Regulations enacted by the Minister for Finance mean that designated persons are required to seek professional advice about their duties, to seek and obtain information from beneficial owners of trusts and to establish beneficial ownership local registers as required.
Beneficial Ownership EU Regulations 2016 (April 2017)
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What has happened?
The European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2019 (the “2019 Regulations”) were adopted on 29 January 2019 and trustees should act now to ensure that they comply with the new measures.
Prior to 2019, trustees were required to maintain beneficial ownership information by virtue of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (the “2010 Act”) (as amended in the Criminal Justice Act 2013 and Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018). The 2019 Regulations set out new obligations which represent significant developments for trusts, their ultimate beneficial owners and their trustees.
The 2019 Regulations transpose part of an EU directive (the Fourth Anti-Money Laundering Directive) (“MLD4”) aimed at increasing transparency in relation to the ownership of express trusts and other arrangements. The date for transposing MLD4 into Irish law was 26 June 2017.
The 2019 Regulations must also be considered in light of the Fifth Anti-Money Laundering Directive (“MLD5”) of the EU which came into force on 9 July 2018. MLD5 is required to be transposed into law by 10 January 2020. MLD5 requires trustees to include information on the beneficial ownership of trusts in a central national register. Ireland is required to establish its central register by 10 March 2020. MLD5 broadens the scope of those who can be granted access to beneficial ownership information held on register and includes provision for any person who can demonstrate a “legitimate interest” to access such information.
What trusts is this relevant to?
The 2019 Regulations apply to all express trusts (whose trustees are resident in Ireland or where the trust is otherwise administered in the State) irrespective of whether or not the trust generates a tax effect. These include family trusts, bare trusts, charitable trusts, pension trusts and unit / other investment trusts.
The 2019 Regulations apply to estates of deceased persons in administration. The 2010 Act determines that the beneficial ownership of an estate is vested in the personal representatives and those persons are required to record and maintain beneficial ownership information on a register.
They apply to trusts, even it not having a tax effect, and bare trustees (who regularly hold real property) will be required to establish a beneficial ownership register.
Who is a beneficial owner?
Beneficial owner is defined in article 3(6)(b) of the MLD4 as “the natural persons… on whose behalf a transaction or activity is being conducted”.
In the case of trusts, the same article lists a range of persons involved with trusts who are considered beneficial owners. They include the settlor(s), trustees, the protector(s) (if any), beneficiaries (who are natural persons) and any other natural person exercising ultimate control over the trust.
It is important to be aware that persons in a fiduciary role include bodies corporate whose identity must be ascertained. A link to our update on beneficial ownership of bodies corporate of April 2017 is available here. Designated persons must obtain information on the beneficial ownership of corporates. They must ascertain the name, date of birth, nationality and residential address of each beneficial owner and a statement of the nature and extent of the interest held by each such beneficial owner with more than 25% in a body corporate.
For the purposes of the 2019 Regulations, reference to beneficiaries is to natural persons. Every natural person who is in the beneficial class is a beneficial owner. The following information in relation to each natural person must be obtained under the 2019 Regulations: name, date of birth, nationality and residential address(es).
It will be important for each body of trustees to determine the appropriate level of diligence required depending on the nature of the trust and each natural person’s beneficial entitlement.
The 2019 Regulations do not identify any such areas of lower risk. Section 28 of the 2010 Act includes any individual entitled to a vested interest (defeasible or not) in the capital of the trust property as a beneficial owner. Section 33(7D) of the 2010 Act requires a designated person to:
“obtain sufficient information concerning the beneficiary to satisfy the designated person that it will be able to establish the identity of the beneficiary at the time of the pay out, or at the time of the exercise by the beneficiary of its vested rights.”
It should be sufficient for a designated person to contact a beneficiary in advance of the point in time when that person, by reference to their entitlements, is about to receive a financial benefit from a trust.
The 2019 Regulations apply to occupational pension schemes established as trusts and will have significant implications as every beneficiary is a beneficial owner. Article 15 of the MLD4 authorises an EU member state to identity areas of lower risk and to allow obliged entities to apply simplified customer due diligence in those circumstances. Article 16 of the MLD4 – when referencing the circumstances which may give rise to low risk situations sets out in Annex 2 a list of relevant factors at 2(c) referring to a pension, superannuation or similar scheme that provides:
“retirement benefits to employees, where contributions were made by way of deduction from wages, and the scheme rules do not permit the assignment of the members’ interest under the scheme.”
Under the 2019 Regulations, every individual who has an interest in a “collective investment undertaking” which is defined in section 24 of the 2010 Act as including (i) an undertaking for collective investment in transferable securities; (ii) an alternative investment fund; (iii) an authorised management company; and (iv) an alternative investment fund manager, will be considered a beneficial owner.
The 2019 Regulations apply to all collective investment undertakings. However, their implications can be expected to be more challenging to manage in the case of listed and actively traded entities.
The High Court has authority pursuant to article 6(5) of the 2019 Regulations, to determine whether a person’s name should or should not be recorded on a beneficial ownership register. The High Court also has the power to order rectification of a trust register. Aggrieved persons may apply for rectification where a name is mistakenly entered, omitted or unnecessarily delayed from being removed from a register.
The High Court has also been given power to award damages for any loss sustained by an aggrieved party. It is unclear what loss is regarded as relevant in this context.
What are trustees required to do?
Trustees should keep and maintain a beneficial ownership register. Each local register must hold the information collected pertaining to the relevant trust’s beneficial owner(s).
There is an obligation on designated persons to “take reasonable steps” to maintain and hold adequate, accurate and current information on the trust’s beneficial ownership. It is unclear what actions will be considered a sufficient discharge of this responsibility, where such actions have not yielded the required information. It is important that policies are developed by designated persons to ensure that they demonstrate the actions taken to discharge their obligations pursuant to the 2019 Regulations.
There is also an obligation on trustees to keep information in the trust’s beneficial ownership register up-to-date. A trustee must “as soon as practicable”, after learning of the change in information, alter or delete the information on the relevant register in order to ensure that the change is reflected. Not only are trustees required to keep the information on the register up-to-date, but they must also record the actions taken to keep the register up-to-date.
Failure to comply with the 2019 Regulations is a criminal offence with persons being liable to a class A fine (up to a maximum amount of €5000) where convicted.
To whom are the registers available?
Current obligations under the 2019 Regulations
Under the 2019 Regulations, the information gathered on local registers is required to be made available to the Revenue Commissioners and State competent authorities on request. A “State competent authority”, as defined, includes the Central Bank of Ireland, the Minister for Justice, Equality and Law Reform and any other competent authorities prescribed by regulations made under the 2010 Act. A State competent authority may disclose the information in a beneficial ownership register to a corresponding competent authority in another EU member state.
Future obligations under MLD5
MLD5 will require EU member states to establish a central register of beneficial ownership information and expands the scope of persons and bodies who can access such information. After Ireland has transposed MLD5 (which it is required to do by 10 January 2020), beneficial ownership information will be made available on a central register to certain permitted person and bodies which include:
- competent authorities and Financial Intelligence Units (without any restriction);
- obliged entities;
- any natural or legal person who can demonstrate a “legitimate interest”; and
- any natural or legal person who files a written request in relation to a trust or similar legal arrangement which holds or owns a controlling interest in any corporate or other legal entity through direct or indirect ownership.