The AML/CFT Handbook, introduced in March 2019 (how time flies!), was greeted with the expectation that it would be a user-friendly manual containing all that was needed to adhere to the new Schedule 3. It certainly clarified many aspects which had caused confusion in the past and combined the various information sources produced by the GFSC.
The one thing that we all knew would be tested later was the claim that it could be easily updated to react quickly to the needs of the sector. This was considered essential to enhance Guernsey’s reputation as a jurisdiction open for business. The latest proposals for changes to the Handbook certainly look like a quick and pragmatic reaction to business needs but do they achieve that aim?
In my last blog, I looked at the proposals to reduce the amount of identification information required for beneficiaries and took a look at some of the issues which may arise without clear guidance. In this blog, I am looking at the changes proposed in respective of the verification – or not – of the beneficial owners of corporate trustees.
When a firm enters a business relationship with a trust where the trustee is a legal person, the firm must identify and take reasonable measures to verify any natural person who is the beneficial owner of that corporate trustee. That is unless the corporate trustee is a “transparent legal person”. This new concept is defined in Schedule 3 and includes a regulated person within the meaning of Section 41(2) of the Beneficial Ownership Law. In simple terms, this means a trustee which is a company subject to the GFSC Handbook does not need its beneficial owners verified.
However, the definition of transparent legal person – and therefore when those benefits of reduced CDD apply – does not currently extend to a corporate trustee in another jurisdiction which is subject to the same or equivalent provisions of the Handbook. So, when dealing with a non-Guernsey corporate trustee – even one based in an Appendix C country – the identity of the beneficial owners of that company need to be identified and verified. This is even if they have been through the same rigorous vetting process to be regulated.
It could be said that this inconvenience of providing such due diligence every time a corporate trustee enters into a business relationship is an occupational hazard. However, when places like Jersey do not require such due diligence under their Money Laundering legislation, it is easy to see why some corporate trustees would consider doing business elsewhere because of this requirement.
So the new proposal means it “may be possible” to rely solely on a summary sheet identifying ownership details of a corporate trustee if it, or its parent, is subject to the same or equivalent provisions of the Handbook in the jurisdiction where it is based and supervised. But this is only in low or standard “risk scenarios” because if it is a high “risk scenario” and neither the corporate trustee nor its parent is based in a jurisdiction with equivalent provisions, then reasonable measures need to be taken to verify its beneficial owners.
These proposals beg four questions:
- what do the GFSC mean by saying it “may be possible”?
- what elements need to be taken into account when identifying a “risk scenario”?
- what verification is needed in a high “risk scenario” if both or only one of the corporate trustee and its parent is based in a jurisdiction with equivalent provisions?
- what does the new phrase “risk scenario” mean anyway?
It would appear that the first new paragraph, 7.115, is intended to set the scene for when reduced due diligence can be applied to a corporate trustee. It requires a firm to consider the ML and FT risks associated with a particular beneficial owner who has influence over the business and affairs of that corporate trustee. The following two paragraphs, 7.116 and 7.117, talk about the “risk scenarios” and set out when the location of the corporate trustee and its parent is relevant and the means of assessing whether they are in a jurisdiction which has equivalent AML/CFT legislation and supervision.
But does the wording of these new paragraphs mean that a firm has to assess the “risk scenario” of the corporate trustee’s beneficial owners? If so, does it mean if they are considered low or standard risk, then this reduced due diligence applies? Or does it also depend on whether the jurisdiction of the corporate trustee or parent is low or standard risk? In any event, what is clear is that, when making a decision, a firm needs to look into the identity of the corporate trustee’s beneficial owners and consider their influence – no easy task.
As to the third question, hopefully if either or both corporate trustee and parent are in an equivalent jurisdiction, this will suffice to remove the need for verification of the identify of its beneficial owners and be considered a low or standard “risk scenario”.
As to the introduction of this new phrase “risk scenario”, it has been said that the GFSC, by introducing this phrase, are enabling this reduced verification for all business relationships no matter their overall risk rating. This may seem a practical solution considering the beneficial ownership of a corporate trustee may not be relevant to the overall risk of a business relationship but, if this is the case, this needs to be clarified. This clarification is necessary because, if it is not, it could lead to claims that other elements of the business relationship are also irrelevant to the overall risk and so require less CDD. Whilst this may not be a bad thing, it is a departure from normal practice and one which may confuse rather than assist if its intention is not made clear.
As I noted in my last blog, in respect of the amendments proposed for the reduction of identification information for certain beneficiaries, the need for clarity is forever present if the benefits are to be reaped.