Understanding Trusts and Similar Legal Arrangements

Trusts and similar legal arrangements are pivotal components in the financial and legal frameworks of the European Union, especially with regards to anti-money laundering (AML) directives and regulations. The 4th and 5th Anti-Money Laundering Directives (AMLD) of the EU, along with Germany’s Money Laundering Act (GwG) and the BaFin Interpretation and Application Guidance, provide a comprehensive structure for the management, regulation, and oversight of these entities. This guide aims to elucidate the key aspects and obligations surrounding trusts and similar legal arrangements, ensuring a clear understanding for legal professionals, financial entities, and trustees alike.

Defining Trusts and Similar Legal Arrangements

Trusts are recognized as legal arrangements where assets are managed by one party for the benefit of another. The 4th AMLD expands this definition to include any legal arrangements with structures or functions akin to trusts. The German GwG aligns with this definition, emphasizing the legal recognition of trusts based on the law applicable to their establishment.

Identification of Beneficial Owners

Both the 4th and 5th AMLDs underscore the importance of identifying the beneficial owners of trusts, which include settlors, trustees, protectors (if any), beneficiaries, and any individuals exercising ultimate control. The German GwG, in harmony with the AMLDs, mandates that trustees obtain, retain, and update information on beneficial ownership, ensuring transparency and compliance.

Transparency and Reporting Obligations

The 5th AMLD introduced enhanced transparency requirements, necessitating the registration of beneficial ownership information in a central register. This directive applies not only to trusts but also to similar legal arrangements. In Germany, trustees are obligated to report beneficial ownership information to the transparency register, with specific conditions for those outside the European Union engaging in business relationships or acquiring real estate within Germany.

Due Diligence and Risk Management

The BaFin Interpretation and Application Guidance highlights the due diligence obligations for entities involved with trusts and similar arrangements. This includes verifying the identity of beneficial owners and assessing the plausibility of the information provided, especially when the contracting party acts as a trustee. The guidance also addresses the trading on instruction and the need for obliged entities to be vigilant for any anomalies that might indicate a deviation from normal business relationships.

Cross-Border Cooperation and Access to Information

The AMLDs facilitate cross-border cooperation among Member States, ensuring that information on beneficial ownership is readily accessible to competent authorities, financial intelligence units (FIUs), and obliged entities. The aim is to create a cohesive and efficient framework for monitoring and regulating trusts and similar legal arrangements across the EU.

4th AMLD

The specified articles from the 4th AMLD (Directive (EU) 2015/849) focus on defining the term ‚beneficial owner‘ within the context of trusts and similar legal entities, aiming to enhance transparency and combat money laundering and terrorist financing. Here’s a summary with a focus on „trust“:


The directive delineates the roles within a trust that qualify as ‚beneficial owners‘:

  1. Settlor: This is the person who creates the trust by transferring assets into it, essentially initiating the trust’s existence.
  2. Trustee(s): These are the individuals or institutions appointed to manage the trust’s assets and operations, acting in the best interests of the beneficiaries.
  3. Protector: An optional role, not always present, where an individual is appointed to oversee the trustees, ensuring they adhere to the trust’s purposes and terms.
  4. Beneficiaries: Defined as those individuals or a class of persons intended to benefit from the trust. If specific beneficiaries have not been determined, the directive acknowledges the broader class of persons for whom the trust operates as the beneficial owners.
  5. Others with Control: This includes any other individuals who exert ultimate control over the trust, whether through direct or indirect means, or other mechanisms not explicitly mentioned.

Similar Legal Entities

For entities akin to trusts, such as foundations, the directive applies the same principles to identify beneficial owners. It extends the definition to cover individuals holding positions equivalent to those in trusts (settlor, trustees, protector, beneficiaries, or others with control), even if the legal structure or nomenclature differs.

Key Requirements for Obliged Entities

  1. Sufficient Information: Obliged entities, which include financial institutions, lawyers, accountants, real estate agents, and others subject to AML rules, are required to gather adequate information about beneficiaries who are defined by characteristics or a class in a trust arrangement. This is to ensure they have a clear understanding of who the beneficiaries are.
  2. Establishing Identity: The information collected must be comprehensive enough to enable the obliged entity to identify the beneficiary at critical points of interaction. These points include when a payout from the trust is made to a beneficiary or when a beneficiary exercises vested rights associated with the trust.
  3. Timing and Clarity: The directive emphasizes the importance of being able to establish the beneficiary’s identity precisely when it becomes necessary, such as at the time of payout or when the beneficiary’s rights are exercised. This ensures that at any given point, the entity can determine who stands to benefit from the trust and adhere to the necessary AML compliance checks.

