Role of ‘dormant’ and deregistered trusts in drive to be removed from greylist - 10 October 2024

Role of ‘dormant’ and deregistered trusts in drive to be removed from greylist

When South Africa was greylisted by the Financial Action Task Force (FATF) in February 2023, many people believed that its damaging effect was already anticipated and largely priced in by the financial markets at that time and, therefore, did not present a significant further risk to the stability of the South African economy. From this statement, it is clear that the greylisting did, in fact, negatively affect the South African economy; the markets have just reacted earlier in anticipation of our greylisting. The consensus, however, is that should we not be removed from the greylist by early 2025, it will weigh heavily on our long-term economic prospects. It is, therefore, in all South Africans’ interests that South Africa be removed from the greylist as soon as possible.

In a media statement by the National Treasury on 24 February 2023 (the day we became greylisted by the FATF) government’s commitment to implement the recommended actions by the FATF was confirmed. Government recognised that “addressing the action items will be in the interest of South Africa, and that doing so is consistent with its existing commitment to rebuild the institutions that were weakened during the period of state capture, the effectiveness of which is essential to addressing crime and corruption. The action items as formulated in the Action Plan therefore form part of the broader commitment of the Government to combat financial crime, corruption and state capture, as announcement by President Ramaphosa in October last year in response to the findings and recommendations of the Zondo Commission on state capture. The need to address the action items is also consistent with the national strategy on AML/CFT which was adopted by Cabinet in November 2022, and will help strengthen the fight against financial crimes in the country, and assist in preserving the integrity of the country’s financial system.”

Government has committed to resolving the eight strategic actions by January 2025 as motivation to be removed from the greylist. One of the actions was to ensure that competent authorities have timely access to accurate and up-to-date Beneficial Owner (BO) information on legal persons and arrangements and to apply sanctions for breaches of violation by legal persons to BO obligations. During the past eighteen months that the requirement exists for trustees to submit beneficial ownership registers to the Master, registers for only about 66,000 trusts have been submitted. Although the Master does not have an exact count of registered inter vivos trusts, they estimated the total number of trusts by adding the number of trusts registered at the 16 Master Offices. Each Master Office allocates a trust number (IT number) to each inter vivos trust and starts with trust number 1 each year. The estimated number of inter vivos trusts registered with the Master Offices is 650,000 inter vivos trusts. Given this number, our compliance rate is just more than 10%. However, this number includes those trusts that were deregistered with the Master. The Master did not record trusts that were deregistered by the trustees but would only acknowledge the deregistrations in writing and place them in the Master’s paper files of the trusts, which trusts would remain in the same filing order as the existing trusts. Therefore, an adjustment should be made to exclude these deregistered trusts to calculate the actual compliance rate, as they do not hold any Anti-Money Laundering/Countering The Financing Of Terrorism (AML/CFT) risks. Another factor may skew the compliance rate. Trustees are not obligated to deregister a trust if it remains inactive, which results in many trustees ‘abandoning’ trusts. These trusts are often referred to as ‘dormant’ trusts. Clearly, they also do not hold any AML/CFT risk and should be excluded from calculating the compliance rate to demonstrate actual risk. Many trustees are unaware that even though they may regard trusts as ‘dormant’, they are not excluded from the requirement to submit BO registers. Such trustees, therefore, remain exposed to a fine and/or imprisonment for non-compliance.

Getting a more accurate count of the total number of active trusts in South Africa that are open to money laundering and terrorist financing could easily be achieved through the following interventions:

• The Master could cooperate with professional bodies and large trust service providers to identify those trusts that were deregistered with the Master over the years, which are included in the 650,000 calculated number of trusts registered with the Master over the years.
• Trustees should physically deregister trusts that were never activated; the so-called ‘dormant’ trusts. The Master may consider a mechanism to fast-track deregistrations as there is a drive to deregister such trusts, given the potential fines and/or imprisonment upon conviction of an offence in terms of the amended trust legislation and the South African Revenue Service (SARS’s) drive to get all trusts registered and compliant. These trustees often ignore the fact that each trust has to register as a taxpayer with SARS. With SARS’s focus on trusts, they plan to introduce penalties for late/non-submission of trust tax returns from April 2025. It will, therefore, be in the interests of trustees to rather deregister those trusts with the Master as soon as possible.

As a country, we are running out of time to meet our January 2025 compliance deadline. Therefore, government is considering all kinds of interventions to improve the compliance rate for trusts before this date.  The Department of Justice and Constitutional Development issued a Media Statement on 17 September 2024 titled “Trustees not complying with the provisions of the amended Trust Property Control Act to face harsher punishment”. In a drive to improve the chance to exit the greylist in early 2025, the media statement set a deadline for filing the beneficial ownership registers with the Master by 15 November 2024. The Master plans to launch a multi-pronged media campaign to urge trustees to comply voluntarily, as it is in all South Africans’ interests to cooperate in an attempt to be removed from the greylist.

As responsible citizens, all trustees should submit beneficial ownership registers to the Master through their online portal at https://icmsweb.justice.gov.za. In certain instances, details of all the beneficial owners are not available. For example, if the family has lost contact with the founder of the trust. The result is that trustees hold back on the submission of BO registers. A solution may be for the Master to allow trustees to submit information they have and provide for conventions similar to what SARS uses, such as providing 15 x 9’s (i.e. 999999999999999) if a contact number is not available. This will allow many more trustees to comply, and the Master will know that the information was unavailable then.

Trustees should seek professional advice and assistance to meet the new legislation requirements, as they remain exposed to fines and/or imprisonment. These requirements are here to stay. The FATF has already indicated that it will increase the frequency of reviews. South Africa should, therefore, remain focused on mitigating and responding to financial crimes such as money laundering and corruption.