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Lord Willoughby de Broke
To ask Her Majesty’s Government whether they support the inclusion of private trusts in the draft provisions of the Fourth Money Laundering Directive.
Lord Willoughby de Broke (UKIP)
My Lords, I am grateful for the opportunity to draw this matter to the attention of the Committee. I must start by declaring an interest. My farm, on which I scratch a living, is run under a parliamentary trust with trustees who are properly named and all the accounts are in order, as far as I know.
Having got that out of the way, I should say that this debate is about the amendment which the European Parliament recently passed in plenary session to support the amendments to the fourth money-laundering directive inserted by the European Parliament’s Economic and Monetary Affairs Committee. This recent amendment means that companies and, crucially, trusts will have to be listed in public registers in EU countries. This amendment goes well beyond the scope of the original draft directive published by the European Commission last year. That required privately owned companies and trustees of express trusts to maintain records of the identities of their beneficial owners. However, at that stage, the directive required the information to be made available to competent authorities and obliged entities only—that is, law enforcement bodies and persons conducting due diligence. The original draft did not envisage public registers and did not even mention trusts.
The important point to underline is that under the third money-laundering directive, which was implemented in UK law by the Money Laundering Regulations 2007, there is already a legal requirement to identify the beneficial owners of trusts, companies and foundations and their trustees. Indeed, HMRC already requires that any person concerned with the making of a settlement must make a return under declaration S218 stating the names and addresses of the settlor and the trustees of the settlement. The tax authorities already have all the tools they need to ensure compliance with those money-laundering regulations.
Individuals at law firms to whom I have spoken in preparing for this debate have repeatedly made the same point. The existing “know your client” rules—noble Lords will be familiar with the tedious requirement to produce your passport and utility bills when you do business with a company with which you have done business for 30 or 40 years—already make that point. All intermediaries, whether financial or solicitors, already have a legal duty to report to the authorities anyone attempting to use a trust for illegal purposes or they face a fine and even imprisonment. Those rules have been deemed completely adequate by successive British Governments who have never attempted to introduce this sort of intrusive law which is being put forward by the European Parliament.
Why are we now faced with this wholly unnecessary and intrusive directive? It is principally, I think, because of the ignorance and misconception about trusts in the rest of the member states of the EU whose legal systems are based on civil law, not common law. That encompasses 26 of the 28 members of the EU. Civil law countries do not have trusts in their legal systems, so they do not understand the centrality of trusts in English law. Oddly enough, it was a French legalist, Monsieur Pierre Lepaulle who, talking of trusts, wrote:
“The trust is the guardian angel of the Anglo-Saxon, who accompanies him everywhere, impassively, from the cradle to the grave”.
In the EU, there is a complete misconception of the use of trusts, evidenced by the very strong support in the European Parliament for this amendment. Trusts are seen as vehicles for tax fraud—corporate or individual—and as the preserve of the rich, thus a higher risk to Governments in terms of tax evasion.
The truth could not be more different. Trusts in England and Wales are mostly used in mundane and practical situations. Let me give some examples: the co-ownership of land, the administration of deceased estates, the protection of children during minority, the protection of vulnerable and handicapped people, retirement pension schemes and employee share-ownership schemes. Most UK charities are structures as trusts. According to the Law Society, there are well over 1.5 million trusts in Britain, so the requirement of this amendment for a national public register of trusts, their beneficiaries and trustees will have far-reaching and potentially damaging consequences.
The Englishman’s home has traditionally been his castle. This will no longer be true. This proposal will threaten individuals’ and families’ basic rights to confidentiality in their private affairs. Publicly accessible registers of private individual’s affairs can well present risks for those who are named in them, for example by being targeted by financial criminals. On that, I want to draw noble Lords’ attention to the “Panorama” programme on 28 February, called “Kidnapped, Betrayed by Britain”, in which the journalists on the programme investigated the disappearance in Dubai of a British businessman. According to that investigation the British authorities handed over thousands of pages of confidential documents to the Iranian authorities without informing the British businessman involved and ignoring the warnings that their actions posed a risk to his safety. He was kidnapped, disappeared and is presumed dead. Now, that is probably a little extreme but it shows that there are risks in making these registers public to anyone at all. The Latvian rapporteur who introduced this amendment said after the vote in the European Parliament that it was,
“a good day for law-abiding citizens, but a bad day for criminals”.
