5: The Fifth Money Laundering Directive and Trust Registration – An exemption for charities, but how wide does it go?
There was good news for charities on 15 July 2020 when the government published its responses to two consultations on implementation of further measures in the UK under the Fifth Money Laundering Directive (more conveniently referred to as ‘5MLD’) aimed at tackling money laundering and terrorist financing. 5MLD threatened to remove the current exemption (save in limited circumstances) for charitable trusts from having to register with the Trust Registration Service, meaning a potential new administrative burden, and possible penalties, across a range of charities. Happily, the government response indicates that the charity exemption will continue, although we await the full details.
What was at stake?
HM Treasury and HMRC consulted in 2019 on how it proposed to implement 5MLD in the UK, including proposals to extend the requirement to register with the Trust Registration Service (‘TRS’) to all express trusts, including charitable trusts. Under the current regime, charitable trusts only need to register if they become liable to pay one of the main taxes (and hence need to generate a tax return).
We responded to that consultation, as did the Charity Law Association and Charity Tax Group among others, noting the difficulties which would arise for charities unless a more practical, proportionate approach was adopted. The extension stood to cover not only charitable trusts, but also other charity-related trust situations, such as different funds held by a charity on trust and nominee arrangements for holding shares in the trading subsidiary company of an unincorporated charity.
If such trust situations were not excluded, they would have been required to register on the TRS, meaning a new and additional registration and updating requirement in relation to detailed information about the charity trustees, as well as certain donors and beneficiaries. Such a result would have:
- involved unnecessary duplication, as much of the information is already registered with HMRC and the relevant charity regulator;
- been complex and time-intensive to administer, not least because it is not always clear to the charity that a ‘trust’ arrangement exists (eg where the assets of a charitable unincorporated association are held by individuals for the charity) or what the terms of the trust may be (eg where the original documents for a prize fund have been lost);
- imposed much of the burden on the smallest charities, such as those below the £5,000 registration threshold in England and Wales; and
- involved the risk of financial penalties for non-compliance, a particular risk where lay trustees were likely to be unaware of the new obligation.
The new consultation and government response
Happily, the government appeared to take on board those difficulties, resulting in a further consultation in January-February 2020. That consultation proposed, among other things, to exclude ‘charitable trusts’ from the scope of the extension of the TRS regime on the basis the ‘the risk of these kinds of trusts being used for money laundering or terrorist financing activity is low’ (para 3.17 of the consultation document).
We responded to the consultation, suggesting that the draft regulations be amended to make clear that charities in England and Wales below the £5,000 registration threshold are exempt and noting a number of other charity trust situations where confirmation / clarification of exemption was also needed.
In its response on 15 July 2020, the government has confirmed that ‘charitable trusts’ will be excluded. It has also amended the definition in the regulations to include expressly exempt and excepted charities in England and Wales, including those excepted due to being below the £5,000 income registration threshold.
There remain a number of points where clarity is needed, for example, confirmation that the following are also excluded:
- charities not yet registered in Northern Ireland but on the ‘Combined List’;
- special trusts or other funds held by charities, especially if not listed on the charities register as linked funds;
- bare trusts or nominee arrangements for assets held for charities (such as trading subsidiary shares held for a charity); and
- equity-sharing by charities and individuals (eg where a church enters into such an arrangement with a pastor to enable the pastor to live at or near the church).
It appears from the government response that these arrangements are intended to be excluded, but we will need to wait for detailed guidance (which has been promised) to be sure.
For those trusts which will not be excluded from the new measures, it is proposed that trusts would be required to register by 10 March 2022 for trusts existing before 9 February 2022. The government confirms in the response that it is developing detailed guidance and that it will seek stakeholder input ‘as required to ensure that the guidance is suitable and meets the requirements of users’. It also notes that there are some policy issues which the government ‘wishes to continue exploring over the coming months’ and that ‘Engagement and feedback will be sought as required on these topics’.
There will, therefore, be a little wait before we know the final position. When it is finalised, the government has noted concerns about a lack of awareness of the proposals, so we would expect a suitable campaign to raise awareness ahead of the new requirements coming in to force.
For now, charities which have been concerned that they may have to ready themselves for a new registration requirement can relax, although should remain alert for the promised detailed guidance.