How To Perform Customer Due Diligence / KYC On A Trust? What Are The Main Risks From Money Laundering Perspective?

By Sikander Hayat 

Before we start to have a look at the KYC requirements for a Trust, we need to understand some basics about this entity type.

1.      What kind of legal entity is a Trust
2.      How many kinds of common Trusts structures are there
3.      Who normally use Trust entities and
4.      From Money Laundering point of view, what are the major risks

From money laundering point of view, Trusts can be a very tricky type of entity as it can be structured in such a way to avoid detection of real beneficiaries. Trusts can also be used as avehicle for tax evasion. Trusts can be set up in jurisdictions which are very opaque and make it difficult for any law enforcement agencies or counterpartiesto be sure of who is actually behind the trust.  We also need to watch out for situations where:

1.      The client establishes a trust when there seems to be little reason to do so
2.      The trust is established in a jurisdictionwhich has limited AML/CTF

A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created bya settlor, who transfers property to a trustee. The trustee holds that property for the trust's beneficiaries. Trusts exist mainly in common law jurisdictions and similar systems.
Trusts are created by settlors who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms under which it was built on. In some areas, it is possible for older beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime beneficiary and a trustee at the same time.

Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. The same conditions of a will may apply through a trust. Individuals who don't want their wills publicly posted opt for trusts instead.
Trusts can also be used for estate planning. Typically, the assets of a deceased individual are passed to the spouse and then equally divided to the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood.
Trusts can also be used for tax planning. The taxes relating to trusts are typically different compared to achieving the same thing through another route. In some cases, the tax consequences provided by using trusts are lower compared to other alternatives. As such, the usage of trusts has become a staple in tax planning for individuals and corporations

Bare trusts
Interest in possession trusts
Discretionary trusts
Accumulation trusts
Mixed trusts
Settlor-interested trusts
Non-resident trusts
Each type of trust is taxed differently. Trusts involve a ‘trustee’, ‘settlor’ and ‘beneficiary’.

Bare trusts
Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary. Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.
Example: You leave your sister some money in your will. The money is held in trust. Your sister is entitled to the money and any income (eg interest) it earns. She can also take possession of any of the money at any time.

Interest in possession trusts
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
Example: You create a trust for all the shares you owned. The terms of the trust say that when you die, the income from those shares go to your wife for the rest of her life. When she dies, the shares will pass to your children. Your wife is the income beneficiary and has an ‘interest in possession’ in the trust. She doesn’t have a right to the shares themselves.

Discretionary trusts
These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital. Depending on the trust deed, trustees can decide:
a)      What gets paid out (income or capital)
b)      Which beneficiary to make payments to
c)      How often payments are made
d)      Any conditions to impose on the beneficiaries

Discretionary trusts are sometimes set up to put assets aside for:
A future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life beneficiaries who aren’t capable or responsible enough to deal with money themselves

Accumulation trusts
This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.

Mixed trusts
These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.

Settlor-interested trusts
These are where the settlor or their spouse or civil partner benefits from the trust. The trust could be:
An interest in possession trust
An accumulation trust
A discretionary trust
Example: You can no longer work due to illness. You set up a discretionary trust to make sure you have money in the future.
You’re the settlor - you may also benefit from the trust because the trustees can make payments to you.

Non-resident trusts
This is a trust where the trustees aren’t resident in the UK for tax purposes. The tax rules for non-resident trusts are very complicated.

How To Perform KYC Checks On A Trust?
1.      Full legal name and address of trust

2.      Address for the legal trustee

3.      Document of legal existence

4.      Government ID

5.      Appointment of Trustees document

6.      Identify source of wealth/ assets settled into the Trust

7.      Confirm line of business of settler

8.      Identify type of Trust

9.      Verify identity of protector (if applicable)

10.  Verify identity of settlor.

11.  Verify identity of all ascertainable beneficial owners of the trust

12.  Proof of legal existence of corporate Trustees.

13.  List names and verify identity of authorized signatories of the corporate trustee

14.  Confirm appointment of directors/ officers of corporate Trustees.

15.  List of authorized signatories and anyone with trading authority on the account to be opened.

16.  Verify identity of  individual Trustees

17.  PEP & Negative News Search

18.  Document Translations (if applicable)

19.  for entities in high risk jurisdictions;

20.  Certified evidence of legal existence

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  1. Big thumbs up for the great information you share on this post.
    Taxation Services in Pakistan

  2. Excellent is the word to describe this great lecture you have put here in writing.

  3. Clear and concise- thank you!

  4. This comment has been removed by the author.

  5. Awesome post with wonderful piece of information. Thanks for taking time to share this with us. Looking forward for more posts from you. Check this out: Top KYC Solution Companies


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