No, it was a bad day for individual freedom and a good day for Governments with their insatiable appetite for intruding into the private affairs of their citizens.
I understand that the Government oppose this amendment. Indeed, the Prime Minister wrote a letter on 13 November last year to—wait for it—his Excellency Herman Van Rompuy, President of the European Council, informing him that:
“It is clearly important we recognise the important differences between companies and trusts”.
He went on to say:
“I look forward to looking properly at the arguments around trusts and other legal arrangements”.
Judging from the vote in the European Parliament, that letter had about as much success as John Major’s letter to Jacques Santer’s Commission in 2000 on the working time directive. Both letters were instantly consigned to the waste paper basket. So much for our strong voice in Europe—more a muffled squeak—and our seat at the top table.
Could the Minister tell the House how the Government will deal with this matter when it comes to the Council of Ministers in May? Is he able to give some hope to the millions of people who will be affected by this measure, who use trusts routinely and legally, that their private affairs will not be open to any inquisitive individual at the click of a mouse? This amendment is unnecessary and intrusive. It should be consigned to the same WPB as our Prime Minister’s letters.
Lord Dykes (LD)
My Lords, I am tempted to think that the noble Lord, Lord Willoughby de Broke, is a little overanxious about this matter. That will perhaps come out later on in this debate. However, he made some points that I am tempted to agree with on the background to this. It is a very complex and vast area, and it has dragged on for quite some time.
The latest manifestation is the massive vote in the European Parliament in favour of really significant action in this regard. All member Governments are obliged to respond, and there will be meetings in May and subsequently. Eventually, I presume, the new directive will come from the Commission. That will take time to unfold. Most countries already have some clusters of cultures in these matters of declaration, tax information and all the rest of it. However, once again there is obviously a difference between the UK and Ireland and the others in these general matters relating to trusts. The trust is a particularly Anglo-Saxon vehicle, so one has to bear those things in mind when trying to formulate coherent legislation.
The will of the European Parliament cannot just be laid aside, as it were. The vote was very emphatic. It was not only the numbers but also what was said in both the committees and the debate in plenary, with great emphasis that there was now a need to take action in this field and to establish coherence and equivalence between what the EU does as a collective, the worldwide anti money-laundering legislation of one kind or another and the international move to try to get everybody dealing with these matters in a similar way. It is a vast world problem. The noble Lord, Lord Willoughby de Broke, spoke quite rightly of the very honourable trusts that there are, particularly for young people, and all the rest of that paraphernalia we have of legal protection and that background. None the less, the worldwide money-laundering offence is vast, as we know. Member Governments of the EU, as well as authorities elsewhere and the world institutions, are trying to deal with these matters and work together. It is understandable that new legislation is needed.
The United Kingdom already has strong legislation on this. To my mind, it would be very reasonable and essential for HMG to say that the directive provides the broad outline of background permissibility of the legislation, and then each country will introduce its own Bill, becoming an Act after that, in its own way. I live in France as well, so I declare that interest. The law there is extremely different, but none the less aims for the same things. The French have a deep suspicion of this offshore money that is laundered by criminals, terrorists and gangsters of one kind and another in highly organised large international movements of people, moving large amounts of money. That has to be taken care of and followed up vigorously and with energy.
I believe that trusts must be included. However, the Government, in one of the recent ministerial letters on the subject, said with some justification, rather along the lines of the Prime Minister’s letter, that the Government do not believe that trust registries would necessarily be an effective option in addressing the risk associated with trusts. So I think there is a case, to some extent. Not being an expert I have to put in phrases such as that to limit my own operational ignorance of the details of these matters, although I was a City person for many years and saw the nasty side of some of these things from a distance from time to time.
