Which beneficiaries to include as “Beneficial Owners” 4 October 2023
November 10th, 2023 12:38
There seems to be huge confusion and different interpretations of which types of trust beneficiaries to include as “beneficial owners” after new measures were hastily introduced in an attempt to avoid greylisting and to meet the Financial Action Task Force’s (FATF’s) requirements. Do trustees have to include only named beneficiaries in the trust deed, classes of beneficiaries, and/or beneficiaries who have received benefits? It is clear that a ‘beneficial owner’ for FATF is not a beneficial owner in the economic sense, but rather a definition provided to capture specific roleplayers in the trust. The FATF Recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, which are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard, were adopted on 16 February 2012 and regularly updated since, with the last update in February 2023.
Recommendation 25 (Transparency and beneficial ownership of legal arrangements)
This recommendation guides member countries in terms of what data trustees and trust service providers should collect and maintain. Countries should assess the risks of the misuse of legal arrangements for money laundering or terrorist financing and take measures to prevent their misuse. Countries should ensure that there is adequate, accurate, and up-to-date information on “express trusts” (trusts created by the free and deliberate acts of the parties involved) and certain defined parties to those trusts.
The General Glossary clarifies that the meaning of the term “beneficiary” depends on the context and that in trust law, a “beneficiary” is the person/s who is/are or may become entitled to the benefit of any trust arrangement. It explains that while trusts must always have some ultimately ascertainable beneficiary, trusts may be registered with classes of beneficiaries who may become entitled to income or capital on the expiry of a defined period, or following the exercise of trustee discretion in the case of a discretionary trust.
Which information should trustees keep?
In terms of the Interpretive Note to Recommendation 25, trustees are required to obtain and hold adequate (sufficient to identify the beneficiary and their role in the trust), accurate (verified to confirm its accuracy), and up-to-date beneficial ownership information on each beneficiary or, where applicable, the class of beneficiaries. Interesting to note that although trustees are required to obtain and hold information on the class of beneficiaries and its characteristics, they are not expected to obtain fully adequate and accurate information until the person becomes entitled as beneficiary at the time of the payout or when the beneficiary intends to exercise vested rights. This seems to only require information on beneficiaries in classes as and when money may flow or assets be transferred to them. Trustees also have to keep information on any other natural person(s) exercising ultimate effective control over the trust, which refers to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. Clearly, beneficiaries by law, even if they have vested rights in trust assets, do not “control” the trust. Therefore, classes of beneficiaries will never be included under this requirement.
Even though trustees will have knowledge of who may potentially benefit under a class of beneficiaries, in terms of the current definition of “beneficial owner” in the Trust Property Control Act, only beneficiaries who are physically named in the trust instrument of a discretionary trust are currently required to be included. Even though beneficiaries of bewind trusts (never for discretionary or vesting trusts that are ownership trusts where assets are owned by the trustees) are to be included in terms of paragraph (a) of the definition, they would clearly already be included as they are always named in the trust instrument. Even if beneficiaries in a discretionary trust received benefits, they cannot be included under this paragraph, as ownership consists of a complex web of many rights all of which are rights in rem (right in a thing), and not merely rights against persons. Even if the trustees exercised their discretion in favour of a beneficiary and vested trust income, capital gains, or trust assets in the beneficiary, they will only have personal rights (right in personam) to claim income and/or a capital gain and/or an asset from the trustees, but subject to any rights attached to such vested right. ITC 1328 case of 1980 established that “a vested right may nevertheless be vested even though in some instances enjoyment of the right may be postponed”. As ownership includes the rights of possession, right of use and enjoyment, the right of disposition, and even the right of destruction, clearly a beneficiary in a class who received a distribution that was not yet paid out, cannot be included under this paragraph. The beneficiary will obtain a real right in the trust asset only when ownership in such asset is transferred to the beneficiary. Most often in South Africa, trustees have the discretion to make payment or transfer the asset vested in a beneficiary at a future date determined by them. Clearly, those beneficiaries are not intended to be included as “beneficial owners”. A beneficiary, in that capacity, can also never “exercise effective control of the administration of the trust”, so someone as part of a class of beneficiaries cannot be included under paragraph (b) of the definition.
Which information should trust service providers keep?
The FATF requires them to have policies and procedures in place, adopting a risk-based approach to enable them to form a reasonable belief that they know the true identity of the beneficiaries of the trust and take reasonable measures to verify the identity of the beneficiaries, such that they are satisfied that they know who the beneficiaries are. It is required that they should at least identify and verify the identity of beneficiaries who have current fixed rights to distributions of income or capital (vesting trusts, included under named beneficiaries) or who actually receive distributions from the trust. Where the beneficiaries of the trust have no fixed rights to capital and income (such as discretionary beneficiaries), they should obtain information to enable them to identify the named discretionary beneficiaries in the trust instrument. For both beneficiary classes and where beneficiaries are minors (under 18) - interestingly, although they should satisfy themselves that these are the intended beneficiaries in terms of the trust instrument, they are not obliged to obtain additional information to verify the identity of the individual beneficiaries referred to in the class unless or until the trustees determine to make a distribution to such beneficiary. When benefits pass to these beneficiaries, it is not clear if it should only be reported as and when these events of distribution happen, or whether those beneficiaries will then always be included once initially included. Trust service providers should have procedures in place to update the information provided if named beneficiaries are added or removed from the class of beneficiaries, or beneficiaries receive distributions or benefits for the first time after the information has been provided, or there are other changes to the class of beneficiaries.
In South Africa, the Financial Intelligence Centre Act (FICA) applies to trust service providers and it is specifically required of them to collect and maintain particulars of how the beneficiaries of the trust are determined for beneficiaries not referred to by name in the trust instrument (Section 21B(4)(e)(ii)). This seems to be the place where Government meets the requirements of FATF for classes of beneficiaries; and does not make it a reporting obligation for trustees to the Master and the South African Revenue Service. The trust service provider is, however, not required to submit this information to anyone; it should just retain it for FIC inspections.
Be mindful of oversharing
Given the current security risk with the Master’s Google Docs submission form, it is not advisable to provide information on parties to the trust not strictly required by the current South African laws and regulations, especially for vulnerable people such as minors who are often captured in classes of beneficiaries in trust instruments. Even FATF treats minors cautiously – see above. It may even expose trust service providers - who force oversharing of information - to legal action if sensitive information is leaked and places the client at risk. It also adds an unnecessary additional compliance burden where mistakes can be made and information may become outdated, placing the trustees at unnecessary risk. Government should change the laws and the regulations if information other than the current required information is in fact required.
~ Written by Phia van der Spuy ~