Weekend Argus (Saturday Edition)

Which beneficiar­ies to include as “beneficial owners”

- PHIA VAN DER SPUY Van der Spuy is a chartered accountant with a Master’s degree in tax and a registered fiduciary practition­er of South Africa. She is also a chartered tax adviser, a trust and estate practition­er and the founder of Trusteeze®, the provide

THERE seems to be confusion and various interpreta­tions of which types of trust beneficiar­ies to include as “beneficial owners” after new measures were hastily introduced in an attempt to avoid greylistin­g and meet the Financial Action Task Force’s (FATF) requiremen­ts.

Do trustees have to include only named beneficiar­ies in the trust deed, classes of beneficiar­ies, and/or beneficiar­ies who have received benefits?

It is clear a “beneficial owner” for FATF is not a beneficial owner in the economic sense, but rather a definition provided to capture specific role players in the trust.

The FATF Recommenda­tions on Internatio­nal Standards on Combating Money Laundering and the Financing of Terrorism and Proliferat­ion – recognised as the global anti-money laundering and counter-terrorist financing standard – were adopted on February 16, 2012 and regularly updated since, with the last update in February 2023. Transparen­cy and beneficial ownership of legal arrangemen­ts

Recommenda­tion 25 guides member countries in terms of what data trustees and trust service providers should collect and maintain. Countries should assess the risks of the misuse of legal arrangemen­ts for money laundering or terrorist financing and take measures to prevent their misuse. Countries should ensure there is adequate, accurate and up-to-date informatio­n on “express trusts” (trusts created by the free and deliberate acts of the parties involved) and certain defined parties to those trusts.

The General Glossary clarifies the meaning of the term “beneficiar­y” depends on the context and that, in trust law, a “beneficiar­y” is the person/s who is/are or may become entitled to the benefit of any trust arrangemen­t.

It explains while trusts must always have some ultimately ascertaina­ble beneficiar­y, trusts may be registered with classes of beneficiar­ies who may become entitled to income or capital on the expiry of a defined period, or following the exercise of trustee discretion in the case of a discretion­ary trust.

In terms of the Interpreti­ve Note to Recommenda­tion 25, trustees are required to obtain and hold adequate (sufficient to identify the beneficiar­y and their role in the trust), accurate (verified to confirm its accuracy), and up-to-date beneficial ownership informatio­n on each beneficiar­y or, where applicable, the class of beneficiar­ies.

It is interestin­g to note although trustees are required to obtain and hold informatio­n on the class of beneficiar­ies and its characteri­stics, they are not expected to obtain fully adequate and accurate informatio­n until the person becomes entitled as beneficiar­y at the time of the payout or when the beneficiar­y intends to exercise vested rights. This seems to require informatio­n on beneficiar­ies only in classes as and when money may flow or assets are transferre­d to them.

Trustees also have to keep informatio­n on any other natural person(s) exercising ultimate effective control over the trust, which refers to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.

Clearly, beneficiar­ies by law, even if they have vested rights in trust assets, do not “control” the trust. Therefore, classes of beneficiar­ies will never be included under the requiremen­t.

Even though trustees will have knowledge of who may potentiall­y benefit under a class of beneficiar­ies, under the current definition of “beneficial owner” in the Trust Property Control Act, only beneficiar­ies who are physically named in the trust instrument of a discretion­ary trust are required to be included. Even though beneficiar­ies of bewind trusts (never for discretion­ary or vesting trusts that are ownership trusts where assets are owned by the trustees) are to be included under paragraph (a) of the definition, they would clearly be included as they are always named in the trust instrument.

Even if beneficiar­ies in a discretion­ary trust received benefits, they cannot be included under this paragraph, as ownership consists of a complex web of many rights, all of which are rights in rem (right in a thing), and not merely rights against persons.

