Beneficial Ownership and disclosure of trusts: challenging the privacy arguments

On July 22^nd, 2016 the French supreme constitutional court ruled on a case brought by a US American citizen resident in France who had created a trust, allegedly to distribute her inheritance. She was contesting moves by France to set up a public register of trusts connected to France in an attempt to tackle tax fraud and serious economic and financial crime[1]. So, what does this mean for transparency and tax justice?

In defence of the US citizen’s privacy, and in a setback for transparency, the French Court^[2] ruled that

• the disclosure in a public register of the names of the settlor, the beneficiaries and the trustee provides information on how a person intends to dispose of her assets. This results in an infringement of the right to respect for private life, and
• the contested provisions relate to the right to respect for private life which is manifestly disproportionate in relation to the objective pursued.

This potentially throws a spanner in the works in terms of rapid moves in recent times to improve transparency in global finance, and to curb the secrecy that helps tax dodgers, money launderers and corrupt officials escape the rule of law. The Tax Justice Network’s Andres Knobel says,

“Trusts aren’t love letters to your spouse and children, so we should stop pretending they should remain secret. Let’s get real. Trusts can engage in business just like companies, or directly own such companies. Trusts involve rights and control over assets, sometimes millions of dollars. They provide a shield to protect them from outsiders. How can something be a private matter, and yet affect access to assets by a tax authority, a former spouse, heirs, someone who lent you money or the victim of an accident seeking damages? The potential to avoid and evade taxes, launder money or exacerbate inequality by accumulating wealth through generations just doesn’t sound private to me.”

This French ruling may now have a deadly effect in the European Union (EU) where discussions are being held to extend transparency provisions availably mainly for companies to trusts. The EU is at the forefront of beneficial ownership regulation after it approved the fourth Anti-Money Laundering Directive on May 20^th 2015, which could have gone further on trusts but the UK successfully lobbied against it.  The EU Directive requires all EU member states to register the beneficial owners of companies and some trusts – that is, the natural persons who ultimately own or control an entity.

We’ve written about loopholes in the Directive regarding companies and trusts. Since there is some disagreement even within civil society about which trusts should be registered, and which parties to a trust (e.g. settlor, trustee, etc.) should be considered a beneficial owner, we’ve also written on the case for registering trusts – and how to do it[3].

On the bright side, as a result of the Panama Papers, the EU Commission has been working to amend the Directive. It envisions requiring public registries for companies and for some types of trusts. Germany is now also showing support for this, which is also good news.

Ancient trust law

Now, back to France. Given that the French court’s ruling clashes with the emerging EU discussion to create public registers of trusts, it is important to explore and challenge its ruling on these two issues:

(i) the right to privacy to dispose of one’s wealth

and

(ii) the disproportionality between disclosure and the goal of preventing tax evasion.

So…

(i) Privacy in the disposition of one’s wealth

Privacy is an important human right. But as with any right, it is not absolute. Its exercise has to be balanced against the exercise of other rights (and obligations) as well as against others’ rights. In principle, issues that only concern oneself (religion, political ideology, sexual orientation, etc.) should arguably remain private. It’s really no one else’s business because it doesn’t affect them. By the same token, any matter that may indeed affect a third person should not remain secret, a.k.a. “private[4]”. Otherwise, those other persons’ rights may be diminished.

In principle, any individual should be allowed to do as they want with their wealth. Save it, spend it, donate it- you name it. But just like any other right, property is not absolute. Depending on the country, “others” may have rights to part of an individual’s wealth: tax authorities, a spouse for alimony, children for child support, the victim of an accident, etc. In other words, if that same individual has creditors (e.g. because of an unpaid loan, because of a car accident where a pedestrian got hurt, etc.), the latter should be able to access the debtor’s wealth to obtain the money that they are owed. A trust is a complex structure that may affect access to assets by an individual’s creditors, even if that individual keeps controlling or enjoying those assets.

A trust usually involves a settlor, in our case the US American resident in France, transferring assets to a trustee who will hold and manage those assets in favour of beneficiaries. These beneficiaries are appointed by the settlor, and in our case, they will likely be the heirs who would eventually inherit or benefit from those assets after the settlor’s death. A trust thus involves changing the title to assets, that will now be under the name of the trustee (or sometimes directly held by the trust, like some bank accounts). Depending on the type of trust, the settlors or beneficiaries will however retain a certain degree of control over the assets, and even the right to use the assets, such as living in a house held by the trust. Moreover, during the time in which assets are held in the trust and before they are distributed to the beneficiaries, trust assets may be regarded as being in an “ownerless limbo” because they aren’t really part of the personal wealth of either the settlor, the trustee or the beneficiaries. This means that neither the creditors of the settlor, the trustee or the beneficiary (if any creditor exists), will have a right to access those trust assets to get the money that they are owed.

