The fifth Anti-Money Laundering Directive

The European Union’s (“EU”) fifth Anti-Money Laundering Directive (“AMLD”) was drafted to enhance the previous AMLDs by increasing the transparency requirements for trusts. The objective of the increased requirements were anticipated to yield the same transparency results and standards placed on corporate structures. The EU’s aim is to empower and enable the Reporting Authorities by supplying sufficient knowledge of the various structures utilized by residents and citizens of the EU to ensure money laundering, especially tax evasion, is reduced and ultimately eliminated.

In grasping an understanding of the effect of the fifth AMLD, primarily on trusts, an examination of the context is necessary.  Understanding the elements leading to the decision to implement the fifth AMLD, and additionally considering the purposes of trusts, will reveal the potential impact of the directive on existing trusts as well as the future of trusts.  Exposing the rationale behind the fifth AMLD aimed at supporting trust and structural transparency attempts to justify the aggressive measures taken. The implementation of several regulations, guidance notes and laws where the original intent appears to be related to confidentially holding assets and managing obligatory tax revenue has directly affected trusts. In order to comply, the complexity of engaging tax advisors, corporate advisors, or anti-money laundering compliance advisors, to name a few, has slowly begun to deter potential clients because of the costs, the complexity or even being saddled with the obligation to register and disclose.  

The concept of transparency arguably began when the United States of America (“United States”) introduced the reporting of beneficial owners and controllers that are citizens of the United States. The reporting obligation, under the Foreign Account Tax Compliance Act (“FATCA”) of 2010, led to international agreements between the United Kingdom (“UK”) and many other countries including the United States. By 2014, Organization for Economic Cooperation and Development (“OECD”) introduced Common Reporting Standard quite similar to FATCA but adopted by most, if not all, the countries that are members of the OECD. The concept of transparency continued to evolve with the fourth AMLD adopted by the European Union (“EU”). This directive included a specific objective related to the disclosure and registration of the ultimate beneficial owners of corporations, trusts and legal arrangements. The disclosure of such members that meet specific criteria enables the identification of the actual controller and major beneficiary behind any given structure owning assets within the UK or with obligations to the UK. The significant difference, which is also a significant impact, is that this registration would be publicly accessible. In addition to the existing transparency efforts, the EU imposed a requirement of economic substance that requires offshore corporations to submit a declaration of legitimacy. The declaration of legitimacy is based primarily on the purpose and activity of the corporation. This continued effort by the EU to identify tax efforts will undoubtedly continue. It is difficult not to consider FATCA, the base erosion and profit shifting (“BEPS”) or Common Reporting Standard (“CRS”) in relation to organisations or groups that sought to address the loss of revenue by nations due to various attempts at tax evasion especially enveloped in offshore structures. The offshore locations are primarily being frequently classified as tax-free havens by the EU and disclosed on the EU list of tax havens in a negative light. The fifth AMLD, unlike these other enforcements, was a new concept that sought to publicise, not only the first layer of ownership, but now the ultimate beneficial owners and, what is more, to make such information public.

The focus and continued debates remain, with the fifth AMLD adopted subsequent to the fourth AMLD, but prior to the imposed obligation of specific entities for declaration of economic substance. Despite this requirement imposed, which certainly has an impact on trusts and trust structures, the fifth AMLD presents more considerable contention. Before effectively understanding the self-evident contention between the need for the obligations put forward in the fifth AMLD and the requirements of practitioners and their clients, as mentioned, a full understanding of the objectives surrounding these obligations is a necessity. Analysing the potential impact of the fifth AMLD would require understanding the origin or original purpose of trusts, the manner in which such trusts evolved into usages seen in modern times, the introduction of significant transparency influences, the impact of transparency breaking down the major players, and finally, the future of transparency and trusts leading to current frustrations faced by practitioners.

FATF sought to put forward recommendations that would combat any predicate offenders’ use of money laundering schemes to achieve concealment of funds origination, thereby ultimately exposing funds which would lead ultimately to cutting off access to funds. Among the recommendations outlined by FATF were transparency and beneficial ownership of legal persons and arrangements. Today, such transparency guidelines include the direction of disclosure of relevant information to appropriate or competent authorities to ensure that at the very least known offenders are captured or that building a case against potential offenders is achievable. The information received by the competent authorities works as a resource in investigations or can be analysed to reveal potential anomalies. Although this requirement has been in place for quite some time now, the collected information is strictly available per jurisdiction. The competent authorities house vast information reported by those obligated to report segmented by countries and confidential information requirements. As mentioned above, the exchange of information initiative allows this vast information to be accessible by other authorized jurisdictions in the continued fight against tax evaders.