Beneficial Ownership Information Requirements

  1. Trustee Obligations: Trustees of express trusts governed by the law of Member States are required to obtain and maintain accurate and current information on beneficial ownership. This includes details about the settlor, trustees, protector (if any), beneficiaries or class of beneficiaries, and any other individuals exerting significant control over the trust.

Disclosure and Accessibility

  1. Disclosure to Obliged Entities: Trustees must disclose their status and provide beneficial ownership information to obliged entities (like banks and legal firms) when entering into business relationships or conducting transactions that meet specified thresholds.
  2. Access by Authorities: The information must be readily accessible to competent authorities and Financial Intelligence Units (FIUs) to facilitate oversight and investigations.

Central Register Requirements

  1. Central Register: Trusts that have tax consequences are required to have their beneficial ownership information recorded in a central register. This register is accessible to authorities and FIUs, and possibly to obliged entities for due diligence purposes, without alerting the trust’s parties.
  2. Data Accuracy: Information in the central register must be adequate, accurate, and kept up-to-date.
  3. Due Diligence: Obliged entities cannot solely rely on the central register for customer due diligence; they must also apply a risk-based approach.
  4. International Cooperation: Competent authorities and FIUs must be able to share the information with their counterparts in other Member States efficiently.

Extension and Reporting

  1. Application to Similar Arrangements: The measures apply not only to trusts but also to other legal arrangements with similar structures or functions.
  2. Commission Report: By June 26, 2019, the European Commission is tasked with assessing the technical requirements for the safe and efficient interconnection of central registers, potentially leading to legislative proposals.

5th AMLD

The 5th Anti-Money Laundering Directive (Directive (EU) 2018/843), through the amendments specified in Article 1, significantly enhances the transparency and regulatory oversight of trusts and similar legal arrangements within the EU.

Enhancing Transparency and Market Confidence (Recitals 25-32)

  • Importance of Accurate Information: Recital (25) highlights the necessity for accurate and current beneficial ownership information as a critical factor in tracing criminal activities, given the global financial system’s complexity and its potential exploitation for money laundering and terrorist financing.
  • Clarification of Responsibility: Recital (26) seeks to clarify which Member State is responsible for monitoring and registering beneficial ownership information of trusts and similar legal arrangements. It points out the issue of certain trusts not being monitored or registered due to differences in Member States‘ legal systems. It suggests that registration should occur where trustees or equivalent persons are established or reside and underscores the need for Member State cooperation and interconnection of registries to avoid multiple registrations within the EU.
  • Comparable Rules: Recital (27) argues that rules regarding access to beneficial ownership information for trusts and similar legal arrangements should be comparable to those for corporate entities. It leaves it to Member States to decide how similar trusts are to corporate entities and aims to prevent the misuse of trusts for illicit activities.
  • Transparency Levels: Recital (28) acknowledges that Member States, considering data protection rules, may determine the transparency level for trusts not comparable to corporate entities. It allows for wider access to beneficial ownership information if deemed necessary to prevent financial system misuse, with careful consideration of individual rights, especially privacy and data protection. Access to this information could be granted to those demonstrating a legitimate interest or inquiring about trusts controlling corporate entities outside the EU.
  • Legal Certainty and Identification: Recital (29) emphasizes the need for legal certainty and a level playing field by requiring Member States to identify and notify the Commission of trusts and similar legal arrangements recognized under their national law, aiming for their publication in the Official Journal of the European Union to facilitate identification by other Member States.
  • Public Access Benefits: Recital (30) supports public access to beneficial ownership information, arguing that it enhances the integrity of business transactions and the financial system by allowing civil society scrutiny, aiding investigations, and deterring misuse through reputational impact. It also notes the benefits for financial institutions and authorities, including those in third countries, in combating money laundering and terrorist financing.
  • Disclosure Regime: Recital (31) emphasizes that investor and public confidence in financial markets is significantly influenced by the transparency of beneficial ownership and control structures, particularly in the EU’s concentrated ownership environment. While large investors can promote long-term growth, there’s a risk of asset diversion for personal gain by controlling owners, which transparency aims to mitigate.
  • Access to Information: Recital (32) underscores the importance of a coherent and coordinated approach to providing public access to beneficial ownership information of both corporate entities and trusts. Clear rules should enable third-party verification of beneficial owners across the Union, enhancing market integrity.

Coherent Legal Framework (Recital 33)

  • Comparable Rules: Recital (33) calls for a legal framework that ensures consistent access to beneficial ownership information for trusts and similar arrangements, once registered, akin to the transparency requirements for corporate entities. This aims to create a uniform standard across the EU for accessing ownership information.

