Do you have Trust Issues?
PART 1: What Trusts are, and why they are used.
Do you have trust issues?
Well your not alone!
Oh wait, I am not talking about your personal relationships. I’m talking about issues with carrying out Anti Money Laundering Customer Due Diligence (CDD). CDD requirements are at their most challenging when your customer is a trust. If you find CDD for trusts confusing then this blog will help you to overcome your trust issues. We will cover:
PART 1: What Trusts are, why they are used, and AML enhanced CDD, SoW and PoF means.
PART 2: The different trust roles to consider for Identity verification.
PART 3: A Step by step guide for Trusts with a Checklist for Compliance Officers.
Before we begin…
2Shakes have provided this blog to be helpful, but we want to be clear that we are not providing professional advice, and that we are not liable for in anyway. You should always refer to legislation, your AML supervisor, your AML Programme and Compliance Officer.
What is a Trust and why have one?
Generally, a Trust is a legal structure that takes on the ownership of assets to be used for the benefit of someone (or something) else. It is created using a document called a Deed.
Trusts date back to the middle ages. Knights would set up a Trust so that their castle was looked after for the benefit of their wife and children while they went off fighting (and in case they didn’t come back!)
Trust originally were used for knights. Fast forward to today and Trusts are still in use, and not just for Crusaders!
People set up Trusts for lots of reasons, for example:
Legacy: An elderly couple place the ownership of their family home into a Trust for the benefit of their family. They want their beloved family home to stay in family ownership after their death. Over time they transfer all their assets into the Trust to consolidate them and allow their family (with help from their accountant or lawyer) to manage them on their behalf during their retirement and after they have passed.
Protection: An entrepreneur with many business ideas transfers shares in their first company into a Trust. That way the shares have some protection from potential legal claims related to other businesses they start.
Succession: A charity sets up a Trust that outlines its purpose, and how it will go about realising it. It includes succession planning for how the charity will be run after its founders retire.
No one knows exactly how many Trusts there are in NZ because there is no NZ register of Trusts. But the Ministry of Justice estimates between 300,000 and 500,000 Trusts in NZ! Which is a lot, considering there are 677,000 registered limited companies. While it is predicted that number of Trusts will reduce in the future (due to recent changes to NZ Trust law). For now, as a Reporting Entity offering professional services, it is still very likely you will have to deal with Trusts.
Trusts require Enhanced Due Diligence (EDD)
If your customer is a Trust – and you are providing AML services – you must perform Enhanced Customer Due Diligence (EDD).
Legislation outlines situations when EDD is required, and a customer that is a Trust is one of these. Typically, these enhanced situations are where internationally there has been a higher likelihood of money laundering terrorist financing occurring, such as when a client lives in a high[1]risk country.
The requirement to do enhanced CDD on Trusts are set by the Financial Action Task Force (FATF), which is an international body. It’s not personal. The fact you are dealing with Trusts does not mean you or they are risky. The reason you need to carry out enhanced due diligence is that internationally Trusts are used as an ‘entity of choice’ by criminals who want to launder money, because they can be used to provide a layer of anonymity.
We all want it to be hard for criminals to clean their money in our country, one of the ways to do that is to make sure all movement of money through Trusts is legitimate. Which is why the bar is raised for on CDD when its a Trust to enhanced.
Trusts - Where did the money come from? (aka SoW and PoF)
Trusts are often set up to manage property ownership.
When you carry out Enhanced Customer Due Diligence (ECDD), you do everything you would for Standard due diligence and add on SoW/PoF. This means you also must also find out where the Trust’s money (assets) came from. This is known as either:
Source of Wealth (SoW) What is the the source of the Trust’s wealth. For example, the source of wealth might be the sale and purchase agreement of a property that was placed (settled) in the Trust.
Proof of Funds (PoF) Where the Trusts funds come from. The proof of funds might be the financial accounts of the Trust, or a business owned by the Trust and providing it income.
Every situation is unique, so what you accept as SoW/PoF will likely vary from Trust to Trust. Just remember in all cases you are checking and recording evidence that the Trust’s money came from a legitimate and explainable source.
