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Like any other FATF recommendations, it is not formally binding, however, it contributes to the creation of industry wide standards which are, to a great extent, reflected and transposed into law (including EU AML Directives).
The Guidance is aimed at supporting countries and regulators in further development of robust AML frameworks, however, obliged entities should assess the risk associated with trusts and legal agreements in their portfolios and apply it, where appropriate, in their policies and processes.
Key takeaways
The Guidance recommends that countries should assess money laundering and terrorist financing (ML/TF) risks of the misuse of legal arrangements, and take preventive measures. In particular, countries should ensure that there is adequate, accurate, and up-to-date information on express trusts and other similar legal arrangements.
This includes collecting information on its beneficial owners - the settlor(s), trustee(s), protector(s) and beneficiary(ies), or class(es) of beneficiaries, and any other persons exercising ultimate effective control - where any of those parties are legal entities this should also include the identification of ownership. Such information should be possible to be obtained or accessed efficiently and in a timely manner by competent authorities.
The Guidance explains the difference between express trust and similar arrangements recognizing that this may be challenging since there is no universally accepted definition of what constitutes a similar legal arrangement to a trust. Trusts were initially developed under common law systems. Similar legal arrangements developed in civil law contexts are not expected to replicate the trust concept identically. Therefore, assessing whether a legal arrangement is similar to an express trust requires a comprehensive and contextual analysis of various factors.
What Express trust is and examples of similar legal arrangements?
Express trust is created by the settlor, usually in the form of written instrument
- Governing the relationship between the settlor, trustee and beneficiaries
- Trustee as a legal owner of the assets
- Without legal personality
- Purpose of managing and distributing the assets
Examples of other similar legal arrangements:
- Fiducie
- Certain types of Treuhand
- Fideicomiso
- Waqf
What factors should be considered when assessing the similarity of legal arrangements versus express trusts?
Two main factors should be considered by the countries to determine whether they qualify as a legal arrangement similar to an express trust:
- The structure
- The function (the purpose) of the legal arrangement
Understanding the ML/TF risks
Mechanisms for preventing and mitigating risk
According to the Guidance, countries should take appropriate steps to manage and mitigate the risks identified in the risk assessment. To mitigate the risks, it is necessary to clearly establish specific features that characterize each type of trust or similar legal arrangements, particularly the purposes of these arrangements.
The following outlines risk-mitigating preventive measures. Some of these measures go beyond the existing standards but could help mitigate risks:
- A robust understanding of relevant ML/TF risks,
- Sanctions for trusts operating in a country that bypass registration requirements by registering in another country,
- Mechanisms to supervise or monitor persons administering trusts that are not TCSPs (e.g., lawyers and accountants),
- Mechanisms for enhanced due diligence by FIs/DNFBPs with business relationships involving trusts or similar legal arrangements, where relevant and in line with a risk-based approach,
- Mechanisms to investigate violations of registration requirements and/or beneficial ownership reporting rules, where in place, with special consideration given to the threat posed by relevant higher-risk arrangements,
- Providing sufficient enforcement capacities and powers to the competent authorities,
- Providing adequate verification and enforcement capacities and powers to the trust registry, beneficial ownership registry, TCSP supervisor(s), or other relevant public body,
- Introducing an international cooperation regime to facilitate rapid, constructive, and effective international cooperation regarding information, including beneficial ownership information on trusts and similar legal arrangements.
- A register of trusts administered in the country or for which the trustee or equivalent resides in the country,
- A register of trusts governed under the law of a country (where the law is such that the trust has no legal capacity without such registration). Establishing licensing or registration requirements for professional trustees,
- Applying FATF Recommendations 10 to 12 to:
- Non-professional trustees,
- Professional administrators of trusts that are not TCSPs,
- Mechanisms applying disclosure requirements to legal arrangements that wish to operate in, own significant assets in, or apply for registration in a country; additionally, applying disclosure requirements to legal arrangements that receive funding from foreign sources or from sources deemed to be high risk,
- Introducing arrangements whereby actors in specific sectors, particularly those deemed to be at higher risk, can detect and report concerning activities,
- Introducing legislative measures, such as anti-abusive provisions, limits on measures particularly vulnerable to abuse, and disclosure requirements of the other parties to the trust, etc.
Full FATF Guidance is available under the following link. In case of any question, our team will be happy to assist you.
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