Trustees beware! You can now be fined and jailed!

27 February 2023 ,  André van NiekerkJohnny DavisMark le Riche 1460

Trusts have for some time now been the target of criticism for their alleged use and abuse in the money laundering environment. The latest challenge to the trust comes in the form of a major amendment to South Africa’s anti-money laundering framework by the General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Act 22 of 2022 (“Amendment Act”) which holds serious implications for trusts and trustees. In this article we will focus specifically on how the trust form is abused and how the Amendment Act aims to curb such abuse.

In South Africa, trusts are regulated in terms of our common law and the Trust Property Control Act 57 of 1988 (“Trust Act”). The Trust Act regulates the administrative aspects of trusts and is the primary statute that governs trust law in South Africa.

But why the negativity about trusts and how is the trust being used for illegal purposes?

The problem with trusts is that they can be used to conceal the true ownership and control of assets or can be used to channel illicit funds in a way that makes it difficult for authorities to effectively determine the ownership and control of the trust as well as trace the source and flow of funds to or from individuals that may be connected to criminal activities.

Clever money launderers set up multiple trusts with complex ownership structures, often involving other corporate entities, and so obscure the true identity and owners of these structures as well as the origin and flow of funds. The result is that the trust, a legitimate estate planning tool, has now become a red flag for authorities fighting money laundering.

Importantly though, it doesn’t mean that trusts are no longer valid or not allowed to be used for estate planning or other authorized purposes. It must just be understood that the trust has become a target for attention by anti-money laundering authorities who require increasing transparency and reporting from trusts to ensure that it is not being used for illicit activities.

Following on a recent negative report by the Financial Action Task Force (“FATF”), as well as the Greylisting, on identified weaknesses in South Africa’s financial regulatory framework, South Africa passed the Amendment Act late in December 2022 in an effort to address these shortcomings and improve our regulatory measures needed for the fight against money laundering.

The Amendment Act specifically also targets trusts and has imposed measures that is believed to help curb the abuse of the trust for criminal activities. The introduction of the concept of “beneficial ownership” as a new concept in our law of trust, aims to ensure that trusts keep accurate records of who the beneficial owners are i.e. the ultimate warm bodies that control the trust and stand to benefit from its assets and income. In addition, trustees are now required to record and report on its beneficial ownership, including changes to this ownership structure, with failure to do so attracting hefty fines and the possibility of jailtime for trustees, making non-compliance no light matter!

The crux is that these amendments aim to enhance the fight against the use of trusts for money laundering by requiring greater transparency in respect of the trust and its ownership and control, to be enforced with a big stick in the form of penalties and jailtime.

A number of provisions of the Amendment Act are already in force, with most of the remaining provisions taking effect as of 1 April 2023. A word of caution therefore to trustees to take note of these vital changes and make sure that your trust remains compliant and is not in contravention with reporting requirements and legislation. You are also welcome to contact any of our commercial or fiduciary advisors to discuss how we can assist you to ensure that you are ready for these new compliance requirements.

And be sure to keep an eye out for our follow up articles in which we explore in more detail the other areas affected by the Amendment Act as well as our online webinars coming soon on these new anti-money laundering amendments.

Related articles:

New anti-money laundering amendment legislation to affect companies and trusts
Alert: South Africa’s grey listing means extensive new compliance requirements!

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Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).

Related Sectors: Wealth Management