FATF Revision of Recommendation 25 – White Paper for Public Consultation on beneficial ownership (BO) of legal arrangements

I  Scope of Legal Arrangements, risk assessment and foreign trusts 

The FATF is considering revising the definition of legal arrangements by referring to Article 2 of the Hague Convention on the law applicable to trusts and their recognition so that jurisdictions can use this as a basis of whether legal arrangements have a similar structure or perform a similar function to an express trust.

FATF is further considering whether countries should apply measures to understand the risk posed by trusts and similar legal arrangements governed under their law or which are administered in their jurisdictions or whose trustees are residing in their jurisdictions, and to take appropriate steps to manage and mitigate these risks. For other legal arrangements, the FATF is considering limiting the scope of risk assessment and mitigation obligations to such legal arrangements that have sufficient links with the countries

II. Obligations of trustees under R.25 

FATF is considering how to further clarify obligations on trustees (and persons holding an equivalent position in a similar arrangement) to obtain and hold adequate, accurate and up-to-date information, related to parties to a trust. Inter alia, R.25 currently requires trustees to obtain and hold information on beneficiaries (defined to cover persons entitled to benefit from any trust arrangement) or classes of beneficiaries.

This requirement does not extend to objects of powers of discretionary trusts, who may derive a benefit from a trust in the future, notwithstanding that there is a likelihood that such an object will become entitled, e.g., they are named in a letter of wishes, or they may present a higher ML/TF risk.

FATF is considering setting the nexus of such obligations to countries where the trustees reside and/or where the trusts are administered. Also, the FATF is considering bringing professional and non-professional trustees under the same set of requirements by extending the requirement for records to be kept for at least 5 years to such non-professional trustees.

III. Definition of Beneficial Owners 

The FATF defines beneficiaries and beneficial owners differently. FATF is looking into whether a clarification of the definition of beneficial owner in the case of legal arrangements is warranted. A separate definition could further clarify the concept of ownership and control in the context of legal arrangements. Under this approach, beneficial ownership information could include the identity of each: (i) settlor; (ii) trustee(s); (iii) protector (if any); (iv) beneficiary, or where applicable, class of beneficiaries or objects of a power; and (v) other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above. When the trustee and any other party to the legal arrangement is a legal person, the beneficial owner of that legal person should be identified.

IV. Review of Current definition included in the FATF

“Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer2 and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person or arrangement. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person or arrangement.”

V. Obstacles to transparency 

FATF would like to gather further input on how legal arrangements could be misused for money laundering/terrorist financing purposes. Themes which are under consideration include complex ownership structures, flee/flight clauses etc.

VI. Approach in collecting beneficial ownership information 

FATF is considering ways to strengthen the requirement for countries to have access to BO information in respect of legal arrangements and contemplating whether countries should be required to use mechanisms besides trustees, including for example: (i) a public authority or body holding information on the beneficial ownership of trusts or similar legal arrangements, (ii) asset registries, (iii) information collected by other competent authorities, or (iv) information collected by other agents or service providers including trust and company service providers, investment advisors or managers, accountants, or lawyers.

VII. Adequate, accurate and up-to-date information 

FATF is considering how to clarify the key attributes of access to information by competent authorities, that access should be timely, and information should be adequate (to identify the natural persons who are the beneficial owner(s) and their roles in the trust), accurate (i.e. verified using reliable, independently sourced/obtained documents or other methods, on a risk-sensitive basis) and up-to-date (i.e. updated within a certain period following any change).