Additional sanctions against trust offices – Really required?

Additional sanctions against trust offices – Really required?

Each of us is familiar with the degrading conditions that have dominated the news in recent weeks. The response of the international community has also been clear; the level of sanctions imposed on companies, natural persons and other affiliated entities has been intensified from all angles. The intensification of the sanctions regime does not only affect sanctioned parties. It also has repercussions on the companies that have to apply the sanctions regulations  when performing their services. Trust offices are particularly in the spotlight of the public opinion and politics.

This also follows from, among other things, the parliamentary questions imposed by the Dutch political party GroenLinks and the answers provided by the Minister of Finance which were widely reported in the news last week. The call for a stronger signal towards Russia is clear and is understandable. At the same time, the question arises whether the ideas as outlined by the Minister of Finance are going to have us achieve the goal that is being pursued. The (limits of the) intended additional sanctions in relation to trust offices are touched upon in this blog. In doing so, I also take the opportunity to provide some context on the subject.

Dutch sanctions legislation – internal organizational safeguards and reporting obligation

Sanctions legislation in the Netherlands is aimed at maintaining and/or restoring international peace and security and promoting the international legal order and combating terrorism. The Dutch Sanctions Act 1977 (Sw) provides the basis for the elaboration of (inter)national rules to implement international sanctions measures, whereby, if necessary, the Minister of Finance may also issue ministerial sanctions regulations[1] . The Dutch Regulation on Supervision pursuant to the Sanctions Act 1977 (Regeling Toezicht Sanctiewet 1977) (the Dutch Regulation) includes rules for the purpose of compliance with provisions of the Sw.

The Dutch Regulation is mainly of interest to financial companies under supervision and to supervisors of these financial institutions. The Dutch Regulation states that institutions[2] must incorporate safeguards into their AO/IC to ensure compliance with the sanctions regulations. For example, institutions must ensure that they have built in control mechanisms into their AO/IC and have their records in order to be able to freeze the financial resources of that relationship in the event of a “hit” as a result of a check of the sanctions lists, or to prevent the provision of these resources to such a sanctioned party.

Pursuant to Article 3 of the Dutch Regulation, if an institution (such as a pension fund or a trust office) discovers that the identity of someone involved in a financial service or financial transaction corresponds with a person or entity on a sanctions list, it must immediately notify the Dutch Authority of the Financial Markets (Stichting Autoriteit Financiële Markten, AFM) or the Dutch Central Bank (De Nederlandsche Bank, DNB) accordingly. When performing such notification, the notifying party must also submit the details of the identity of that relationship to the supervisory authorities. This is the so-called duty to report. The transaction history must also be considered in this process. The freezing of funds after a “hit” with a party on a sanctions list will in principle continue until the sanctions regime is changed and there is no longer an obligation to freeze funds, an exemption is granted or the Minister of Finance or DNB has issued a notice to that effect.

Supervision of sanctions in the Netherlands

Regulators have been paying extra attention to compliance with anti-money laundering and sanctions legislation in recent years. This has not diminished in the context of the stricter sanctions. On its website, for example, DNB has already provided insight in how it assesses the ongoing due diligence process at institutions that are subject to the Dutch AML laws and Sw and in the beginning of March this year has paid attention to the steps it expects financial institutions to take in the event of a sanctions hit.

All in all, eyes are not only on the parties included on the sanctions lists, but precisely (or perhaps even, especially) on the service providers who are active in the financial markets and provide services to these now-sanctioned (legal) persons or affiliates.

Proposed requirements and sanctions against trust offices in particular

Because of the characteristics of their services, trust offices are subject to an increased integrity risk. In view of the war and the sanctions imposed as a result thereof, among others, trust services are put under an even greater magnifying glass. The assumption seems to be that many assets related to the Russian regime are parked in the Netherlands and that trust offices play a role in this.

In a recent publication[3] from the NOS, for example, wording along the following lines was stated: “A lot more is possible in terms of sanctions,” says Minister of Finance Kaag. “We are looking at the trust offices, the service offices for Russian investors. Can we crack down or ban those? ” Among other things, Kaag sees possibilities to impose more sanctions with respect to the service providers of letterbox companies, according to the answers she gave to the previously mentioned parliamentary questions. In this context, the Minister explicitly mentions banning the provision of trust services to clients and beneficial owners (UBOs) of clients from Russia and Belarus.[4] According to the Minister, this ban will make it more difficult for wealthy individuals from these countries to have their money flow through the European Union. This group of wealthy individuals would capture those with close ties to the president or those who benefit from the Russian regime. The Minister indicates that this approach would be most successful if adopted at the European level, but that she does not rule out the possibility that (emergency) legislation would be adopted at the domestic level to facilitate this.

