Earlier this month, the Financial Action Task Force (FATF) updated its guidance on Recommendation 25 of the FATF Recommendations, relating to transparency and beneficial ownership of legal arrangements.
The guidance can be found on the FATF’s website. It comes after similar guidance was released last year on Recommendation 24, relating to transparency and beneficial ownership of legal persons.
Who needs to read it? Why?
This guidance, like the FATF Recommendations and their interpretive notes, is intended to assist countries in developing their anti-money laundering and countering financing of terrorism (AML/CFT) regimes to align with the FATF’s expectations. As a result, it is not directly in force under New Zealand law.
However, we expect it will be considered by the Government in developing our regime, and it is intended to provide some colour for reporting entities seeking to understand the money laundering and terrorism financing risks that can be associated with legal arrangements.
What does it cover?
Under the FATF Recommendations, a legal arrangement is a trust or another similar arrangement. The New Zealand regime, as well as trusts, also includes partnerships, charitable entities, and unincorporated societies. In essence, they are arrangements of persons that do not constitute a separate corporate entity.
While recognising that legal arrangements are often used for essential and legitimate purposes, this guidance discusses the kinds of risks of abuse they can be vulnerable to (such as from their private nature, ease of formation, flexibility, and separation of legal and beneficial ownership). It then goes on to explore what can be done to mitigate those risks (with a focus on transparent beneficial ownership information).
It also steps through a number of common parties to legal arrangements, and discusses issues relating to particular sectors (such as trust and company service providers and the legal profession) and what authorities may need to do to address those in their regime.
Our view
New Zealand has one of the highest rates of trusts per head of population of all OECD countries, ranging in size from Te Titiri settlement trusts through to individual family trusts. We also have a high level of other legal arrangements, such as unincorporated societies and associations, partnerships, and the like. As a result, their AML/CFT treatment is a more significant issue for us than for jurisdictions that we might otherwise regard as comparable.
This FATF guidance, together with its counterpart for legal persons, is timely, as the New Zealand Government has been investigating the development of a beneficial ownership register in New Zealand (which we have previously discussed).
Dealing with legal arrangements can be a complicated matter for reporting entities, so they may find it useful to look over what the FATF has in mind when addressing them.
What next?
If you have any questions about this guidance, the FATF Recommendations, or New Zealand’s AML/CFT regime more generally, please do not hesitate to contact one of our experts.
This article was co-authored by Sam Short, Senior Solicitor, and William Ma, Solicitor, from our Banking and Financial Services team.
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