Why the Fifth Money Laundering Directive Has Caused Issues for Trustees
The European Commission explains that its Anti-Money Laundering Directives are “designed to strengthen the EU's defences against money laundering and terrorist financing”. For decades, these directives have slowly expanded to create more regulations such as: requiring states to conduct risk assessments, expanding the definition of Politically Exposed Persons (PEPs), and requiring the registration of trusts. The most recent in the United Kingdom has been the Fifth Money Laundering Directive (5MLD). Institutional factors within the government, however, form barriers towards the implementation of some of these regulations.
While a part of the EU, the UK was required to enact the first five Anti-Money Laundering Directives. Following Brexit, however, the UK government has chosen to opt-out of the EU’s Sixth Anti-Money Laundering Directive (6MLD). The government claims that domestic legislation is already sufficient and even “goes much further” than what the EU recommends. This could mean that the UK’s 5MLD could, for the moment, be the last. This is good news for trustees struggling to keep up with continuously updating regulations and for firms dealing with private clients who act as agents for trusts. This does not mean, however, that the full implementation of the 5MLD will be a quick final step; the registration of non-tax-paying trusts will take place over the course of a full year.
The UK government first announced the Fifth Money Laundering Directive in April 2019. The main change enacted by this new regulation is that in addition to tax-paying trusts being registered with the new Trust Registration Service (TRS), most non-tax-paying trusts will need to register as well. Having been announced in 2019, the initial implementation was set to begin in January 2020. Whilst aspects of the 5MLD did begin then, the registration of non-tax-paying trusts with the TRS was pushed to March 2021. Having given trustees advance notice, Her Majesty’s Revenue and Customs (HMRC) believed this would ensure a seamless transition with updated government software to allow for registration. The onus of registering and ensuring that all information is correct falls on the trustee. Failure to register will result in a warning letter and subsequent penalties will be GBP 100.
The Fourth Money Laundering Directive (4MLD) linked liability to pay tax with registration as a way for the government to keep track of money that could possibly be laundered or used in connection with terrorism. The 5MLD, however, has expanded the scope of the TRS to include most non-tax-paying trusts as well. In general, the only trusts that still do not need to be registered with the TRS are low-risk trusts which include:
Trusts used to hold a life or retirement policy paying out only on death, terminal or critical illness, or permanent disablement, or a policy paying out to meet the cost of healthcare services;
Pilot Trusts which were set up before 6 October 2020 for future use and which hold no more than GBP 100;
Will Trusts which are created by someone’s will and come into effect on their death provided the trustees only hold the estate assets for up to 2 years after the person’s death;
Trusts set up under intestacy rules and Personal Injury Trusts set up under a court order to receive compensation;
Trusts for bereaved children under 18 and 18-25 trusts where a parent has died;
Co-ownership Trusts set up to hold shares of property or other assets which are jointly owned by 2 or more people for themselves as "tenants in common"; and
However, as of May 2021, trustees of non-tax-paying are still unable to register through the TRS because HMRC has yet to update their registration website. The government software which will allow for this is meant to be updated later in 2021 with an announcement to follow. This has meant that the deadline for registration has also been extended until autumn 2022, but will continue to be extended if the TRS is not updated by autumn 2021.
Although firms have had ample time to prepare for the implementation, because HMRC has yet to allow for registration of non-tax-paying trusts, firms have yet to be able to offer the service due to the delay in government software updates. With delays and poor communication, this final step could create issues and confusion for those having to register.