That is an important question and perhaps the Minister will be able to help us in this debate by saying how the Government would deal with the specific question of trust registries—in the sense already implicit in the draft legislative proposal from the European Parliament, with its massive vote backing it up, as we know, that one should provide in public the minimum amount of detail to give satisfaction in the sense of revealing that it is not laundered illegal money, if that can be done.
Equally, to leave out trusts would be wrong, because obviously lots of villains would immediately switch from companies to trusts. You have only to go to some of the many tax havens that our own empire, rather more than others, unfortunately left as a legacy—rather more than France, which quite rightly takes a very dim view of tax-exile territories. That is where these things occur. The banks themselves have worked on an international comparison and co-operative effort, which is gaining strength all the time, and now includes Switzerland, Luxembourg and Lichtenstein, to try to deal with illegal, laundered money. This is gangster and terrorist money and illicit illegal money of other similar kinds. That background is helpful, too, and I wish the Government well in eventually dealing with this matter in terms of domestic legislation.
Will the Minister help us with one or two points that arise from this legislation? On the question of trusts, it says:
“If the beneficial ownership information of companies but not trusts is made public, the latter will become—
as I suggested earlier—
“the default alternative means to undertake the same criminal activities which the new company rules seek to prevent”.
Is a specific mechanism possible to deal with that particularly immediate problem?
I agree very much with the MEP Judith Sargentini when she says that:
“If we had decided to leave trusts out of the scope of the new legislation, then it would immediately have made them the perfect vehicle for criminals wishing to avoid taxation and launder their illegal money through the financial system”.
When considering the eventual directive that will come out of this legislative proposal, which will take some time, it is necessary to deal with that important problem.
I am also concerned about the phenomenology of the risk assessment procedure and I would be grateful if the Minister could help us there, too. The Explanatory Notes state that the risk assessment should cover at least the following aspects: the overall extent of money laundering and the areas of the internal market that are at greater risk; the most widespread means used by criminals to launder in illicit proceeds; as well as the recommendation to the competent authorities on the effective deployment of resources. The evaluation, by the way, should be done every six months. That may be quite difficult to keep to, although I do not wish to sound complacent about this desperate international problem—we will see.
The document further asserts that, to keep everything in proportion and targeted, member states could adopt, or retain in force, stricter provisions in the field covered by this directive to prevent money laundering and terrorism financing, provided that such provisions are in full compliance with Union law. There will, of course, be variations in the national legislation of each member state.
I exclude the two Irelands from my next comment because they, again, would need different treatment, and there is a historical British taxation background in both those countries. However, the culture of the member states that came in in 2004 will be somewhat different in many cases from that of member states which joined the Union prior to 2004.
Finally, I quote again from the Government’s response contained in the excellent House of Lords Library briefing pack, for which I thank the Library staff. It states that,
“while the Government remains broadly supportive of the Commission’s proposals, there are a limited number”—
The Deputy Chairman of Committees (Baroness Andrews) (Lab)
I am so sorry to interrupt, but there is a Division in the Chamber. We will adjourn for 10 minutes.
Lord Dykes
I was just about to finish by asking the Government three quick questions. In the Minister’s letter of 13 December 2013, which I was referring to, the Government broadly supported the Commission’s proposals but a limited number gave cause for concern. I am deliberately not including the gambling points; I am leaving those out because I think that they are empirically rational and sensible. First, what does the Minister estimate will happen when the ECOFIN meeting takes place? What will be agreed? Presumably it will need far longer than that to agree the total package.
Secondly, would the Commission’s proposal discontinue third-country equivalence listing as established under the third money-laundering directive? That needs further explanation.
Finally, the Commission intends—this is in the Explanatory Memorandum of the European Parliament’s legislative proposal—to complement the current proposal by strengthening the EU’s repressive response to money-laundering. Consequently, there is a plan to propose criminal law harmonisation for this offence based on Article 83(1) of the TFEU. That also needs more explanation because there are arguments for and against that concept.
