EU: Money-laundering Directive

Lord Pearson of Rannoch Excerpts

Thursday 3rd April 2014 Grand Committee

[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.

--- Later in debate ---

[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.