The Minister further addresses the question of whether trust offices with cross-border services, namely those with overseas offices and working for Russian UBOs, will be forced to disclose the constructions that these trust offices enable through Dutch and other jurisdictions. The Minister indicates that in principle a trust office has no legal obligation to disclose the constructions with UBOs, even if these are Russian. In the Netherlands, trust offices are subject to disclosure requirements towards the Dutch supervisory authorities when incidents occur or when a sanctioned UBO at a client is identified. In addition, trust offices must comply with sanctions legislation at all times and report unusual transactions to FIU-Netherlands. The Minister states that her commitment is to prohibit trust offices from serving Russian clients. In that case, (forced) openness in this respect will not (or no longer) be necessary, since it will then simply be generally prohibited to work for entities based in Russia or for entities with a UBO based in Russia, regardless of whether these (legal) persons have been sanctioned or not.

In addition to the above topics, the responses also cite possible sanctions such as, for example, the seizure (on a European basis) and global registration of assets of sanctioned persons, the further expansion of the sanctions lists to include new persons and entities that support, benefit from and/or generate income for the Russian government, the elimination of the safe harbor for interest and royalty pass-throughs, the expansion of (spontaneous) information exchange in the case of exempted alienation profits, and the restriction of investment protection constructions and reporting exemptions. It is mentioned that these various options are currently being investigated and/or assessed for feasibility, proportionality and subsidiarity, and in the light of the protection of fundamental rights. More clarity on this is likely to be expected in the (near) future.

The aforementioned NOS publication also shows the reaction of the trade association of trust offices. It responded by saying that most Dutch trust offices hardly have any ties with Russia and that trust offices continuously work with sanction lists in their daily practices and that they check all their clients after the tightening of the sanction lists. In case of a ‘hit’ the assets are immediately frozen.

Not just a “crisis measure”?

Whereas the expectation would have been that the (answers to the) parliamentary questions would only address very specific items about the current situation and the application of any additional sanctions considered by the Minister in that context, strikingly enough reference is also made to a more general study that is currently being conducted into (the functioning of) the trust sector in the Netherlands. The question was raised whether the Minister is prepared to accelerate the introduction of a bill to implement a Dutch ban on the provision of trust services. Kaag replied that the study into the future of the trust sector is taking into account the social and financial-economic (added) value of the trust sector, in the broadest sense of the word, and that the researchers are considering various scenarios, including the scenario of a total ban on the provision of trust services in the Netherlands. The results of this study are expected in the summer, after which the Minister will present her conclusion to the House.

Attention is also briefly paid to the illegal provision of trust services in a more general sense. Here, too, the Minister states that it is currently being investigated whether more intensive supervision and extra resources for supervisors are needed to curb the illegal provision of trust services as effectively as possible. In addition, the Illegal Trust Services Project of the various national supervisory and investigative authorities has been launched to improve the joint approach of the authorities in this context as well. Finally, in a broader sense, the responses also mention that the investigations into tax avoidance and money laundering and the terrorism financing focus on the way in which trust offices, among others, perform and are supervised in respect of their obligations as gatekeepers.

Conclusion

Where financial service providers are involved in activities that pose an increased risk in the current situation, it is only logical that they – like the supervisory authorities – should be extra vigilant. Certain actions with respect to clients must be taken in line with the legislation, or providing services to those sanctioned parties must even be terminated. The nature of the service provision simply entails this.

It would however be good if all initiatives developed by the Minister with respect to the trust sector were goal-oriented and took concrete facts and possible abuses as their starting point. I wonder if that is what is happening now and whether in this specific case, there is not too much deviation from the initial goal, i.e. to send a signal and to limit the movement of sanctioned (legal) persons on the Dutch financial market as much as possible.

Here the danger arises that – partly in view of the more general investigations regarding this sector and the lurking motto ‘kill two birds with one stone’ – trust services as such would almost start to qualify as a sanctioned activity, while the focus of the sanctions legislation should be on the sanctioned (legal) persons. The trust sector would then be severely restricted, not necessarily because of their involvement in facilitating money flows and structuring transactions with sanctioned parties, but mainly because of the nature of their services in a more general sense. If such a restriction would be decided upon, it at least should be justified on the basis of concrete facts and research and not on the basis of sentiments and assumptions. Time will tell and we will follow the developments with interest.

[1] Art. 1, letter c, Sw in conjunction with the Decree Designation Minister of Finance as referred to in Art. 1 Sw;

[2] As defined in Article 1(a) of the Dutch Regulation in conjunction with Article 10(2) of the Sw;

[3] Such publication only available in Dutch;

[4] Antwoord op Kamervragen over het bericht ‘Kaag wil extra sancties trustkantoren, grote gevolgen voor Zuidas’, p. 2/9 (Dutch only);