-governmental organisations, or on the basis of demonstrated previous activities relevant to the fight against money laundering and terrorist financing or associated predicate offences, or a proven track record of surveys or actions in that field’.

There is a limited protection proposed for exceptional circumstances where the access would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable.

The criticism

The European data protection supervisor is an independent institution of the EU. The supervisor is responsible under Article 41.2 of Regulation 45/2001 ‘With respect to the processing of personal data… for ensuring that the fundamental rights and freedoms of natural persons, and in particular their right to privacy, are respected by the community institutions and bodies’, and ’…for advising community institutions and bodies and data subjects on all matters concerning the processing of personal data’.

His opinion on the proposals is very critical. They are described as disproportionate and as extending the purpose of 4AMLD beyond combating terrorist financing and money laundering to tax evasion. He made the point that forms of invasive personal data processing, may be acceptable in relation to anti–money laundering and fight against terrorism, but unnecessary out of those contexts. Also the expressed need for timely detection may be a crucial factor in the context of terrorism financing, but is much less relevant in the context of the fight to tax evasion. Emergency–based measures that are acceptable to tackle the risk of terrorist attacks might well be regarded as excessive when applied to prevent the risk of tax evasion. Finally, it is a fundamental principle of data protection that information gathered for one purpose (anti–terrorism) should not be used for another (tax evasion).

We can but hope that the criticisms will lead to significant amendments.