How far you go should be based on the circumstances and risk for each situation (it is a risk-based approach). If a Trust derives its income and assets from another Trust, it is likely you’ll need to establish SoW/PoF for that Trust, and so on. Oh, and just because a Trust Deed is established with a nominal sum (like $20), that isn’t SoW done and dusted – what about the usual, significant assets that were settled into the Trust after it was established? The SoW evidence should address that. You can find more on the factors that trigger EDD, and how to record evidence of SoW/PoF correctly here.
Additional Due Diligence just for Trusts Unique to Trusts, the legislation requires you to record additional information that depends on the type of Trust you’re dealing with.
There are a dizzying array of factors that can be different across Trusts. Plus there is no set format or template for what a Trust deed looks like. On top of that, Trusts are mostly written in pretty formal legal language. So it can feel like you need a secret decoder key to figure them out! For AML/CFT purposes the first thing you need to do with the Trust Deed is use it to categorise what type of Trust you are dealing with. It should be one of the following types:
Fixed Trust
The trust deed ‘fixes’ who will benefit and how. Payments are distributed in the proportions set out. In the trust deedl look for disbursements or payments to beneficiaries in fixed proportions (equal shares, percentages, etc). There will be no discretionary powers for the Trustees to make payments as they see fit. So no wording like ”at their sole discretion”, etc.Discretionary Trust
The trust deed allows Trustees discretion to decide when, how and who will benefit. Payments can be made to some beneficiaries and not others. A trust where the Trustees can choose who to make payments to (often but not always, from a defined list of beneficiaries) and how much each receives. Look for discretionary powers of the Trustees – again if it includes “discretionary” or “at the discretion of…” then it is likely to be a discretionary trust.Charitable Trust
The trust deed outlines the charitable purpose and how it will realise that purpose. The purpose of the trust should show clear charitable intent, the purpose (objects) of the Trust. Charitable trusts are often (but not always) registered with Charities.co.nz.
For each type of Trust you will need to record different information about the beneficiaries and objects of the Trust. 2Shakes guides you to capture and store this information.
PART 2: The different trust roles to consider for Identity verification.
Trust roles and who needs to be ID verified?
You need to decide which people involved in a Trust are either a benefical owner or in effective control. For Trusts, the different roles who can be considered for identity verification are
Settlor(s) The person who owned the assets before they were transferred (settled) to the Trust. For example, if a couple put their house into a Trust, then the couple are the settlor. Settlors are considered Beneficial Owners and should be ID verified.
Individual Trustees The people who manage the assets on behalf of the trust are called the trustees. These individuals will be named in the Trust Deed, or in a variation. The trustees control the assets and can ‘move the money’. Therefore individual Trustees are considered Beneficial Owners and should be ID Verified.
Corporate Trustees A Trustee who is a company, rather than an individual. This is a can of worms, but I couldn’t ignore it. What you and your AML Programme decide to do is up to you. Remember, you are trying to find Beneficial Owners – in this case, the natural persons who control the Trust. Where a company is Trustee, the natural persons who can act on the Trust may be anything from one or two directors, all the way through to hundreds of lawyers at the company (see, can of worms). Small companies should be easy (ID verify a director or two). Large companies are best to talk to and work out how to proceed (they should by now have a good process for providing ID verification for their corporate trustee role). And when it gets really huge, we have seen some customers using their exceptions register (due to practical difficulties in verifying hundreds of people!)
Beneficiaries These are the people who benefit from the trust. For fixed trusts, if a beneficiary has more than 25% proportional benefit they are over the threshold and are considered Beneficial Owners (and should be ID verified). For fixed trusts with less than 10 beneficiaries you need to record each persons name and date of birth. Fixed beneficiaries with less than 25%, as well as beneficiaries of a Discretionary trust, are not required by the legislation to be ID verified.
Note: Always check your AML Programme to determine who you need to ID verify, which may be more than the legal minimum!
When your customer is a company, 2Shakes provides you with our proprietary algorithm to search the Companies Office register to suggest all beneficial owners for Identity verification. But there is no register of Trusts. So you will need to view the Trust Deed (and any variations) to find not only the type of trust, but also the names of the people involved in the trust. Then you can carry out identity verification for the people who meet the Beneficial Owner criteria. It is normal for a Trust to need many people to be identity verified.
It’s also normal for a Reporting Entity not to meet all these people! For example, getting all 6 trustees of a family trust who might be spread across different parts of NZ (or the globe) to come into your office to meet with you can be a challenging logistical task! 2Shakes lets you choose electronic and biometric identity verification, so you can collect and verify identity, address and PEP status fast, securely and painlessly just by entering the person’s email address. You can find out more about smart ways to use technology to verify identity for AML here.
