The subtleties of trusts and AML/CFT compliance

by Contributor13 Nov 2019

Dr AML answers questions monthly in a new column for NZ Lawyer. This month, the specialist discusses the subtleties of trusts and AML/CFT compliance.

Q: Increasingly, we find that other reporting entities demand access to trust deeds, and they also want identification information for us as professional trustees. This conflicts with our duty to our client. Do we have to supply it?

A: Unfortunately there is a lot of misinformation about this topic, which has created confusion around what is actually quite a straightforward matter. In a word, the answer is basically yes, but there are some subtleties that are useful to understand.

The AML/CFT laws have been in place for many years, so in this case the Financial Markets Authority offers a very useful fact sheet. Internationally, trusts are not the commonplace arrangement that we see in NZ, and their propensity to be used to hide identities means they are subject to automatic enhanced due diligence. This basically means you need to be reasonably sure where the trust’s assets came from.

It is understood that the point of some trusts is to hide identity. For example, we’ve seen instances where very prominent people wanted to provide for illegitimate children – but without the scandal that could ensue. But to be fair, most people set them up for asset protection, and that collides directly with a fundamental tenet of all AML legislation: understanding where the money came from.

It is interesting that in the new Trusts Act, all trustees are effectively required to know this and have ready access to the documentation as evidence. A simple way to meet this would obviously be to have a voluntary, private register of trusts and officers. We will leave this to the government to ponder. But in the meantime, if your client wishes to transact with any reporting entity then they must provide information about the identities of those who control the trust and where its funds came or come from.

You will need to identify all the trustees and generally the beneficiaries, but if they are children a simple name and date of birth is enough. It is also important to have a look at the settlor – if still around they will often be a trustee, but even if not it is generally useful to be clear on who they are as part of identifying the source of wealth.

There is much confusion around source of wealth or funds. The first thing to observe is the “or” in that sentence. Trusts differ in nature, and you need to apply judgement in whether income or wealth is more relevant. For example, the purchase of commercial property is a very common way for criminals to convert a windfall gain from a criminal act into a clean income stream, so observing that income is probably not useful – you would need to check how they funded the asset in the first place.

Many firms rely on one another for due diligence. Just be careful – reliance under the act requires that supporting documentation is supplied within five days[1], and the burden is on the recipient to review that documentation and check that it meets their internal standards of the receiving reporting entity for compliance. So if you are supplying an assurance to another party, have the documentation pack ready to go. This is why we don’t recommend reliance: it is safer to supply the information and let the other reporting entity exercise their own judgement.

Finally, a reminder: it is an offence to arrange a structure in order to avoid AML/CFT requirements[2], and that reluctance to supply information is likely to be grounds to make a suspicious activity report.

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The TIC Company carries out CDD as the agent of reporting entities across New Zealand. Dr Alice Tregunna [LLB (Hons), LLM, PhD] is their Chief Compliance Officer. You can submit questions for published responses through their web form at www.ticc.nz or email DrAML@ticc.nz.

 

[1] s.33 AML/CFT Act

[2] s.101 AML/CFT Act, s.243 Crimes Act.