Balancing Interests (Recital 34)

  • Fair Balance: Recital (34) highlights the need to balance the public interest in preventing financial crimes against the fundamental rights of data subjects. The information made publicly available should be limited and specific, focusing on the economic activities of beneficial owners without unduly compromising their privacy. It also mentions the possibility of including nationality information for non-native beneficial owners in the central register.

Public Scrutiny and Data Retention (Recital 35)

  • Enhanced Scrutiny: Recital (35) argues that increased public scrutiny through accessible beneficial ownership information can help prevent the misuse of legal entities for purposes like tax avoidance. It stipulates that such information should remain available in national registers for at least five years after the registration need ceases, with provisions for Member States to process this information further if it serves a public interest and is proportionate.

Jurisdiction and Access to Information (Recital 41)

  • Governing Law: The law that governs access to information and defines „legitimate interest“ should be that of the Member State where the trustee of a trust or equivalent person in a similar legal arrangement is established or resides. If the trustee or equivalent person is not based in any Member State, the governing law is that of the Member State where the trust’s beneficial ownership information is registered according to the directive.

Defining Legitimate Interest (Recital 42)

  • National Definition: Member States are tasked with defining „legitimate interest“ both as a broad concept and specifically as a criterion for accessing beneficial ownership information. This definition should not be narrowly limited to situations involving ongoing administrative or legal proceedings.
  • Inclusion of Preventive Work: The definition of legitimate interest should encompass the preventive activities related to anti-money laundering, counter-terrorist financing, and associated offenses conducted by NGOs and investigative journalists, where applicable.
  • Cross-border Access: Upon the establishment of interconnected beneficial ownership registers across Member States, access to the information in these registers should be governed by the legitimate interest definition of the Member State where the trust or similar legal arrangement’s beneficial ownership information is registered. Access decisions should be made by the relevant authorities of that Member State.
  • Appeal Mechanisms: Member States may set up appeal mechanisms against decisions granting or denying access to beneficial ownership information, ensuring a balance between transparency and privacy rights.
  • Cooperation and Information Exchange: Authorities responsible for the beneficial ownership registers are encouraged to cooperate and share information with their counterparts in other Member States. This is particularly important for trusts and similar legal arrangements that are governed by the law of one Member State but administered in another, ensuring efficient registration and information exchange.

Amendments to Article 3

  • Expanded Definition of Beneficial Owners: The directive broadens the definition of beneficial owners in trusts to include settlors, trustees, protectors (if any), beneficiaries or the class of persons for whom the trust is set up, and any other natural person exercising ultimate control over the trust through direct or indirect ownership or other means.

Amendments to Article 14

  • Proof of Registration: Obliged entities, when entering new business relationships with trusts or similar legal arrangements, must now collect proof of their registration or an excerpt from the beneficial ownership register, ensuring that these entities are compliant with beneficial ownership information requirements.

Comprehensive Amendments to Article 31

  • Applicability to Trusts and Similar Arrangements: The amendments clarify that Article 31 applies not only to trusts but also to other legal arrangements with similar structures or functions, such as fiducies, Treuhand, or fideicomisos, and require Member States to identify characteristics that determine similarity to trusts.
  • Beneficial Ownership Information: Trustees or equivalent figures in similar arrangements must obtain and hold accurate and current information on beneficial owners, including settlors, trustees, protectors, beneficiaries, and those with effective control.
  • Central Register Requirement: The directive mandates the establishment of central registers for beneficial ownership information of trusts and similar arrangements. This requirement applies to the Member State where the trustee or equivalent figure is established or resides, or where the trust engages in business relationships or acquires real estate.
  • Access to Information: Competent authorities, FIUs, obliged entities, and any person demonstrating a legitimate interest or filing a written request related to trusts with controlling interest in corporate entities, are granted access to beneficial ownership information. The accessible information includes the name, month and year of birth, country of residence, and nationality of the beneficial owner, along with the nature and extent of the beneficial interest.
  • Data Protection and Exemptions: Provisions are made for the protection of personal data, and Member States may exempt access to information in cases where it would expose the beneficial owner to risks such as fraud or violence, with exceptions for financial institutions and certain obliged entities.
  • Interconnection of Registers: The central registers must be interconnected via the European Central Platform to facilitate access to beneficial ownership information across Member States.
  • Retention and Reporting: Information must be retained in the national registers and through the interconnection system for at least five years and no more than ten years after the registration need ceases. Member States are required to report the categories and characteristics of trusts and similar arrangements to the Commission for consolidation and publication.

German GwG

The German GwG provide a detailed framework for the treatment of trusts and similar legal arrangements in terms of beneficial ownership, transparency, and obligations for trustees and other involved parties.