So what happens when a company is owned by a Trust?
When 2Shakes finds the beneficial owners for Identity verification it will show you when a company is owned by a possible trust. If the possible trust owns more than 25% of the company’s shares then the Trust is above the Beneficial Owner threshold. In such cases you will need to record the additional information for Trusts (2Shakes has the Trusts tab for this), and verify the identity of the natural persons who are the Beneficial Owners of the Trust itself. This is the same process described above. The difference is that being owned by a Trust does not in itself require Enhance Customer Due Diligence to be performed on the company or the Trust. There may be other factors that require EDD in any situation, and your Programme may require you to still do EDD, so always check!
PART THREE: A Step by step guide for Trusts with a Checklist for Compliance Officers
So let’s have a look at how you can put all this into action. Clearly, the process of performing AML CDD on a Trust involves a number of steps. Usually, this is a process that involves asking a number of people for information which you can assess, record and where necessary verify, until you have all the information you need.
We are mostly focused on the additional work for Trusts, but have included some other areas for completeness. Remember to check with your AML Programme and Compliance Officer for your unique CDD procedures!
1. GET TRUST DOCUMENTS: Ask your client for a copy of the Trust Deed along with evidence of where the Trust’s assets/funds come from (Source of Wealth/Proof of Funds). Using the Trust Deed you can determine and record:
The correct name and address of the Trust
The type of Trust (Discretionary, Fixed, etc)
Additional objects and beneficiary information need for Trusts
The people who need to be ID verified and their role(s)
Remember, Trustees often change overtime, so make sure you have the latest documents to ensure you know the people currently involved in the Trust. If the latest documents don’t show the original Settlor(s), ask for the original Trust Deed too.
Note: Trust Deeds can include quite private information. If a client is reluctant to provide the Trust Deed, you may be able to get a trusted third party (e.g. their lawyer) to provide you the information you need without disclosing all the Trust details).
2. CARRY OUT YOUR RISK ASSESSMENT: Trusts will be Enhanced DD, but you still need to carry out a risk assessment to consider other risk factors for this client.
3. GET IDENTITIES VERIFIED: You need to verify the identity and address of each Beneficial Owner identity & address. Verifying identity can be done by meeting in person viewing documents (Manual), or remotely using Biometric verification. You will also need to carry out a PEP check on each person. Check out our PEP blog if you need more information on how to do this.
4. RECORD CDD: Record all your due diligence information securely, including CDD level, Nature and Purpose, Risk Assessment, additional Trust information, etc. Securely store all documents and other information you collect [e.g. Trust Deeds, identity documents or IDV reports, proof of address, PEP check result, Proof of Funds/Source of Wealth, etc]. You should also record key decisions in your client notes. As with any CDD you carry out, record anything that differs from what you have in your AML Programme as an exception. After all, snags can arise from time to time that mean you can’t carry out the process in your Programme. If you make a decision to do something different, then record what that was, why, and your rationale for doing it that way.
5. COMPLAINCE OFFICER APPROVAL: The AML Compliance Officer can then review the CDD information, and approve it as completed, so you can provide the Trust with AML captured services.
Compliance Officer Checklist
Because Trust CDD involves different moving parts it’s a really good idea to run through a check list to make sure everything is done. If you’re the AML Compliance Officer then you might check:
Trust Deed documents
The Risk Assessment
The Nature and Purpose of the business relationship
Source of Wealth or Proof of Funds
People for ID correctly listed (Trustees, Settlor, Beneficiaries)
Identity verification for all people
Addresses verification for all people
PEP check clear for all people
Additional trust information (name and address, type and objects and beneficiary information).
Once you’re happy with the due diligence carried out, we recommend that you set up a system that makes it clear when EDD has successfully completed. That way everyone can easily see when ‘systems are go’ to begin to provide AML captured services.
The 2Shakes AML Platform lets you securely manage all your due diligence. You can track clients through CDD, record and store all your due diligence information, and carry out ID and Address verification and PEP checks.
We hope this blog has helped demystify due diligence on Trusts. If you have any questions or need more info please contact us and we’ll help. Thanks for reading, and remember – you’ve got this!
Useful resources
Political Exposed Person checks
2Shakes Trust webpage
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