Lord Phillips of Sudbury (LD)
My Lords, this is an interesting debate and we should thank the noble Lord for introducing it. It concerns a series of issues that are still very much in the air because, as I understand it, the European Parliament has approved the directive but has made amendments to it. One of those amendments is of particular concern; namely, that the right of access to the information has been widened from “competent authorities” such as Governments and “obliged entities” such as banks, lawyers and so on to the general public. I think that the noble Lord, Lord Willoughby de Broke, is particularly concerned about it. I wanted to make that clear because there is a long way to go. Negotiations will be held between the Parliament, the Commission and the Council of Ministers, and then it will come here. Being a hoary old lawyer, I am cautious about being at all definitive until I see the final wording and have the opportunity to discover precisely what the disclosure requirements will mean.
I think that the noble Lord, Lord Willoughby de Broke, has somewhat exaggerated the potential breach of privacy. Charities, for example, are themselves public bodies. They comprise the biggest body of trusts in the country and, since they are essentially public bodies, there is no earthly reason why any aspect of their affairs should not be made public. However, I do accept the position with regard to family trusts. Here I should say that I spent several years during the late 1960s and early 1970s dealing with a great deal of family and business work that involved a considerable amount of trust work, particularly with what are called discretionary trusts. I am well aware of the background to those sorts of trusts and why they have a particular relevance, as has been explained to us.
However, I must also be plain. I am deeply concerned about the continuing decline in public trust which I am afraid is afflicting virtually every aspect of our establishment. Perhaps, mercifully, only the judiciary is free of public suspicion and mistrust. One institution after another has lost credibility. I need not go through all the institutions in our country, but it is necessary for us to remember that we ourselves have contributed to the decline in public trust through the events of a few years back, which the public have certainly not forgotten. That want of public confidence, if you like, is now being played on. I do not say this with any disparagement, but UKIP is definitely plugging into that sentiment, just as I believe Alex Salmond and his Scottish colleagues are doing north of the border.
I understand perfectly why there is disaffection and disconnection between the body politic and the ordinary citizen. However, one crucial, central element of that is corruption—using that word in its broadest sense—by big business, particularly among the banks, which frankly has been stupendous, and in the other areas I have touched upon. I want to see a radical attack on corruption, and anything that weakens the ability of the prosecutorial authorities to deal with this corruption must be remedied by us here in Parliament.
I am not as big a fool as to believe that passing laws is a substitute for achievement on the ground; indeed, in this area, I am afraid, the gulf between legislation and implementation is tragically wide, which is something that this House really has to concentrate on in the coming months and years, because what is going on is a farce. Look at Her Majesty’s Revenue and Customs: it had 96,000 staff in 2005 but by next year that will be down to 56,000. Even if you are inclined to believe that there is a great deal of inefficiency et cetera, that is way beyond anything that is at all compatible with the need of the country to see tax avoidance in particular, and fraud in general, dealt with.
Just before he retired, I had lunch with Richard Alderman, the former head of the Serious Fraud Office. He was almost crying into his soup, telling me that he had met one of his former senior staff the month before to find this gentleman bewailing the fact that he had left the SFO and rather wishing he was back rather than being employed by a firm of American lawyers in London at 500% of his salary. At the Serious Fraud Office, as at HMRC, the senior cadres of people are so far outgunned by their opposites in big business, particularly the banks, that it is not just David and Goliath, it is David without his sling against Goliath. It is not a joke. It is a scandal and we should be ashamed of it.
I want ultimately to see the fine print but at this moment I am definitely in favour of strict disincentives for fraudulent activities—money-laundering or anything else you can name—utilising the trust mechanism. I am too experienced a lawyer and know just how convenient the trust is in nefarious activities, precisely because it is informal, fluid and has little statutory law bureaucracy around it.
