Fines given to trustees and trust service providers, an April fools’ joke? Act today 31 March 2023!
March 31st, 2023 10:42
Even though measures were introduced by the government (silently on 22 December 2022) to strengthen South Africa’s anti-money laundering and terror financing legislation in an attempt to remain off the Financial Action Task Force (FATF) Greylist, after South Africa’s performed weakly on the measurement of the effectiveness of the implementation of the FATF recommendations (South Africa failed in all 11 effectiveness measures), few trustees and even trust service providers are aware how it directly impacts them and what is expected of them. Part of the remedial efforts included amending five laws key to the effectiveness of South Africa’s anti-money laundering /combatting of terrorist financing measures, the Financial Intelligence Centre Act, namely the Non-profit Organisations Act, the Trust Property Control Act, the Companies Act, and the Financial Sector Regulations Act. Of those, amendments to the Trust Property Control Act and the Financial Intelligence Centre Act are most relevant for trustees and trust service providers. Overnight, the landscape of trusts has changed, which added extra layers of compliance as well as exposure to risk, as non-compliance may lead to a fine not exceeding R 10 million or imprisonment not exceeding 5 years or both. Most of the amendments have an effective date of 1 April 2023; well for trustees as the Masters of the High Court are clearly not ready to receive and maintain digital registers as required of them. This imposes a higher risk for trustees (any one of them) and trust service providers, as authorities may have to knock on their doors to verify their compliance. Traditionally, huge reliance was placed by family trustees on the independent trustee (and even the trust service provider) in meeting trustee obligations. The amendments apply equally to all trustees and each and every trustee has to cooperate to remain compliant. Although the regulations determining what information is to be kept are not yet Gazetted, trustees are advised to work on the draft regulations issued on 13 January 2023.
What is expected of trustees?
Firstly, all trustees are expected to maintain up-to-date registers of “beneficial owners” to the trust. The word “beneficial owner” is used by the FATF to identify a ‘warm body’ who financially benefits from transactions. A “beneficial owner “is an individual who gets to enjoy ownership benefits even though the title to some form of the property is in the name of another individual. It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company. The FATF believes that these persons should be identified and reported on. In the context of a trust, by definition, “beneficial owners” include (rightly or wrongly) the founder(s), trustee(s), and the named beneficiaries in the trust deed, as stipulated in the amended Trust Property Control Act. The FATF issued a guidance document on Transparency and Beneficial Ownership in October 2014, which requires professional trustees (typically found as the single trustee in historical tax havens) to maintain the information they hold for at least five years after their involvement with the trust ceases. Countries are also encouraged to extend this requirement to non-professional trustees and other relevant authorities, persons, and entities.
Secondly, trustees are required to disclose their positions as trustees to any “accountable institution” with which the trustee engages in that capacity and to make it known to that “accountable institution”. Trustees should be mindful of the expanded list, as it no longer only covers banks as we got to know “accountable institutions”. “Accountable institutions” now include the following - legal practitioners (inclusive of trust advocates), trust and/or company service providers, credit providers, money or value transfer service providers, high-value goods dealers, including precious metals dealers (such as Krugerrand dealers), and precious metals and stones dealers (such as jewellers), crypto asset service providers, and clearing system participants to name but a few.
Thirdly, trustees are to keep a register of accountable institutions which they use as agents to perform trustee functions and who provide any services to trustees.
Lastly, trustees may have to review their trust deeds for required amendments thereto to cater for the legislation changes, such as matters that would disqualify a person from acting as a trustee and when a trustee can be removed.
Are you an independent trustee and/or provide trust services?
The new measures keep the board of trustees liable for non-compliance, not the trust service provider. Therefore, if you or your company act as an independent trustee, you or your company will be exposed to risk and the requirements will add an extra layer of compliance. A number of independent trustees historically did not charge for such services, however, with the recent amendments, they will have to price for risk, as well as the extra layer of compliance. No longer should families shop for the cheapest (or free) offering, as it may cost them a lot in the end.
The new measures introduced expect the independent trustee to (like all other trustees) keep up-to-date information of “beneficial owners” of the trust – see above. It is hardly possible to expect of such a person to keep track of the whereabouts of all these people. It, therefore, makes sense to procure an indemnity from the family trustees if they do not update their and their family’s details in a central repository that all trustees have access to.
The independent trustee also cannot keep track of all the interactions of the family with “accountable institutions” in their capacities as trustees and should also seek an indemnity from family trustees for non-compliance with the new requirements discussed above. The independent trustee should typically require all interactions with “accountable institutions” to be agreed upon by written and signed trustee resolution before any engagement. It may be prudent for the independent trustee and/or trust service provider to educate the (often ignorant) family trustees on the expanded list of ‘accountable institutions’.
Even though the trust service providers will not be held liable for trustees’ non-compliance, that has to be communicated to the trustees, and at least (from a reputational perspective), trust administrators should seek indemnity from trustees for elements that they, as trust administrators, cannot control.
In the Financial Intelligence Centre Act, the definition dealing with trustees and related service providers (item 2 in the Schedule) has also been amended as follows: A “board of executors or a trust company or any other person that invests, keeps in safe custody, controls or administers trust property within the meaning of the Trust Property Control Act, 1988 (Act 57 of 1988)” has been replaced with
(c) A person who carries on the business of creating a trust arrangement for a client.
(d) A person who carries on the business of preparing for or carrying out transactions (including as a trustee) related to the investment, safe keeping, control or administering of trust property within the meaning of the Trust Property Control Act, 1988 (Act 57 of 1988).”
That means that the independent trustee and the trust service provider, if they carry on such a business), are obliged to register with the Financial Intelligence Centre (FIC) as an “accountable institution”. They have to be registered with the FIC as such for all items in which they conduct business, even though their system only allows for one registration per user at this point ( a system glitch). All these newly identified ‘accountable institutions’ had 90 days since 19 December 2022 to register. The deadline for registration was therefore 20 March 2023. The FIC recognised that a number of required accountable institutions were not registered as yet and issued a notice allowing relevant service providers until 31 March 2023 to register to avoid attracting increasing administration sanctions for non-compliance and late registration.
The independent trustee and/or trust service providers will have to comply with the duties of “accountable institutions” as set out in Chapter 3 of the Financial Intelligence Centre Act. These regulatory obligations include implementing customer identification and verification processes; conducting customer due diligence; appointing a compliance officer; training employees on the Act compliance; undertaking business risk assessments; and maintaining and implementing a risk management and compliance programme.
Days are over for sloppy trust administration, estate planners seeking cheap/free trust services, and service providers not pricing for risk. It calls for a clean-up of trusts in South Africa, as the measures do not distinguish between different types of trusts, and certainly do not exclude a “dormant” trust. As all trustees will be exposed to risk, it is advised to maintain a central repository of information to which all trustees can contribute and on which they can rely.
~ Written by Phia van der Spuy ~