TCSPs: The New Gatekeepers of the Financial System

When faced with figures such as these, it is unsurprising that national governments and intra-governmental organisations such as the EU and independent bodies, for example the Organisation for Economic Co-operation and Development (OECD), are producing more rules and regulations than ever before to tackle the problem.

Recent developments in Anti-Money Laundering (AML) legislation are an indicator of the trend. In the last 12 months, there has been a flurry of new initiatives for practitioners and advisors to keep abreast of. In June 2018, the EU passed the Fifth Anti-Money Laundering Directive (5AMLD); in October of the same year the European Council agreed further rules, dubbed by some as the Sixth Anti-Money Laundering Directive (6AMLD).

In the UK, the country’s new AML watchdog, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), launched in January 2018, highlights the increased focus on money laundering at a national level. Its role in coordinating and overseeing the UK’s 22 professional body AML supervisors, shows that increased communication between existing regulators is one method open to jurisdictions. Meanwhile, Unexplained Wealth Orders (UWOs), introduced by the UK Criminal Finances Act 2017, provide new powers that require persons under suspicion to explain the source of their assets. This extra level of enforcement was first used in 2018.[iii]

New rules on money laundering are only part of the regulatory landscape; legislation on tax avoidance and evasion has also appeared at a rapid pace. For example, the EU amended the Directive on Administrative Cooperation in the Field of Taxation (DAC) in May 2018, with the new rules requiring intermediaries who design or promote aggressive tax-planning schemes to disclose them. In a similar development, the OECD issued model Mandatory Disclosure Rules (MDRs) in March 2018, making it harder to avoid disclosing information under the Common Reporting Standard (CRS).

Another form of action on tax avoidance and evasion is the EU’s list of non-cooperative jurisdictions for tax purposes that was published in December 2017. After several revisions, the list currently features just six jurisdictions. An additional grey-list is made up of 64 countries that have pledged to reform their tax systems to meet EU standards. In October 2018, the Chair of the Code of Conduct Group responsible for overseeing both lists told the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance that other jurisdictions were being screened as part of the process.

While these measures target a wide range of financial institutions, from banks to independent accountants, a sector that has been the source of particularly focused debate is trusts, and more specifically, Trust or Company Service Providers (TCSPs). A TCSP is defined as a person or entity participating professionally in the creation, administration and management of trusts and corporate vehicles. Given this role, TCSPs are often involved in the establishment of most legal persons and arrangements in the jurisdictions they operate in, positioning them as gatekeepers of the financial sector.

Concerns have been expressed about the vulnerability of TCSPs in relation to financial crime; an example of this can be found in Ireland’s first National Risk Assessment (NRA). Although TCSPs that are subsidiaries of credit or financial institutions were rated as a low risk, all other TCSPs were deemed to be a medium-high risk of money laundering or terrorist financing.[iv] Backing this up, the UK think tank the Royal United Services Institute (RUSI) warned that TCSPs are ‘often crucial enablers to money laundering’[v].

Of the recent measures, the legislation that will have the most impact on trusts and TCSPs is 5AMLD, which introduced central registers of beneficial ownership for all express trusts and trust-like structures. At present, it has been left to Member States to decide who will be able to access the registers once they are in operation. In jurisdictions such as Germany, certain authorities (for example, law enforcement bodies) are granted access to the information on the register. Aside from this, the Directive allows Member States to give access to ‘persons who are able to demonstrate a legitimate interest’. Discussions are ongoing within many Member States about how to interpret ‘legitimate interest’. In Germany, the phrase applies to specialist journalists or NGOs, if seriously engaged in preventing corruption. These individuals are given restricted access to the register, with some personal data not being visible to them.^[vi]

The requirement for central registers in 5AMLD is not an isolated case. Seen as a driver of transparency, beneficial ownership registers are becoming increasingly common. Transparency is a laudable goal and important to tackling financial crime. However, the implementation of beneficial ownership registers in many jurisdictions has not been without its critics. 

One reason for such criticism has been the effect on privacy. During the drafting of 5AMLD, STEP and the Law Society obtained a legal opinion which found that a publicly accessible register or legislation that allowed a wide interpretation of ‘legitimate interest’ risked infringing upon both Article 7 (respect for private and family life) and Article 8 (protection of personal data) of the EU Charter of Fundamental Rights. The European Data Protection Supervisor (EDPS) raised similar criticisms of the 4^th Anti-Money Laundering Directive (4AMLD), noting the increased access to beneficial ownership information lacked proportionality and brought with it ‘significant and unnecessary risks for the individual rights to privacy and data protection’[vii].

