New onerous legislation (with penalties for non-compliance) for trustees - effective date 1 April 2023
February 24th, 2023 09:16
A lot has recently been said in the media about the possibility and impact of a Financial Action Task Force (FATF) greylisting for South Africa in February this year. The fact is it is no longer relevant whether or not we will be greylisted, as new measures were already legislated in late December 2022 to strengthen South Africa’s anti-money laundering and terror financing legislation, in an attempt to prevent a potential greylisting. Few are aware of exactly what is expected of them as a result, and even fewer are aware of the massive penalties for non-compliance – 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; therefore not a lot of leeway is provided by Government for trustees and service providers to get their acts together.
We are excited to be at the forefront and disrupters in this space and can assist boards of trustees and trust service providers to meet their obligations and to minimalise their risks with the implementation of these new measures. These new requirements also create new business opportunities/income streams for some accountants and trust service providers, whom their clients rely on, for assistance to not fall foul of these new measures introduced by Government.
Who is the FATF?
The FATF was established in 1989 to coordinate an international effort to combat money laundering. It has the mandate to be “the global standard-setter for combatting money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction,” and to hold their members to account in the implementation of these standards. Although its initial mandate was to combat drug trafficking, it expanded its mandate in 2001 to include money laundering and financing terrorism and again later to finance the development of weapons of mass destruction. The FATF set up a framework of fourty recommendations with best practice to combat money laundering and promote international cooperation to achieve that.
What is a greylisting?
Greylisting a country means that it has been recognised as having compliance issues, but has committed to addressing identified inadequacies to counter money laundering and terrorist financing within a given timeframe. When a country is put on the grey list, it is closely monitored by the FATF, and stringent regulations are imposed on them.
Although other countries are not prohibited from doing business with greylisted countries, they are encouraged to apply enhanced due diligence in financial transactions with greylisted countries to ensure that the guidelines of the FATF are not breached.
What does it mean for South Africa?
South Africa joined the FATF in 2003. A review was conducted in November 2019. The publication of the report on this review was delayed due to Covid until October 2021. The report confirmed that South Africa’s technical compliance was very low as it failed to meet twenty of the fourty FATF recommendations. This report placed greater emphasis than the 2009 report on the effectiveness of implementing FATF recommendations, and South Africa failed in all 11 effectiveness measures.
The initial lack of reaction by the South African government confirmed that they did not treat the report as seriously as they should have. It is believed that this lack of action was a result of an appreciation of the complexities to respond sufficiently to the report as well as a perception of interference by the Western countries in South Africa’s political independence. The public outcry of the banking industry got the attention of the National Treasury and Police ministry to introduce appropriate amendments to legislation. Due to delays caused, the changes had to be rushed through the legislative process without proper consultation with relevant bodies, such as the Fiduciary Institute of South Africa (as far as amendments to trust legislation were concerned). Some industry experts are of the view that the amended legislation is in contradiction to established law, which may even be taken on judicial review.
According to a Business Leadership South Africa (BLSA) report in collaboration with Intellidex, which was published in October 2022, there is an 85% chance that South Africa will end up on the greylist end of February 2023. The expected economic impact of greylisting could be minimal or severe depending on the actions South Africa may take. It is estimated that the impact could be less than 1% of GDP if Government acts quickly, or up to 3% of GDP if South Africa is not responding sufficiently to the list of issues identified. Although it is expected that greylisting should not seriously hinder foreign investment in South Africa and trade with other countries will continue (especially since South Africa has raw materials which are high in demand), capital flows will be subject to more complex due diligence procedures, which could have a cost implication. It is also expected that interest rates may increase because capital flows from certain foreign institutional investors will no longer be available (certain institutional investors are precluded by internal rules or by rules imposed by regulators from investing in greylisted institutions). This may have a negative effect on the rand exchange rate. Similarly, the cost of funding government debt will increase. It is however accepted that some of these negative factors may have already been priced into the market.
What does a “beneficial owner” mean and why has it become relevant in South Africa?
The word “beneficial owner” is used by the FATF to identify a ‘warm body’ who financially benefits from transactions. The FATF requires disclosure of these “warm bodies” to relevant institutions. Beneficial ownership transparency is one of the measures being used to combat financial crimes such as the financing of terrorism, money laundering, and tax evasion.
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. It is clear from the experience of countries implementing beneficial ownership registers that in order to be effective, registers must cover all types of legal entities and arrangements (including trusts). The FATF believes that these persons should be identified and reported on.
The FATF issued a guidance document on Transparency and Beneficial Ownership in October 2014. Recommendation 24 applies broadly to “legal persons” meaning any entities, other than natural persons, that can establish a permanent customer relationship with a financial institution or otherwise own property, unlike Recommendation 25, which specifically deals with “Enhancing Transparency of Legal Arrangements”, which includes trusts.
