Trust Reporting Systems - An International Comparison

This Policy Briefing examines the issue of how to best ensure that national authorities have adequate access to key information on trusts. The issue is pressing. First, several major nations, including the US, are reviewing how they can improve their systems in the wake of critical appraisals from the Financial Action Task Force (FATF), the body responsible for coordinating the development of anti-money laundering (AML) measures. Second, ensuring tax authorities have adequate access to information on trusts is an important issue as a growing number of international tax information exchange agreements (TIEAs) are signed under the aegis of the Organisation for Economic Co-operation and Development’s (OECD’s) Global Forum programme. We have therefore surveyed the findings on access to information on trusts of a representative sample of ten FATF peer reviews of jurisdictions where trusts are common.

Our main findings are:

• The most widely used model for gathering information on trusts is via competent and well-regulated advisors who are required to pass that information on to the authorities. Generally this approach is highly effective.
• In the trusts context the important elements of a strong reporting regime are clear requirements on professional standards and competence with as few as possible gaps in regulatory supervision. The ‘Statement of Best Practice for Trust and Company Service Providers’ published by the Offshore Group of Banking Supervisors provides a good template here.
• There appears to be a significant disconnect between the risk-based approach used by most jurisdictions and the principles actually being applied in published peer reviews. More explicit consideration of cost benefit issues in the peer review process would strengthen the consistency of application of AML regulations in different jurisdictions.
• Concerns about preserving legitimate confidentiality are implicitly acknowledged by peer review teams as being an important issue in some key jurisdictions, but none of the reviews surveyed consider performance in this area.
• There is no case for developing new (and probably costly) approaches to collect the information needed on trusts for tax purposes – current AML systems are generally ‘fit for purpose’ in gathering the information needed under TIEAs.

Summary results and conclusions

• Of the jurisdictions surveyed, two (Cayman and South Africa) were judged ‘compliant’ on FATF Recommendation 34, the key recommendation relevant for trusts. Six jurisdictions were judged largely or partially compliant and two (US and New Zealand) were judged non-compliant. This spread of results is similar to, or rather better than, similar surveys have found for other key FATF recommendations.
• In the trusts sector the standard model used internationally to fulfil AML obligations is a ‘regulated advisor’ approach (sometimes called the ‘obligation on service providers’ approach), giving competent authorities broad-ranging investigatory powers, but also regulating trust service providers and requiring them to collect key information.
• South Africa is unique in our survey in adopting a register approach (sometimes called ‘up front disclosure’), requiring trusts to register with the authorities and provide key information as part of the registration process.
• Looking at the regulated advisor and register approaches, there is no evidence that, correctly applied, one is more effective than the other in providing key information to investigators. As FATF itself has noted, ‘it matters less who maintains the required information... provided that the information on beneficial ownership exists, that it is complete and up-to-date and that it is available to competent authorities’.
• The US and New Zealand, take a third approach, labelled by FATF as ‘primary reliance on investigative mechanisms’, which grants strong investigatory powers to competent authorities, but with little or no regulatory requirement on trust service providers to collect key information. Both countries using this approach were found to be noncompliant.
• The main variation between jurisdictions using the standard ‘regulated advisor’ approach is in terms of where the regulatory boundaries are drawn and how consistently regulatory standards are applied. ‘Trust service providers’ vary widely from jurisdiction to jurisdiction, in some instances being specialist trust companies, in others a range of lawyers, accountants and other professionals. In all cases, the important elements of a strong AML regime are clear requirements on professional standards and competence with as few as possible gaps in regulatory supervision. The ‘Statement of Best Practice for Trust and Company Service Providers’ published by the Offshore Group of Banking Supervisors provides a good template here.
• It would help strengthen the consistency of application of AML regulations if FATF explicitly considered cost/benefit issues as part of the peer review process. There is no explicit discussion of cost/benefit issues in any of the peer reviews in our survey. As a result jurisdictions are often criticised for deficient procedures in spite of clear evidence that, overall, their systems capture the great bulk of the required information. We note that researchers looking at other areas of the FATF review process have similarly argued that FATF ought to take cost/ benefit issues in to consideration more explicitly.
• Another striking omission from all the peer reviews surveyed is the lack of any discussion of how well differing systems fulfil FATF’s longstanding commitment to respecting individuals’ legitimate expectations of confidentiality. This is an important issue for many trust service providers with respect to, for example, the register approach adopted in South Africa. Concerns about preserving confidentiality are also implicitly acknowledged by the FATF peer review teams as being an important issue in securing general acceptance of stronger AML measures in some key jurisdictions. It would help build confidence in AML measures if FATF explicitly considered confidentiality issues in its peer review process.
• A frequent practical issue identified by FATF peer review teams is that while the necessary information on trusts is available to one enforcement agency, legislation to protect privacy and data protection requirements impose limits on the circumstances in which information can be shared with other agencies. This reinforces the case for ensuring FATF methodologies explicitly address public concerns about confidentiality, the integrity of systems and data security.
• The approaches developed at a national level to collecting AML information, combined with the strong investigatory powers most jurisdictions grant to tax authorities, appear to be generally ‘fit for purpose’ in terms of securing the information on trusts that jurisdictions need to fulfil their obligations under TIEAs. It would simply add to costs, with no clear benefit, to require jurisdictions to develop entirely new approaches to gather information for tax information exchange purposes.