You can trust a lawyer

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Lawyers are probably the greatest obstacles to justice in the world. No, that's not an exam question (although it would be a good one if followed by the single word 'discuss'), it's a statement of belief. My belief.

Let's start with the Law Society in England who have today issued a press release on money laundering and trusts. The EU is rightly seeking to enhance money laundering provisions across Europe. One of its key requirements in the Third EU Money Laundering Directive, which has to be included in UK law by December 2007, is to improve the identification of the beneficial owners of funds. The reason is obvious: serious money launderers (including those who undertake tax evasion, which is a money laundering offence) seek to hide their ownership of funds through the use of trust, foundations, nominee owners of companies and the like.

The EU Directive is clear on the issue of trusts. It says a

Beneficial owner means the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. The beneficial owner shall at least include:

b) in the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds:

i) where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property of a legal arrangement or entity;
ii) where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of person in whose main interest the legal arrangement or entity is set up or operates;
iii) the natural person(s) who exercises control over 25% or more of the property of a legal arrangement or entity.

Now, I applaud the EU for that. There's a series of tests here that allow, on balance of probabilities a declaration to be made of who and where the likely beneficial owners of a trust are and reside. Any professional person could do this. A little judgement may be required in a few cases but in 99% (I mean that) of cases it will be obvious both who and where the "the class of person in whose main interest the legal arrangement or entity is set up" are.

But this obviously sensible law (because it is proposed that the above become UK law), required to tackle massive criminal activity is not good enough for the lawyers. They say the new law uses:

so vague a definition of beneficial owner - a legal concept uniquely created by English common law - that even lawyers may not know if they are contravening the law.

Rabinder Singh QC and Alex Bailin of Matrix Chambers, in an opinion commissioned by the Law Society, found: 'The definition of "beneficial owner"… is so inadequate as to create real uncertainty in the ambit of the associated criminal offences.

'Lawyers, even those experienced in the relevant field, could not advise with confidence when the onerous anti-money laundering obligations will apply in a variety of commonplace situations.'

They also said the criminal offences did not meet community law, common law and European Convention on Human Rights requirements 'of legal certainty and, accordingly, would be open to challenge'.

Let's be clear:

  1. Lawyers will know when they're breaking the law. They'll know exactly what they're doing. What they're worried about is that they might not be able to break the law (sorry - but see what lawyers do in Jersey with regard to running sham trusts, and in the Isle of Man as reported by the US Senate and you'll see what I mean, and respectfully, they're not so very different from English lawyers);
  2. On the balance of probability they'll be able to determine at any time who is intended to benefit from the trust - just ask the trustees for starters, and if in doubt err on the side of caution;
  3. Almost no trust has real doubt on these issues in reality - or they fail for uncertainty anyway. Alternatively, the issue is overcome in 99.9% of cases by 'letters of wishes', which any lawyer can refer to.

So what's the real objection? It's that I think lawyers don't want trusts to be subject to the EU Savings Directive, but once this law comes in there's no reasons why they shouldn't be subject to its provisions. After all, the beneficial owners of the funds and their location will have been determined. So the EUSD can be applied to the trust. Which, by the way will also be true therefore for trusts in Jersey and elsewhere. That's what this is about.

The UK government should very politely tell lawyers that their objections are hollow, fabricated and deny the ability of a professional person to form a judgement within the boundary of law that ensures that criminal activity is prevented. By all means the lawyer required to make a declaration on beneficial ownership when a trust has several possible beneficiaries should be protected from liability if their reasonable assumptions on the issue turn out to be wrong e.g. because circumstances change in a way that could not reasonably be foreseen (such as the death of a child). I'm happy with that protection. But saying criminal action (including tax evasion) cannot be stopped because lawyers are not clairvoyant is just farcical. And I don't think that's far from what the Law Society is doing.

PS If you want evidence in support of my argument that this is really about tax, in their briefing note the Law Society say the main uses of trusts are:

- in a will to manage the disposition of the deceased's estate
- in a family trust, to safeguard assets for future generations
- on someone's death intestate, when statutory trusts are imposed
- on the acquisition of land by more than one person
- when establishing a pension scheme
- when effecting life policies for the benefit of a family
- in the creation of an individual voluntary arrangement to avoid bankruptcy
- in setting up a charity
- to manage investments
- to facilitate the holding of financial instruments - such as insurance, bonds etc

The fact they don't mention tax once is both hypocritical, and a sure indicator that this is their real concern.