We all know that the extent of tax evasion has dispirited this country. In the excellent report put out by our colleagues in the Select Committee on Economic Affairs in July last year, Tackling Corporate Tax Avoidance in a Global Economy, the public were able to read about Amazon, Starbucks, Thames Water, Vodafone, Cadbury before being taken over by Kraft—would not its Quaker forefathers just fall out of bed?—and, of course, Google. Citing just the example of Google, the report tells us that in the years between 2006 and 2011 in the United Kingdom, it generated £80 billion of business and paid—can your Lordships believe it?—£16 million tax. It is conceivable that that was done legally but the truth is that most tax avoidance is fraudulent when done on a major scale.
What are we doing vis-à-vis foreign so-called investors? The crooks from across the world come to this country, but why do they come? It is on record, if noble Lords doubt it. Look at the Migration Advisory Committee report from February this year. The principal reason that the big crooks bring their black money to London is because it is safe here.
Noble Lords should consider, too, the rights that anybody who invests £1 million in government bonds for five years and spends 180 days a year in this country acquires. He or she, and their families, have indefinite leave to remain in this country, while knowing that they will not pay tax on their rotten money, because they make damn sure that they do not. They will not use lawful means, most of the time. The sort of people we are talking about are driving up central London property prices so that decent, ordinary Londoners cannot get near staying in London and have to get out of the city in order to live. That is all part of a world that we have to deal with, and part of dealing with that world is to attack trusts.
Lord Pearson of Rannoch (UKIP)
My Lords, I declare an interest in that I set up a family trust in 1984. It is on the point of expiry, so it is not much of an interest.
I intervene briefly to press the Minister for detail on a question put by my noble friend Lord Willoughby de Broke. In view of the letter from the Prime Minister that my noble friend quoted, can the noble Lord confirm that the Government remain unhappy with this latest intrusion by the EU into our national life? If that is so, will the Government advance the doctrine of subsidiarity? Does the noble Lord not agree that this sort of thing should be left to our national Parliament and that this would be rather a good opportunity to test that doctrine, useless though it has always proved in the past?
Failing that, what chance do the Government think they have of avoiding this directive? Could the noble Lord tell us, just for the record, whether the eventual decision will be taken by majority voting or whether the Government can, in fact, block it? I look forward to the noble Lord’s answers.
Lord Watson of Invergowrie (Lab)
My Lords, I am grateful for the opportunity to speak in the gap. I apologise for not having put my name down, but I was not sure I could be here this afternoon. The noble Lord, Lord Willoughby de Broke, alluded to the maxim of an Englishman’s home being his castle. Perhaps it is because I am not an Englishman that I do not completely subscribe to his views, but I do subscribe to the maxim that there is quite a lot to be said for having nothing to hide and therefore nothing to fear. I am concerned that he made virtually no mention in his remarks of the issue of money-laundering, and I thoroughly agree with the noble Lord, Lord Phillips of Sudbury, that it is actually a very important issue. Whether or not it is more important than trusts, I will leave for others to decide, but it is very important that we grasp this issue. I spoke at some length on this during the passage of the Financial Services (Banking Reform) Bill last year, as indeed did the noble Lord, Lord Phillips.
I see that the Government have committed to creating a public register of the beneficial ownership of companies. That is a step forward, but if beneficial ownership does not include trusts then, as I think the noble Lord, Lord Dykes, said, that opens up such an obvious route for criminals to avoid taxation and launder their illegal money in various ways through the financial system. That is surely something we must seek to avoid if at all possible. I note that the directive has strong support from the bigger EU member countries. I know that will not cut much ice with the noble Lords, Lord Willoughby de Broke and Lord Pearson, but it is none the less important, and I see that the resolution was passed very decisively when it came up for consideration.