The following is quoted from the guidance document:
“Trusts enable property to be managed by one person on behalf of another, and are a traditional feature of common law. They also exist in some civil law countries or are managed by entities in these countries, and have a wide range of legitimate uses (for example, the protection of beneficiaries, the creation of investment vehicles and pension funds, and the management of gifts, bequests or charitable donations). Given the ease with which some types of trust can be established, the involvement of an external professional such as a notary or TCSP is not always necessary to establish one. Specific registration requirements for trusts are uncommon, though information may be required in tax declarations if the administration of the trust generates income. On the other hand, trusts usually do not possess a separate legal personality and so cannot conduct transactions or own assets in their own right, but only through their trustees.
Some countries have implemented measures that may improve the transparency of trusts including: establishing registration or other regulatory regimes for charitable trusts; imposing responsibilities on relevant DNFBPs including lawyers or TCSPs; imposing requirements to involve specific types of regulated entities in the formation of trusts; collection of information by tax administrations or other competent authorities; establishing registries of professional trustees; and establishing trust registries”.
It goes on to say the following:
“Trust law countries (own insert - any country whose law allows for the creation and recognition of trusts) should require the trustees of any express trust (own insert - a trust created deliberately by a settlor) governed under their law to obtain and hold adequate, accurate, and current beneficial ownership information regarding the trust. This information should be kept as accurate, current and up-to-date as possible by updating it within a reasonable period following any change. In this context, beneficial ownership information includes:
a) information on the identity of the settlor, trustee(s), protector (if any), beneficiary or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and
b) basic information on other regulated agents of, and service providers to the trust, including investment advisors or managers, accountants, and tax advisors.
The purpose of these requirements is to ensure that trustees are always responsible for holding this information (whichever country the trustee is in, and regardless of where the trust is located). In most instances, this is information that the trustee would normally have in any case because holding it is either a legal requirement, or a practical necessity in meeting the responsibilities of a trustee. It is important to ensure that the trustee identifies any person who owns or controls the trust in whatever capacity they may be in. As noted, beneficial ownership information for legal arrangements includes information on the identity of the settlor, trustee, beneficiaries or class of beneficiaries, protector (if any) and any other person exercising control over the trust. The specific parties involved may vary depending on the nature of the trust and countries should establish mechanisms based on the nature of express trusts being established under their laws.
It is not necessary for countries to include these requirements in legislation, provided that appropriate obligations to such effect exist for trustees (for example, through common law or case law). It is not expected that a trust law country would be required to enforce such requirements globally on every trust governed by their law—only that it is an obligation on the trustee which could be enforced (with appropriate sanctions) by any competent authority with competence to deal with the trust.”
The guidance document states that if a trust is created under the law of one country, but the trust is administered (and the trustee and trust assets are located) in a different country, the latter is likely to have more contact with the trust and its assets, as well as persons or entities involved in the trust. Therefore, that country should be the country responsible for the trust and implement appropriate sanctions as necessary.
The guidance document also requires professional trustees 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. Trust service providers and family trustees should be aware of this expected practice and start getting into the habit to do that.
The guidance document also encourages countries to ensure that other relevant authorities, persons, and entities hold information on all trusts with which they have a relationship, including agents and service providers to the trust, including investment advisors or managers, lawyers, or trust and company service providers.
The universal standards and recommendations for the collection and disclosure of beneficial ownership have been supported by FATF, the G7 (an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), the G20 (an intergovernmental forum comprising 19 countries and the European Union; South Africa is currently the only African member of the group), the International Monetary Fund (IMF), the United Nations (UN), and the World Bank. South Africa, therefore, has committed to implement beneficial ownership transparency under the FATF Recommendations, and also has commitments through the G20, the Open Government Partnership (OGP), the UN Convention Against Corruption, and the National Anti-Corruption Strategy. South Africa has over the years ticked some of these international compliance tick boxes – for example, its laws provide for access to databases such as trust registers (with the Master of the High Court) and company registers (with CIPC). In particular, “PAIA” (the Promotion of Access to Information Act 2 of 2000) provides for the constitutional right to access information in the form of records held by both public and private bodies.
Unlike popular belief that “beneficial ownership” is a term recently introduced into South African law, the following timeline demonstrates the implementation of the concept of beneficial ownership over a period of time:
· April 2012 – SARS introduced the concept of “beneficial ownership” in relation to dividends. The beneficial owner in respect of dividends is since then regarded as the person entitled to the benefit of the dividends attaching to a share.
· 2015 – Government committed to the high-level principles of beneficial ownership transparency set by G20
· 2016 - Government approved the setting up of the Inter-departmental Committee on Beneficial Ownership Transparency to develop and carry out a National Implementation and Action Plan to ensure the realisation of the G20 High-Level Principles, provide progress reports, and develop a definition of “beneficial owner”
· 2017 – The Financial Intelligence Centre Amendment Act introduced a legal definition of “beneficial owner” as “in respect of a legal person, means a natural person who, independently or together with another person, directly or indirectly (a) owns the legal person; or (b) exercises effective control of the legal person”. It also added additional due diligence measures relating to legal persons, trusts and partnerships separately.