Proposals for publicly accessible registers of company beneficial ownership have also been met with resistance from jurisdictions such as the British Virgin Islands (BVI) and the Cayman Islands. BVI Premier Orlando Smith has called the UK’s Sanctions and Anti Money Laundering Act 2018, which mandates the registers, ‘unsatisfactory, ill-founded, unnecessary and based on ill-informed opinion’.  

The United States (US) currently doesn’t have a publicly accessible national beneficial ownership register. Cross-jurisdictional bodies such as the Financial Action Task Force (FATF) and the OECD have criticised the US stance on the topic. FATF found the US to be non-compliant with the organisation’s corporate transparency and gatekeeper requirements in both 2006 and 2016.  Recent attempts to alter this situation through the Counter Terrorism and Illicit Finance Act (CTIFA) have failed. In this instance, a requirement to submit beneficial ownership information to authorities for use in a register was removed from the legislation[viii]. Opponents of the measure, such as the American Bar Association (ABA) called it ‘burdensome and intrusive’[ix]. Another common concern is the questionable quality of the data held in such registers.

 Despite their increasing use, having a beneficial ownership register in place isn’t necessarily the silver bullet needed for tackling financial crime. Alternatives to beneficial ownership registers should therefore be explored to support jurisdictions’ efforts to tackle the problem. The same ethos applies when looking at how greater confidence in TSCPs can be delivered, given some of the reputational issues they have experienced in recent years. In 2014, a consultation paper published by the Australian government listed some of the benefits to regulating TCSPs effectively, including:

• Dispersing the regulatory burden associated with combating Money Laundering and Terrorist Financing (ML/TF).
• Closing the regulatory and intelligence gap.
• Enhancing national security,
• Enhancing the reputation of the Australian financial system.[x]

Currently there is a patchwork approach to regulating the TCSP sector internationally. Certain jurisdictions, such as Jersey, have been praised for their standard of regulation,[xi] while others are lagging.

In 2010, FATF published a report about TCSPs and money laundering[xii]. The report, based on questionnaires sent to FATF members, found that variations in the nature and effectiveness of the regulation and supervision of TCSPs in different jurisdictions posed difficulties for properly managing the risks posed by issues such as ML/TF.

The report placed a special emphasis on the vulnerabilities of unregulated jurisdictions, noting that it was difficult to gauge their application of FATF’s 40 + 9 Recommendations,[xiii] [xiv] and the limited restrictions placed on practitioners, which could allow poor practice in the sector.

A potential response to this would be to implement a standardised international system of consistent regulation. Such a standard already exists, published by the Group of International Finance Centre Supervisors (GIFCS). The aim of GIFCS is to bring together supervisors from smaller financial centres around the world and assist with the implementation of international standards of regulation.

Published in 2014, GIFCS’ Standard on the Regulation of Trust and Corporate Service Providers or alternatively the Standard lists three objectives:

• Customers of TCSPs should receive a degree of protection equivalent to that afforded to the customers of other financial institutions.
• TCSPs should be subject to a similar regulatory regime as other financial institutions.
• To be effective, standards should be applied internationally.[xv]

The Standard outlines a benchmark for the establishment of effective systems of regulation and supervision. It includes requirements regarding anti-money laundering, bribery and corruption, and international sanctions.

The Group also assists with the implementation of the Standard. Following the publication of the Panama Papers in 2015, a deadline of April 2019 was set for GIFCS members to achieve a ‘largely compliant’ position with the Standard. To encourage good practice, a member’s compliance will be assessed in the form of a peer review. The completed reports are expected to be made public in due course.

Encouraging more jurisdictions to approach the issue of TCSP regulation in a consistent manner would be an important step towards remedying the situation outlined in the FATF report. With many of the smaller financial centres already committed to implementing the GIFCS standard, it seems to be the logical starting point to build further consensus amongst larger centres and jurisdictions that have no or poor regulatory systems.

