EU Money Laundering Directive May Hit Trusts Sector

by Robin Pilgrim, LawAndTax-News.com, London

19 January 2007

The Society of Trust and Estate Practitioners warned this week that the implementation of the 3rd EU Money Laundering Directive by the Treasury could jeopardise major growth areas of the City of London.

STEP argued that millions of family trusts and billions of pounds worth of City investment are in jeopardy, as the Government risks over-regulating trusts in implementing the Third Money Laundering Directive.

Regulations governing the implementation of the Directive may force trustees, estate agents, banks, auctioneers and stockbrokers to do multiple checks on beneficiaries of trusts upfront. Trustees currently operate on a risk-sensitive approach, and normally verify the identity of beneficiaries before they distribute assets, thus ensuring that potential criminals cannot enjoy criminal proceeds.

The Directive includes criminal penalties for advisers ranging from stockbrokers to lawyers and estate agents to bankers if they do not carry out such multiple checks.

However, STEP has established that the defintion of beneficiaries, which the Treasury intend to implement verbatim, does not make any sense in English law, leaving regulators and advisors confused and likely to prompt gold-plating by those anxious to avoid penalties.

Wilson Cotton, a Director at Smith & Williamson and a member of STEP, suggested that:

"The Government is in danger of over-regulating trusts. If they get this wrong they could send City legal, accountancy and investment services elsewhere as well as threaten millions of ordinary family trusts. We need to think globally and have a risk-based regulatory regime. Increasing competition from other financial centres, such as Hong Kong and New York, means London's future economic success cannot be taken for granted."

David Harvey, Chief Executive of STEP added:

"The Government's own research makes it clear that, outside the City, trusts are used by ordinary people to plan prudently for the next generation. Families use trusts to support the vulnerable, the disabled, to pay university tuition fees, to protect family businesses, or to make sure that children cannot blow their inheritance because they are too young to manage their money."

"What's more STEP research shows that millions of people have trusts written into their wills. If badly implemented this directive will not prevent crime but it will make it more expensive and in some cases impossible for families to plan using trusts."

Keith Johnston, Head of Policy at STEP, warned that growth in the Islamic Finance sector in London could go elsewhere:

‘The UK Government has rightly been trying to develop London’s role as a centre for Islamic Finance. Many STEP members use trusts for clients who want to give their assets away but who also want to remain compliant with Shar’ia law. The market has huge potential."

"The Chairman of the FSA estimated a few years ago that Muslims living in the UK have savings in the region of GBP1billion. This is nothing compared to the money that comes into the UK because wealthy people from the Middle East use trusts to comply with Shar’ia law. The Islamic Finance market globally is worth around GBP500 billion. We are trying to develop that in London but this regulation could see much of it go to Dubai or New York.’

This comes shortly after the the UK's Law Society warned that the new money laundering regulations could put solicitors at risk of inadvertently committing criminal offences because they are "impossible to interpret" in practice. It also warned that the new rules will increase the cost to clients of solicitor’s work in dealing with trusts.

According to the Law Society, a number of the terms in the new EU Directive are unclear, and unless the Government clarifies them, solicitors will have to make extensive enquiries – at clients’ expense – in order to avoid inadvertently committing a criminal offence.

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