EU: Money-laundering Directive

Lord Willoughby de Broke Excerpts

Thursday 3rd April 2014 Grand Committee

Asked by

[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.

--- Later in debate ---

[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 Phillips of Sudbury]

The regime is ineffectual.

[Lord Willoughby de Broke]

That is not right.