Saturday, October 8, 2016

Current Status of Anti Money Laundering Legislation and Practice In Italy


The EU Directive n. 2015/849 (the "IV Directive") on anti money laundering sets forth new provisions requiring financial institutions and professional individuals to verify their customers or clients by identifying the ultimate "beneficial owner" of an entity, legal arrangement or financial transaction; obtaining and conserving information about their customers and the ultimate beneficial owners, as defined in the Directive, and reporting an extensive amount of information about trusts, foundations and other similar arrangements in a central register held by each Member State. EU Member States have time until June 26, 2017 to traspose the provisions of the Directive into their national laws. 


Unlike EU Regulations that are enacted by the EU Council of Ministers, which have automatically the full force and effect of EU prevail over any non conforming national law regulating the same area, EU Directives proposed by the EU Commission are not self executing. EU Members States are left with some leeway to decide which provisions are to be adopted. EU Directives are usually adopted through a number of legislative procedures depending on the different subject matters. As a result, while the deadline to implement the Directive is still pending, and until a country enacts domestic legislation actually implementing the Directive, the Directive has no immediate effect and cannot be directly applied. 

In Italy, the Italian Parliament by way of Act n. 170 of August 12, 2016 granted legislative authority to the Italian Government to implement the provisions of the IV Directive. Now the Government is working at adopting one or more legislative decrees containing the specific provisions that will traspose the IV Directive into Italy’s national law. The legislative decrees to be issued pursuant to the grant of authority provided by the Parliament need not be approved by the Parliament. Rather, they become law as soon as they are adopted by the Government. 

In light of the above, we can safely say that Italy is well on track to implement the Directive within the June 26, 2017 deadline. If that should not be the case, at that point the Directive would become self executing and could still be applied, for those provisions that are sufficiently detailed and need not be specified or modified by way of national implementing legislation.   
  
Law n. 170 refers to the definition of beneficial owner that is set forth in the IV Directive. 

The definition of “beneficial owner” in the IV Directive, for corporate entities, is the following (article 3, paragraph 6, letter a)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 

(a) in the case of corporate entities: 
(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownershipA shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3); 
(ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point.  

Under the definition set forth here above, the beneficial owner is the natural person who ultimately owns or control the tested corporate entity (defined as "customer" in the Directive). 

For the purpose of identifying the natural person who ultimately owns or controls the tested corporate entity, the Directive adopts the “more than 25% shareholding or ownership interest” test, as an indication or presumption of beneficial ownership, and uses both a direct and indirect ownership test. 

Under the direct ownership test, if a natural person directly owns more than 25% of a shareholding or ownership interest in the “tested" corporate entity, that person is presumed to be the beneficial owners of that entity. In case of direct ownership, the analysis stops at the natural person who owns the relevant shareholding interest in the tested corporate entity. Under the indirect ownership rule, a shareholding or ownership interest (of any size) in the “tested" corporate entity, owned by another legal entity (such as another corporate entity, trust, foundation, etc.), is attributed to the beneficial owner(s) of such other legal entity, to determine the ultimate beneficial owner of the “tested” corporate entity.

In case of trust or other similar legal arrangements, "beneficial owner" is defined as follows (article 3, paragraph 6, letter b)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 
...
(b) in the case of trusts: 
(i) the settlor; 
(ii) the trustee(s); 
(iii) the protector, if any; 
(iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;
(v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.  

If interpreted literally, the definition of “beneficial owner” in case of trusts, foundations and other similar fiduciary arrangements is extremely broad, and would automatically require to verify and disclose each one of the settlor, trustees, beneficiaries or protectors of a trust, regardless of whether any one of them  actually owns an interest in the trust’s income or property or has any meaningful power with respect to the administration of the trust. Also, the literal definition of "beneficial owner" used in the IV Directive in case of trusts does not make any distinction between an interest in the income of the trust, as opposed to an interest in the corpus of the trust, and does not refer to any minimum ownership requirement such as the 25 percent ownership threshold that applies in case of corporate entities.  

An over broad interpretation of the term "beneficial owner" in case of trusts would put banks, financial institutions, professional individuals and their customers under extreme pressure, potentially dramatically extending the amount of information to collect and creating a friction between the need of a thorough verification of the customer for anti money laundering purposes, and the right to privacy for all individuals involved who do not own any ownership interest of power of administration with respect to the trust.

It would seem more reasonable to limit the definition of "beneficial owner" of a trust, to those individuals or entities, among the settlor, trustee(s) or beneficiaries, who actually have a meaningful interest in corpus of the trust or real powers with respect to the administration of the trust.  

Arguably, sub paragraphs 6(a) and 6(b) of article 3 should apply separately, depending on whether the "customer" to be tested is a corporate entity (in which case, the test of sub paragraph a) should apply) or a trust or other similar arrangement (in which case the test of sub paragraph b) should apply).

However, there is a potential argument for a concurrent application of the two sets of rules, whenever a shareholding or ownership interests in a corporate entity is held through a trust, foundation or other similar legal arrangement. In that case, under the "indirect ownership" rule requiring to find the natural person that ultimately owns the corporate entity, it may be reasonably be argued that the “beneficial owner” of the trust should be verified under the separate rules of sub paragraph b), and he or she would be deemed to indirectly and ultimately own the shareholding or ownership interest which the trust owns in the tested corporate entity.