The appeal of this attack on money launderers spread to other organisations and groups, including the European Union ('EU'). The EU considered the recommendations put forward by FATF and drafted a set of directives. At the EU level, it has the potential to ensure consistency and buy-in by all its members. These directives were initially imposed with the intent to improve the standards as it relates to the issues and concerns faced by the Member States within the EU. The first AMLD is dated in the year 1990, where the EU adopted rules to prevent the misuse of financial institutions from facilitating money laundering activities. It is apparent that this first AMLD was established to enforce the guidelines and recommendations first established by FATF in the late 1980s. Much like FATF, the EU sought to focus efforts on anti-money laundering. Later in 2001, both would also pursue efforts to combat terrorist financing. For simplicity and clarity, money laundering hereafter mentioned is in consideration of efforts to combat terrorist financing unless expressly stated otherwise. The AMLD that was first adopted in 1990 has since evolved from the first directive to the fifth directive with the sixth directive already in contemplation by the EU. The amendments to these directives are in direct response to increased ingenuity on the part of the lawbreakers, the reactive measures of other nations and proactive drafting of the EU itself. By the fourth AMLD, it was restated entirely; as opposed to being further amended.

In 2015, the European Parliament and Council further amended the fourth AMLD. As such, the fourth and fifth AMLD are read collectively. The significance of these amendments overshadowed the second and third, not only by repealing both but further as it introduced a profound obligation on the competent authorities of countries that adopt these directives. The obligation was a central register to evidence efforts mandated by the AMLD. The central register was an enhancement to the FATF requirement mentioned above. The central register required competent authorities to mandate registration of the beneficial owner in an effort to create transparency. The initial adaptation of the fourth amended AMLD required “trustees of any express trust governed under [the Member States’] law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust”. The wording of Article 31 of the fourth AMLD excluded offshore holdings inclusive of offshore trusts. At the time of its release, offshore structures were considered out of scope or at the very worst not considered at all. The initial drive for the central register was primarily focused on the citizens and residences of EU Member States.

Shortly after the adoption of the fourth AMLD, events revealed aspects of the directives that did require consideration of offshore structures; that is, the necessity of unravelling ownership inclusive of offshore structures as it relates to structures within the EU Member States. According to the proposal for the fifth AMLD, the now infamous Panama Papers revealed a massive non-financial business service utilised throughout the financial structuring for legitimate and illegitimate businesses establishments.

The Oxford University Press wrote extensively regarding the Panama Papers, most relevant is the fifth issue of Volume 22:

The Panama Papers highlight the need for all jurisdictions—and the wider international community— to ensure that legal structures of major economic and social value (companies, trusts, and foundations) are not misused. The responsibility of professionals associated with their establishment and operation is of crucial importance here: they are in many ways society's gatekeepers and the provisions of services such as the so-called nominee directors and (in the context of disclosure of beneficial ownership)  and should not be countenanced.

The EU acted swiftly from the fallout of this event and amended the fourth AMLD to incorporate the lessons learned. Continuous review and understanding of the event led to the identification of law firms in the UK and complex structuring of asset ownership through offshore corporate service providers. The actions by the lawyers revealed deliberate actions to conspire to defraud the appropriate authorities of revenue owed.

The anti-money laundering and financial regulatory obligations are endlessly emerging through groups that exist to examine and develop guidelines, recommendations and even directives having varying approaches, similar objectives and conflicting repercussions. Naturally, the examination of the Panama Papers led to many attempts to circumvent the use of a legitimate service by those seeking to evade tax obligations or engage in other criminal acts. 

The fifth AMLD was adopted on 5 July 2016 in an attempt to circumvent the fallout of the 2016 Panama Papers. The Executive Summary of the Impact Assessment revealed that among other issues addressed, the amendments addressed the gap between linking corporate and legal arrangements in the reporting obligations initially raised in the fourth AMLD. With every modification, there are positive and negative impacts. The fifth AMLD indeed has massive implications and impact on several citizens, but even further extends obligations to offshore structures, including trustees and corporate service providers. The primary benefits of the structure consider the transparency of legal arrangements in the hopes of unveiling deliberate evasion of tax obligations. Arguably, complex legal structures are not merely all-inclusively established for the sake of tax evasion. Many high net worth individuals have come forward with sincere concerns of ownership disclosures leading to life-threatening circumstances, including but not limited to armed robbery, kidnapping or extortion. Others have expressed a need to conceal net worth from family or friends seeking to take advantage. Still, others seek a life of anonymity. The law abiders have, for the most part, no apparent objection to a register. However, the public register has increased much cause for concern. Regardless of the justifications, protests and announcements to delay a public register, the EU seeks to move forward with the public register and has even blacklisted some jurisdictions for lack of compliance. Presently, the public register is yet to be officially mandated. When it does go into full force, it is noted that the register will have limited access to a specific group of authorities for the sole purpose of the objectives already described above. It is easy to speculate that this could continue to evolve into a fully public uninhibited register, which is of great concern. The future of these requirements must be scrutinized now with a clear understanding of the impact known to ensure any further amendments encompass concerns. Undoubtedly, the future of a public register has a significant impact on all obligated to comply.

The fifth AMLD is not the last amendment to these directives as the sixth AMLD was enacted in 2019 and compliance mandated by late 2020. The continued evolution of the AMLD is evidence of the commitment by EU to develop protocols and provisions to address the ever present anti-money laundering activities of law breakers especially tax evaders. Empowering the appropriate persons with sufficient information to investigate and prevent crimes is the main objective of the prevailing laws produced by the EU and various jurisdictions.