knowledge | 13 February 2019 |
No Room for Equity’s Darling in AML Regulations Affecting Trustees of Real Estate
Declaring a trust of land, traditionally unregulated and somewhat informal, is now subject to specific legislative requirements set out in recent anti-money laundering regulations. Trustees of real estate need to be aware of the obligations and ensure that they comply.
The requirements are set out in the European Union (Anti-Money Laundering Beneficial Ownership of Trusts) Regulations 2019 (the “Regulations”), which transpose part of the EU’s Fourth Anti-Money Laundering Directive 2015/849 (“MLD 4”), as amended by the EU’s Fifth Anti-Money Laundering Directive 2018/843 (“MLD 5”), into Irish law. Our briefing on the general scope of the Regulations is available here.
Looking closer at the implications for trustees of real estate and real estate transactions, in brief the Regulations require trustees of an express trust where the trustees are resident in Ireland or where the trust is otherwise administered in Ireland:
- to keep and maintain a beneficial ownership register, recording specific details of each beneficial owner;
- who enter into an “occasional transaction” with a person who is a designated person for anti-money laundering purposes, or forms a business relationship with such person, to (a) inform the designated person in writing that the trustee is acting as trustee, and (b) on request from the designated person, provide the designated person with information identifying all the beneficial owners or potential beneficiaries under the trust; and
- to provide the Revenue Commissioners or any State “competent authority” with timely access, on request, to the trust’s beneficial ownership register.
Provided the beneficial ownership details are known, each of the first and third of these requirements is relatively straightforward. The trustee, on declaring the trust, must set up the beneficial ownership register (which is not required to be in any particular form) and maintain it up to date during the lifetime of the trust. The trustee must also respond to any requests for information by a competent authority.
The second is potentially more complex. In dealings in relation to the trust property, trustees must consider and identify in each business relationship or “occasional transaction” (ie a single transaction or series of transactions which are or appear to be linked to each other where the total amount of money paid is greater than €15,000), whether they are dealing with a designated person for the purposes of anti-money laundering legislation (“AML”). If they are dealing with a designated person, they must inform the designated person in writing that they are acting as trustee and respond to any other requests for information as required by the Regulations.
It will be important for trustees to refer to the specific list of designated persons under the legislation and to be aware that further classes of persons can be designated from time to time. Subject to the exceptions, financial thresholds and other specific terms of the legislation, currently designated persons include many of the types of persons involved in a real estate transaction eg property service providers, lawyers, auditors, accountants, tax advisers, trust or company service providers and, of course, credit and financial institutions. Importantly, however, a person is to be treated as a designated person only in respect of those activities or services that render the person a designated person. This means that property service providers, for example, who buy property in their personal capacity are not designated persons in the context of the personal property purchase.
Taking the example of a typical sale of real estate, a selling trustee would be obliged under the Regulations to disclose the trust to any agent, solicitor or tax adviser acting for the trustee in the sale, as each is a designated person for AML purposes and are acting in that capacity. This is assuming any lender with security over the trust property is already aware of the trust, as that relationship is existing. If the buyer is a designated person, acting in the designated capacity (eg a credit or financial institution acquiring the property interest), the trustee must also disclose the trust to the buyer. This, in turn, triggers the buyer's obligations to comply with its AML obligations as a designated person to know and understand their customer or counterparty and look behind the trust to establish the identity of the beneficial owners.
Separately to the AML obligations, any buyer to whom a trust is disclosed must then also investigate the trust to be satisfied that the property is sold in accordance with the powers of the trustee and other terms of the trust. This means that a buyer acting in its capacity as a designated person for AML purposes and to whom a trust is disclosed can no longer also be “equity’s darling” and so rely on the protections afforded in law to bona fide purchasers for value without notice of the trust.
Counteracting the ever evolving methods used in money laundering and terrorist financing is an on-going challenge. MLD5 came into effect on 9 July 2018 and the deadline for member states to transpose many of its requirements is 10 July 2020. These include further measures to address the corruption risks inherent in trusts and other complex ownership structures as well as those in the alternative financial systems that are evolving around modern technology. Importantly also from the perspective of the real estate industry, MLD5 extends the AML compliance regime to property service providers acting as letting agents and requires member states to ensure that financial intelligence units and competent authorities have access to information which allows the timely identification of any natural or legal persons owning real estate, including through registers or electronic data retrieval systems where these are available. For more on the changes to be implemented by MLD5 see our briefing here.
As the scope of obligations under AML legislation widens, everyone in the real estate industry with relevant obligations needs to be aware of what those obligations mean for them and update their processes and practices accordingly.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.