Under a different interpretation, in the event that a shareholding or ownership interest in a corporate entity is owned through a trust, the analysis should stop at the person or persons who control the entity, under the rules of sub paragraph a), thereby limiting the know your customer verification to the person or persons who act as trustee or trustees for the trust.  

In light of all the potential interpretative challenges, briefly mentioned above, it is important to see how the provisions of the IV Directive are going to be incorporated into the national legislation that will be enacted to transpose the Directive into Italy’s internal law. 

As for the scope of the disclosure mandated by the Directive, it is carried out at two levels. At one level, a bank, financial institution or professional individual that does business with an Italian entity or trust is required to conduct proper customer due diligence, which under article 13, paragraph 1, letter (b) of the Directive, including the following:

(b) identifying the beneficial owner and taking reasonable measures to verify that person's identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer

At another level, under article 30, paragraph 1 of the Directive, the companies themselves are required to obtain and hold  adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. 

Article 30, paragraph 2 requires that the information of the companies’ beneficial ownership and beneficial interests be held in a way that it is accessible in a timely manner to the tax and financial authorities. 

In addition to the above, article 30, paragraph 4 of the Directive provides that the information on the companies’ beneficial ownership and beneficial interests shall also be held in a central register accessible in all cases to the tax and financial authorities, banks and financial institutions and any other person or organization that can demonstrate a legitimate interest to

Finally, under the Directive, a separate and independent disclosure regime may apply to trusts. Indeed, article 31, paragraph 1 provides that:

1.Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust. That information shall include the identity of: (a) the settlor; (b) the trustee(s); (c) the protector (if any); (d) the beneficiaries or class of beneficiaries; and (e) any other natural person exercising effective control over the trust.    

Italy does not have any law governing trusts (except that it applies its owns tax rules for the taxation of trusts both for income and gist and estate tax purposes). Trusts are usually established under foreign law, and recognized and enforced in Italy, if necessary, under the Hague Convention on Trusts which has been ratified in Italy by way of Law n. 364 of 1989. Law n. 171 refers is to “trusts governed under law n. 364 of October 16, 1089”, which includes any trust established under foreign law, which is recognized and enforced in Italy pursuant to the Trust Convention.

Furthermore, article 31, paragraph 4 of the Directive provides that
4.Member States shall require that the information referred to in paragraph 1 is held in a central register when the trust generates tax consequences. The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. It may also allow timely access by obliged entities, within the framework of customer due diligence in accordance with Chapter II. Member States shall notify to the Commission the characteristics of those national mechanisms. 

The separate disclosure for trusts seems to be triggered whenever a trust is recognized and made effective in Italy pursuant Law n. 389 and the Hague Convention, and when the trust generates tax consequences in Italy.

Finally, it should be noted that on July 5, 2016, the European Commission adopted a proposal to amend the IV Directive on anti money laundering, which would reduce the shareholding test from 25% to 10%. 

Until the IV Directive is actually transposed into Italian law,  the provisions of legislative decree n. 231 of November 21, 2007 still apply.  

Legislative Decree n. 231 treats as “beneficial owner” the natural person or persons who ultimately own or control an entity, by directly or indirectly owing or controlling an adequate shareholding, voting or ownership interest in the entity, with the understanding that a (direct or indirect) shareholding or ownership interest of more than 25% of the entity is sufficient to satisfy the definition of beneficial owner. 

In case of trusts, beneficial owner is any identified beneficiary of the trust, who owns a qualified interest in more than 25% of the trust’s assets. 

The disclosure under Legislative Decree n. 231 is much more limited and restricted, given the narrower definition of beneficial owner that applies when a corporate entity is owned indirectly through a trust. Unlike the IV Directive, which mentions each of the trust’s settler, trustees and beneficiaries as beneficial owners of the trust, and as owning indirectly indirectly any shareholding or ownership interest that the trust holds in the tested entry, the legislative decree n. 231 refers solely to the trust’s identified beneficiaries owning an interest in at least 25% of the trust’s assets. 

In the course of our practice, we have been involved in situations in which banks and other financial  institutions or professional firms adopt a stricter and more balanced approach, by referring to the 25 percent ownership test and, for trusts, by limiting their investigations to beneficiaries holding an interest on more than 25 percent of trust's assets and trustees holding effective power of administration of the trust. In other situations, however, we noted that other banks may want to anticipate the application for the new provisions of the IV Directive, even before its entry into force, and conduct a 360 degree investigation on trusts, requesting information about all of the trust's settlor, trustees and beneficiaries (both actual and contingent) of wither income or corpus of the trust, regardless of the existence of an actual interest in, or power of administration with respect to, the assets of the trust.

In those cases, we have experienced that clients are willing to discuss the matter with their banks to make sure that their legitimate privacy rights are respected, and that anti money laundering, know your client verifications do not go beyond their legitimate, reasonable needs and become unmanageable or drain excessive resources.

In anticipation of the implementation of the IV Directive, clients should make the effort to review their structures, and put together a standard package that should be used with all of the banks, financial intermediaries and professional firms with whom they do business, and who will require information pursuant to anti money laundering legislation, to achieve efficiency and stay in compliance in such a challenging area clearly destined to draw more scrutiny and attention.           


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