In other words, by creating a trust and transferring some or all of her assets to the trust, the American citizen may have affected the rights of her creditors. This shows that trusts do not involve only private matters in the disposition of ones’ assets. If the trust does not have to register and disclose the name of its settlor, creditors will never become aware of the existence of the trust, and of the fact that those assets are no longer “belonging” to the settlor, even if she keeps using them or enjoying them[5].

Even though we do not know the type of trust involved in this case, tax havens such as the Cook Islands, Nevis, BVI, Cayman Islands and many States in the USA offer different types of “asset protection trusts” where the objective is precisely to keep creditors (including former spouses and legitimate heirs) off one’s wealth. For example, some countries “offer” non-recognition of foreign laws and foreign judgements as a way to attract shady businesses.

(ii) The disproportionality between trust disclosure and the goal of preventing tax evasion and other crimes

If an individual manages to hide their identity behind shell companies, nominees, bearer shares, trusts or foundations, all sorts of crimes may be committed including tax evasion, corruption, money laundering and financing of terrorism (see TJN’s Financial Secrecy Index for more details).

Trusts have been involved in major tax evasion and corruption scandals such as Sam and Charles Wyly’s tax fraud by shielding more than $1 billion in family wealth, Wildenstein’s scheme to hide art and assets under the ownership of complex trusts for which the French tax authorities were seeking back taxes of more than 550 million euros, or the former Ukrainian president, Viktor Yanukovych, who allegedly acquired the state-owned Presidential Palace without a competitive tendering process and held it through an array of shell companies whose ownership chain ended in an impenetrable Liechtenstein trust.

The representative of EUROPOL and Financial Intelligence Units Network, in a public hearing held by the EU Parliament on Anti-money laundering and tax evasion last November in 2016 included trusts among “the main schemes that were used to hide tax revenue or launder money”.

The World Bank’s “Puppet Masters” report on legal vehicles and corruption also writes specifically on trusts: “investigators interviewed . . . argued that the grand corruption investigations in our database failed to capture the true extent to which trusts are used. Trusts, they said, prove such a hurdle to investigation, prosecution (or civil judgment), and asset recovery that they are seldom prioritized in corruption investigations […] Investigators and prosecutors tend not to bring charges against trusts, because of the difficulty in proving their role in the crime”.

In light of the major tax evasion and grand corruption cases related to trusts (and the many more that may never come to light because of trusts’ effective secrecy), it feels that disclosure of trust’s beneficial owners is not disproportionate to the goal of tackling tax evasion, money laundering and corruption but rather the other way around.

We have shown how trusts do not involve only private matters because they may affect legitimate creditors. What’s even worse, by allowing wealth concentration trusts affect income inequality, and by keeping their related persons secret, trusts may be involved in some of the worst types of financial crimes affecting the rule of law and a level playing field for all citizens.

A disproportionality, thus, is not disclosing trusts’ beneficial owners but rather ensuring trust secrecy.

[1] Law 2013-1117 dated 6 December 2013.

[2] Google Translation of point 6 of the ruling Décision n° 2016-591 QPC du 21 octobre 2016.

[3] In many countries, companies’ statutes and shareholders are publicly available. The UK Companies House already provides this at the beneficial ownership level, online, free and in open data format. The EU Directive will likely be amended to prescribe public access to companies’ beneficial owners under Art. 30 of the Directive. Foundations, which are legal entities that have similar effects and similar ownership structure as trusts are also covered under Art. 30. In the case of trusts, we are only referring to the public access to the identity of the settlor, trustee, beneficiaries and any other related party of the trust – but not to the whole trust deed.

[4] Privacy is usually associated with confidentiality, but both should be distinguished from financial secrecy. As TJN’s Financial Secrecy Index explains: “A bank won’t publish your account details on the internet, in the same way that a doctor won’t hammer details of your personal ailments onto the surgery door. [But] financial secrecy occurs when there is a refusal to share this information with the legitimate bodies that need it – for example to tax citizens appropriately, or to enforce criminal laws.”

[5] To understand the particularities of trusts, let’s put things in perspective. The US American resident in France could have also donated her assets right away, and even appointed someone to manage those assets, by subjecting the donation to a condition (this is available in some civil law countries like Argentina). The difference with the trust is that in a donation, the assets will already be held in the name of the beneficiaries, so their creditors will have access to them, as if trust assets had already been distributed to them. Another option would be writing a will or testament deciding how her assets will be distributed after her death. In this case, however, such partition of inheritance will depend on an essential factor: that by the time that she dies, she still owns all of those assets. While in this case the US citizen would be disposing of her wealth after her death, during her life third persons (e.g. creditors) wouldn’t be affected by such a decision. Assets would still belong to her, so creditors would have access to them to obtain the money they are owed.