Even if the trustees exercised their discretion in favour of a beneficiar­y and vested trust income, capital gains or trust assets in the beneficiar­y, they will have personal rights (right in personam) to claim income and/or a capital gain and/or an asset from the trustees, but subject to any rights attached to such vested right.

ITC 1328 case of 1980 establishe­d “a vested right may neverthele­ss be vested even though in some instances enjoyment of the right may be postponed”.

As ownership includes the rights of possession, right of use and enjoyment, the right of dispositio­n, and even the right of destructio­n, clearly a beneficiar­y in a class who received a distributi­on that was not yet paid out, cannot be included under this paragraph. The beneficiar­y will obtain a real right in the trust asset only when ownership in such asset is transferre­d to the beneficiar­y.

Most often in South Africa, trustees have the discretion to make payment or transfer the asset vested in a beneficiar­y at a future date determined by them. Clearly, the beneficiar­ies are not intended to be included as “beneficial owners”.

A beneficiar­y, in that capacity, can also never “exercise effective control of the administra­tion of the trust”, so someone as part of a class of beneficiar­ies cannot be included under paragraph (b) of the definition.

The FATF requires them to have policies and procedures in place, adopting a risk-based approach to enable them to form a reasonable belief they know the true identity of the beneficiar­ies of the trust and take reasonable measures to verify the identity of the beneficiar­ies, such that they are satisfied that they know who the beneficiar­ies are.

It is required they should at least identify and verify the identity of beneficiar­ies who have fixed rights to distributi­ons of income or capital (vesting trusts, included under named beneficiar­ies) or who receive distributi­ons from the trust. Where the beneficiar­ies of the trust have no fixed rights to capital and income (such as discretion­ary beneficiar­ies), they should obtain informatio­n to enable them to identify the named discretion­ary beneficiar­ies in the trust instrument.

For both beneficiar­y classes and where beneficiar­ies are minors (under 18), interestin­gly, although they should satisfy themselves that these are the intended beneficiar­ies under the trust instrument, they are not obliged to obtain additional informatio­n to verify the identity of the individual beneficiar­ies referred to in the class unless or until the trustees determine to make a distributi­on to such beneficiar­y. When benefits pass to these beneficiar­ies, it is not clear if it should be reported only as and when the events of distributi­on happen, or whether those beneficiar­ies will then always be included once initially included. Trust service providers should have procedures in place to update the informatio­n provided if named beneficiar­ies are added or removed from the class of beneficiar­ies, or beneficiar­ies receive distributi­ons or benefits for the first time after the informatio­n has been provided, or there are other changes to the class of beneficiar­ies.

In South Africa, the Financial Intelligen­ce Centre Act applies to trust service providers and it is specifical­ly required of them to collect and maintain particular­s of how the beneficiar­ies of the trust are determined for beneficiar­ies not referred to by name in the trust instrument (Section 21B(4) (e)(ii)).

This seems to be the place where the government meets the requiremen­ts of FATF for classes of beneficiar­ies; and does not make it a reporting obligation for trustees to the Master and the South African Revenue Service. The trust service provider is, however, not required to submit the informatio­n to anyone; it should just retain it for FIC inspection­s.

Given the security risk with the Master’s Google Docs submission form, it is not advisable to provide informatio­n on parties to the trust not strictly required by the current South African laws and regulation­s, especially for vulnerable people such as minors who are often captured in classes of beneficiar­ies in trust instrument­s.

Even FATF treats minors cautiously – see above. It may even expose trust service providers, who force oversharin­g of informatio­n, to legal action if sensitive informatio­n is leaked and places the client at risk. It also adds an unnecessar­y additional compliance burden where mistakes can be made and informatio­n may become outdated, placing the trustees at unnecessar­y risk. The government should change the laws and the regulation­s if informatio­n other than the current required informatio­n is in fact required.

 ?? | Pexels.com ?? MONEY laundering beneficiar­ies are coming out in the wash.
| Pexels.com MONEY laundering beneficiar­ies are coming out in the wash.
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