· 2020 – Beneficial ownership transparency has been committed to in the 4th OGP National Action Plan
· 2020 – The Anti-Corruption Task Team published the National Anti-Corruption Strategy with a focus on Beneficial ownership transparency (pillars 1 and 3)
· 2020 – The IMF Covid 19 Rapid Financing Instrument loan of $4.3 billion includes beneficial ownership transparency commitment in procurement
· 2021 - The FATF mutual evaluation report requires South Africa to address certain areas of technical compliance, the beneficial ownership of legal persons, and reporting of, and transparency around suspicious transactions
· March 2022 - revised FATF standard requires beneficial ownership information collected to be verified for accuracy and placed in a centralised register or an alternative mechanism that allows for a similar degree of access to information by competent authorities
· Aug 2022 – National Treasury tables General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill in Parliament
· Dec 2022 – Government enacted General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022
· February 2023 – In order to comply with the FATF requirements, SARS requires information on all beneficial owners of newly registered trusts. According to SARS, the following types of beneficial owners may be found in the trust environment: Founder, Trustee, Beneficiary (Beneficiaries will be identifiable when interpreting the Trust instrument), Donor, and Protector (this is not allowed in South African law). SARS regards the ultimate beneficial owner to always be a natural person. Where the type of beneficial owner is identified as a legal entity, legal arrangement, or other (e.g. partnership), sufficient detail should be provided to clearly identify the ultimate natural person that will benefit from the assets or income of a trust.
What does it mean for trustees and trust service providers?
Amendments to the following legislation have been made through the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022: Financial Intelligence Centre Act, the Non-profit Organisations Act, Trust Property Control Act, the Companies Act, and the Financial Sector Regulations Act. Trustees should be aware of the changes to the Trust Property Control Act, 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. The following changes were introduced:
· New Section 1 definitions of ‘accountable institution’ and ‘beneficial owner’ [Effective date 1 April 2023]
· New Section 6(1A) (Section 6 deals with Authorisation of a trustee and security) – This section specifies matters that would disqualify a person from acting as a trustee. This was brought in line with the existing Section 20 (Removal Criteria) and more measures were added [Effective from 1 April 2023, except 1(H) – Master to keep public record]
· Amended Section 8 – Foreign trustee to act only if authorised by Master in writing [Effective date 1 April 2023]
· * New Section 10 (2) (Section 10 deals with Trust account) – This requires a trustee to disclose their position as trustee to any accountable institution with which the trustee engages in that capacity and to make it known to that accountable institution [Effective date 1 April 2023]
· * New Section 11(1) (Section 11 deals with registration and identification of trust property) – Trustees are to provide details of accountable institutions which trustees use as agents to perform trustee functions and who provide any services to trustees. More information and clarification is required to understand what is meant by this requirement [Effective date 1 April 2023]
· * New Section 11A (Section 11 deals with registration and identification of trust property) - information must be kept by trustees in relation to beneficial owners – direct/indirect individual beneficiaries of bewind trusts, founders, trustees, beneficiaries and any individuals who exercise effective control over the administration of the trust:
o trustees have to lodge and keep up-to-date records of the beneficial ownership of the trust [Effective date 1 April 2023]
o trustees have to lodge a register of the prescribed information on the beneficial owners (as defined) with the Master [no effective date yet]
o the Master must keep a register in the prescribed form containing the prescribed information about the beneficial ownership of trusts [no effective date yet]
o trustees and the Master must make the information contained in the register available to any person as prescribed after consultation with the Minister of Finance and the Financial Intelligence Centre [no effective date yet]
· Amended Section 19 (Section 19 deals with failure by trustee to account or perform duties) Treasury just clarified this section. The Master or any person having an interest in the trust property may apply to Court to direct the trustee to comply with the Master’s request or to perform a duty imposed upon the trustee by the Trust Property Control Act, trust instrument, or any other law. Take note that the Master can only remove a trustee in terms of Section 20 if they do not comply with TPCA
· New Section 19(2) – If the trustee fails to comply with highlighted Sections (*) above, they will commit an offence and on conviction will be liable to a fine not exceeding R 10 million or imprisonment not exceeding 5 years, or both
· Amended Section 20 (Section 20 deals with removal of trustee) – it was added that the Master may remove a trustee if they become disqualified to act as a trustee in terms of the new Section 6(1A); it was also expanded that the trustee may be removed if they do not comply with the requirements of the Trust Property Control Act (over and above the requirement to comply with any duty imposed upon them in terms of the Trust Property Control Act).
It is more important than ever that trustees understand the onerous requirements of the role they play in trusts. They have the duty to meet these new requirements and if they fail to comply, they may be fined and/or imprisoned. Family trustees often rely on their accountants and trust service providers to keep them out of trouble. Trustees and/or accountants and trust service providers therefore have to ensure that proper digital systems are implemented to have information handy in electronic format to assist their clients. The Trusteeze has the capability to meet the new FATF requirements.
~ Written by Phia van der Spuy ~