Definitions and Scope

  • Trust Definition: A trust is defined as a legal arrangement recognized as such if the law applicable to its establishment includes provisions for trusts or similar legal institutions. This definition encompasses legal arrangements that are modeled on trusts, even if not explicitly named as such.

Identification of Beneficial Owners

  • Beneficial Owners in Trusts: For foundations and similar legal arrangements, beneficial owners include settlors, trustees, protectors, beneficiaries (or the class of beneficiaries if not yet designated), and any natural person with direct or indirect controlling influence over asset management or distribution.
  • Trading on Instruction: When transactions are carried out on someone’s instruction, that individual is considered the beneficial owner. This also applies to trustees acting under instruction.

Obligations in Business Relationships

  • Identification Requirements: When trusts or similar arrangements designate beneficiaries by characteristics or class, obliged entities must obtain enough information to identify the beneficial owner at the time of a transaction or when rights are exercised.
  • Disclosure by Trustees: Trustees initiating a business relationship or conducting transactions above specified thresholds must disclose their status and provide relevant information to the obliged entity without delay.

Transparency and Reporting Obligations

  • Transparency Requirements for Trustees: Trustees based in Germany or those engaging in business relationships or acquiring real estate in Germany on behalf of a trust must maintain up-to-date information on beneficial owners and report this to the transparency register. This includes information on the beneficial owners‘ identities and nationalities.
  • Exemptions: Trustees already complying with these requirements in another EU member state may be exempt under certain conditions, such as if they or the contracting party with which the trust maintains a business relationship is based in that member state.
  • Electronic Notification: Notifications to the registrar must be electronic and include unambiguous identification of the trust, along with the nature and extent of the beneficial interest.
  • Changes and Dissolutions: Trustees must also notify the registrar of any changes such as renaming, dissolution, or termination of the trust’s obligation under subsection (1).
  • Applicability to Other Legal Arrangements: The obligations extend to non-legal capacity foundations and equivalent legal arrangements based in Germany, with a focus on those serving the donor’s own interest.
  • Access to Information: The German Financial Intelligence Unit and supervisory authorities have the right to inspect or be provided with the stored information by trustees, facilitating oversight and compliance.
  • Regulatory Details: The Federal Ministry of Finance, in consultation with the Federal Ministry of Justice and Consumer Protection, may specify further requirements and characteristics defining the scope of trusts and similar legal vehicles covered by these obligations.

BaFin-Interpretation and Application Guidance on the German GwG

The BaFin Interpretation and Application Guidance on the German Money Laundering Act (GwG) provides detailed instructions on managing risk and conducting customer due diligence, particularly in relation to trusts and similar legal arrangements.

Risk Management and Customer Due Diligence

  • Identification of Beneficial Owners: Entities are required to clarify if a beneficial owner exists for trusts and similar legal arrangements and, if so, to identify them according to Section 10 (1) no. 2 of the GwG. This includes obtaining and verifying necessary information to establish the identity of beneficial owners.

Specific Definitions of Beneficial Owners

  • Foundations and Similar Structures: For foundations with legal capacity and similar structures managing or distributing assets in a trust capacity, beneficial owners are defined as settlors, trustees, protectors, named beneficiaries, groups of persons for whose benefit the assets are managed or distributed, and any natural person exerting direct or indirect control over asset management or distribution.
  • Exclusion of Founders: The founder of a foundation with legal capacity is not considered a beneficial owner unless they are also a member of the management board or can otherwise control the foundation.
  • Beneficiaries: In foundations, beneficiaries are specifically those named in the act of formation as entitled to benefits. If not yet determined, the group of persons primarily intended to benefit from the foundation’s assets should be identified and registered.
  • Disclosure Requirements: Administrators of legal structures, including trusts, must disclose their status to obliged entities when conducting transactions that trigger due diligence obligations and provide all necessary information to identify beneficial owners.

Trading on Instruction

  • Trustee as a Contracting Party: When a contracting party acts as a trustee, it is considered trading on instruction for the person whose interests they represent.

Due Diligence Obligations for Identifying Beneficial Owners

  • Plausibility Checks: Obliged entities must assess the plausibility of information provided about the business relationship, especially when the contracting party is acting as a trustee. This assessment differs depending on whether the trustor is a natural or legal person, with various verification measures required to identify the beneficial owner.
  • Verification Measures: For legal persons acting as trustors, verification includes inspecting registers, obtaining register excerpts, and conducting plausibility checks based on publicly available information or the obliged entity’s own knowledge. It also involves clarifying participation structures and verifying indirectly participating persons with significant equity interests, especially when there are no indications of a natural person exercising control.