Financial crime, such as money laundering, remains a problem that still requires well-thought-out practical solutions. This is agreed by many jurisdictions, evidenced by the volume of legislation, guidance and rules to combat the issue. Another point of agreement is that TCSPs can have both a vulnerability to this kind of crime and a role to play in stopping it. For this reason, it is common sense that best practice in regulating the TCSP sector is identified and replicated, ensuring the sector, and perhaps its future, is secure.

[i] United Nations Office on Drugs and Crime, UNDOC estimates that criminals may have laundered US$ 1.6 trillion since 2009, October 2011: https://www.unodc.org/unodc/en/press/releases/2011/October/unodc-estimates-that-criminals-may-have-laundered-usdollar-1.6-trillion-in-2009.html

[ii] Thomson Reuters, What’s hiding in the shadows: Revealing the true cost of financial crime, 2018: https://risk.thomsonreuters.com/content/dam/openweb/documents/pdf/risk/report/true-cost-of-financial-crime-global-focus.pdf

[iii] The Wall Street Journal, Court Upholds U.K.’s First Unexplained Wealth Order, 3 October 2018: https://blogs.wsj.com/riskandcompliance/2018/10/03/court-upholds-u-k-s-first-unexplained-wealth-order/

[iv]Department of Finance and Department of Justice and Equality, National Risk Assessment for Ireland: Money Laundering and Terrorist Financing, p. 4: https://www.finance.gov.ie/wp-content/uploads/2017/05/NRA-FINAL-for-Publication.pdf  

[v] S. Lain and I. Petraskeviciute, ‘Plugging’ the Money-Laundering Intelligence Gap: Case Studies from Post-Soviet States, 28 July 2016: https://rusi.org/commentary/plugging-money-laundering-intelligence-gap-case-studies-post-soviet-states

[vi] NauthaDutilh, Status overview of UBO register Europe, 31 August 2017, p. 50: https://www.cobalt.legal/files/bundleNewsPost/2990/Overview_status_implementation_UBO_register_-_survey_NautaDutilh_31_August_2017.PDF 

[vii] European Data Protection Supervisor, EDPS Opinion on a Commission Proposal amending Directive (EU) 2015/849 and Directive 2009/101/EC, 2 February 2017, p. 3: https://edps.europa.eu/sites/edp/files/publication/17-02-02_opinion_aml_en.pdf

[viii] KYC360, Brilliant or burdensome? Key points in the US beneficial ownership debate, 2 July 2018: https://kyc360.com/article/burdensome-beneficial-key-points-us-beneficial-ownership-debate/

[ix] American Bar Association, Counter Terrorism and Illicit Finance Act and Concerns Regarding Section 9 (Transparent Incorporation Measures), 27 November 2017: https://www.americanbar.org/content/dam/aba/uncategorized/GAO/gatekeeperregandtheprofessiontf(abalettertohfscfinalversionnov272017).authcheckdam.pdf

[x] Australian Government Attorney-General’s Department, Consultation Paper: Trust and company service providers:  a model for regulation under Australia’s anti-money laundering and counter-terrorism financing regime, November 2016: https://www.homeaffairs.gov.au/consultations/Documents/aml-ctf-statutory-review/trust-company-service-providers-model-regulation.pdf

[xi] Government of Jersey and the Jersey Financial Services Commission, Jersey MONEYVAL Report Summary, 24 May 2016: https://www.jerseyfsc.org/pdf/MONEYVAL_Jersey_Report_Summary_2016.pdf

[xii] FATF, Money Laundering Using Trust and Company Service Providers, October 2010: http://www.fatf-gafi.org/media/fatf/documents/reports/Money%20Laundering%20Using%20Trust%20and%20Company%20Service%20Providers..pdf

[xiii] FATF, The 40 Recommendations, published October 2004: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/the40recommendationspublishedoctober2004.html

[xiv] FATF, IX Special Recommendations: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/ixspecialrecommendations.html

[xv] Group of International Financial Centre Supervisors, Standard on the Regulation of Trust and corporate Service Providers, 17 October 2014: http://www.gifcs.org/images/GIFCSStandardonTCSPs.pdf

Daniel Nesbitt
Daniel Nesbitt is a Policy Executive for STEP (Society of Trust and Estate Practitioners), London, UK. Prior to joining STEP he worked in various policy roles in and around Westminster for a number of years. Most recently he worked at the civil liberties group Big Brother Watch as Research Director; overseeing the preparation of reports, consultation responses and inquiry submissions as well as representing the organisation externally in meetings with key stakeholders and in the media.