I accept that a majority of trusts are set up for entirely legitimate purposes, but the small percentage which abuse the law can have, and often have had, devastating impacts. The opaque corporate ownership structures which are often used allow such crimes as money-laundering, tax evasion, sanctions busting, trafficking of arms, drugs or humans, terrorist financing, bribery and other forms of corruption. Those are surely not issues that we can treat at all lightly. If transparency around trusts is not guaranteed, their illegitimate use is likely to increase significantly, which is a big issue. A public register could distinguish between low and high-risk trusts, with the former being exempt, to avoid unnecessary regulation. Will the Minister give us his view on that point when he replies? I very much hope the Government will eventually support this directive.
Lord Davies of Oldham (Lab)
My Lords, I congratulate the noble Lord, Lord Willoughby de Broke, on introducing this debate. The degree of sharp interest shown by all noble Lords in this issue may have surprised him. Passion has been aroused, and so it should be. It is interesting that it has been identified that the evils that the Government should address are tax avoidance and money laundering. We were also greatly concerned about money flowing towards terrorist activities. That agenda has come very much to the fore over the past decade. If we are not concerned about those issues and whether our law is adequate to control them as best as it can, we are clearly not playing our full role in the public interest.
I congratulate the Government on the work done last year. It is quite clear that they are already committed to creating a public register of the beneficial ownership of companies and therefore a substantial part of the issue is being tackled. I am quite sure that all parties subscribe to that position, with the notable exception of the party that is exceedingly well represented in this Room but is not normally well represented in Parliament by elected Members. Although this issue is complex, the Government have made some considerable strides, and it is clear that we have a slightly more difficult issue, which the noble Lord, Lord Dykes, identified, because of our common law than is the case with countries on the continent. We will wrestle with these issues.
Trusts fit into a very distinctive and different pattern compared with organisations elsewhere, but the point is obvious. If trusts are not included in the legislation, they will become the default mechanism whereby all miscreants will carry on their practices. We know that they go on to a significant extent and that the wider public out there expects Parliament to tackle these issues once they have been revealed. It is therefore of the greatest significance that we keep the momentum up. I understand entirely the anxieties of the noble Lord, Lord Willoughby de Broke, but they are overwhelmed by the need of our society for protection against proven misdemeanours in the use of companies and trusts.
I should emphasise that this is not a new issue. Some people will defend freedom to the nth degree and say that you should not intrude upon private arrangements. Between $8 million and $10 million was secreted away in trusts by an individual, General Pinochet. I doubt whether many people in our country think that he was entitled to the privacy vouchsafed to him at that time; nor should we underestimate the dangers that are implicit in defective and ineffective law. That is why we have to tackle these difficult issues, and I am glad that noble Lords today have pressed the Minister with clear questions about the difficulties that have to be overcome.
It is clearly the case that people enter trusts, particularly family trusts, on the basis of an understanding of privacy. It may therefore be necessary for the Government to tackle trusts in more than one category: those that are capable of being used for nefarious purposes and those that clearly come into the common category of a very large number of people who are merely seeking to safeguard relationships in their family and their resources. However, there is no alternative. We particularly need international action because, whatever we do, if it is not carried out by other advanced economies, all our efforts will be insignificant. Automatic exchange agreements, which would leave the miscreants concentrating on the weakest link in the chain, the country that they identify as being least able to enforce such agreements and implement them, would be used. Financial tax laws are all voluntary. We have nothing that is compulsory, which is what this directive and the amendments are directed at.
I recognise that this is a complex issue and that the Minister is bound to indicate that there are areas in which it is more straightforward to act than in others, but we should bear in mind the strength of the majority opinion in this debate, which has been very forcibly expressed, that we cannot have a situation where the significant holders of real wealth are able to avoid their obligations to the wider public and to the consumers and nations that they serve. It is important that we have legislation that carries out the action that we all regard as essential.
Lord Willoughby de Broke
My Lords, some noble Lords, including the noble Lord, Lord Watson, and to a certain extent the noble Lord, Lord Davies, have missed the point that I was trying to make. There are already, under the Money Laundering Regulations 2007, absolute requirements on financial intermediaries and lawyers to report to the relevant authorities if they suspect that there is any illegal use of trusts. They already have the weapons; the idea that there is absolutely no legislation to deal with trusts is entirely misplaced.
Lord Newby (LD)
My Lords, I thank the noble Lord, Lord Willoughby de Broke, for introducing this debate and all noble Lords for their contributions. I will try to answer some of the broad concerns expressed and lay out the steps that the Government are taking to ensure the effective and proportionate treatment of trusts under the fourth money-laundering directive.
Proposals for the directive are aimed at improving the transparency over who owns and controls companies and legal arrangements, such as trusts. The World Bank estimates that between 2% and 5% of global GDP is subject to money laundering, with some estimates showing that global illicit outflows from developing countries dwarf the amount that they receive in official development assistance. Furthermore, the UN Office on Drugs and Crime estimates that less than 1% of that is currently being seized or frozen. Tackling these illicit flows was therefore a key priority for the UK’s presidency of the G8 last year. As the Prime Minister said at the October 2013 Open Government Partnership summit,
“transparency needs to extend beyond the public sector and into the private sector ... but there are also many wider benefits to making this information available to everyone. It’s better for businesses here ... developing countries ... and ... the more eyes that look at this information the more accurate it will be”.
That is why the UK has committed to establishing the world’s first publicly accessible registry of company beneficial ownership.
The EU’s fourth money-laundering directive is an opportunity to build on that momentum. The directive seeks to implement the revised standards of the Financial Action Task Force and the European Commission’s review of the implementation of the third money-laundering directive. We are committed to ensuring that the directive implements the FATF standards in full. As the Prime Minister wrote to European Heads of Government last year, our first collective step should be to mandate public central registries of company beneficial ownership as the benchmark for transparency of ownership and control. At the same time, the UK recognises that it is equally vital to prevent the potential misuse of trusts and similar legal arrangements.
The FATF sets the global standards to improve the transparency of the beneficial ownership of corporate and legal entities, including companies, and legal arrangements such as trusts. In setting those standards, the FATF recognises that preventing the misuse of trusts is critical but also explicitly recognises that trusts are different from companies. In particular, it is vital to understand that, unlike companies, common law trusts, such as those established under English and Welsh law, are not created by the state. Furthermore, trusts, unlike companies, are used for a range of purposes, such as benevolence, inheritance, protecting vulnerable people and family support. As such, the implications for privacy are far greater, and trusts therefore warrant different treatment.
Measures placed on trusts must therefore be different from those that apply for companies in order to be proportionate and effective. The Government support a mandatory requirement for trustees to know the beneficial ownership of their trusts. That, together with tax reporting to HMRC, to which the noble Lord, Lord Willoughby de Broke, referred, and future automatic exchange of tax information agreements, will offer more transparency on trusts than ever before. In particular, through automatic exchange agreements, financial institutions will report information to national tax authorities on trusts holding accounts with them where the beneficiary is a resident of a partner jurisdiction. That information is then automatically shared with the partner jurisdiction. There are already 44 signatories to this international standard on automatic exchange, which creates a web of information exchange that will provide greater transparency on trusts than ever before.
This approach provides a proportional and effective means of enhancing transparency on trusts holding financial assets, given that they pose the greatest money- laundering risk. The Government oppose the mandatory registration requirement for trusts, which, together with the creation of central registries of trusts, was recently adopted as the European Parliament’s position on the directive. Given the transparency afforded by automatic transfer of information agreements, we consider registration of trusts to be a disproportionate approach and, in particular, one which undermines the common-law basis of trusts in the UK. As such, we continue to work with other member states, civil society and the private sector to ensure effective treatment of trusts.
Beneficial ownership has proved to be the most contentious issue in discussions over the fourth money-laundering directive. We are under no illusions about the challenges ahead. Following agreement between member states, negotiations to reach a mutually agreed final text with the European Parliament are likely to be challenging, given the position adopted by MEPs, as has been described. I assume that among the small minority of those who voted against this directive was a full turnout of the British UKIP contingent.
What happens next is that we are working with the Council presidency and other member states to agree a compromise that would limit the scope of obligations on trusts to those holding financial assets, which the UK would satisfy through existing reporting obligations for trusts holding financial assets, domestic reporting requirements and automatic exchange of tax information agreements. Such a compromise would complement the UK’s advocacy of ambitious action on company beneficial ownership. Of course, such an approach would exclude, for example, wills from the implementation of the directive, as wills do not form that category of trust.
Negotiations are ongoing, and we expect the Greek presidency to seek agreement among member states over the next few months. The subsequent Italian presidency would then seek the conclusion of the directive during the second half of 2014, in co-operation with the European Parliament. In answer to the noble Lord, Lord Pearson of Rannoch, the decision in the Council will be by qualified majority vote.
A number of questions were asked of me—
Lord Pearson of Rannoch
Before the Minister leaves that point, it might be a good place to press him on the famous doctrine of subsidiarity. In view of the difference between our system and the other systems in Europe, would it not be a good idea to use subsidiarity?
Lord Newby
My Lords, the approach I set out would mean that we would have a different way of reporting the majority of trusts. Therefore, there would not be a common system across the EU. The Government’s view is that it is very important that, across all the EU, there is a requirement for both companies and trusts to be more transparently described than they are at the moment. That is why we put a huge amount of effort into pursuing the concept of the mandatory requirement on beneficial ownership of companies. We want to ensure that, as far as possible, information about trusts that could be problematic for money-laundering purposes will be more generally available. Our proposals would do that in respect of the UK without having a full mandatory register in the same way as we propose for companies. We accept that there is a difference in nature between the two, but we think we can have the best of both worlds by having that difference of approach between them.
In response to the question from my noble friend Lord Dykes, trusts would not become default alternatives to companies because there are the requirements to report financial information to HMRC and to pay tax where appropriate and also for the automatic exchange of information where the beneficiary is a foreign national.
Lord Phillips of Sudbury
Would the requirement on the trustees and trust extend to revealing who the beneficial owners are?
Lord Newby
I am not sure I can give my noble friend a definitive answer now. I may be able to, but in any event I will write to him about that.
My noble friend Lord Dykes referred to the challenges of making a risk assessment in this area. Of course, it is almost an impossible task. I do not think that the risk assessment is a key part of the process. We do it because we have a broad sense of what the risks are, without being able to get to the nearest pound or euro.
In answer to my noble friend Lord Phillips’ earlier question, I should have been clearer: the answer is yes.
My noble friend Lord Dykes also asked about third country equivalence. Commission proposals do not include provisions for listing of third countries as having equivalent money-laundering or terrorist-financing regimes. Under the third money-laundering directive, this proved to be a problematic process, and the white list of equivalent jurisdictions was difficult to keep up to date. The FATF peer reviews of member states heavily criticised this white-listing process, and we support the Commission’s view.
My noble friend Lord Phillips of Sudbury discussed the reductions in HMRC staff. It is not a question of whether they are more efficient at doing the same jobs. The truth is that the way in which we manage the tax affairs of the vast bulk of individuals and companies is now online. A huge number of staff whose jobs were essentially related to dealing with paper are no longer necessary. The reduction in staff is largely in response to changed circumstances. I remind my noble friend that we put in an additional almost £1 billion in this Parliament for staff working on tax avoidance and evasion. That has already generated several million pounds-worth of additional revenue beyond what we believe would otherwise have been obtained. There has been a change in gear, if you like, in the way that HMRC operates.
To sum up, given that my time is very brief, the UK is leading from the front on an agenda that places a practical emphasis on transparency and accountability. The Government are working to ensure that the EU shows similar ambition on what is a cross-border issue, with serious implications for developed and developing countries alike. We want the outcome to be fair and proportionate, but we also require it to be effective. That is what we are working towards and what I am optimistic that we will achieve.