Concerns about amendments to the Trust Property Control Act

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AMANDA VISSER: Last year South Africa really pulled out all the stops in an effort to avoid being greylisted by the Financial Action Task Force.

Unfortunately the inevitable happened and we did end up on the watch list, together with Nigeria. One of the efforts was to amend existing legislation pertaining to the combating of terrorism financing and money laundering. The Trust Property Control Act was one of the acts that was amended.

We have Louis Van Vuren, CEO of the Fiduciary Institute of Southern Africa, Fisa, to explain some of the concerns they have with the changes. Louis, an important change relates to ‘beneficial ownership’. Please explain what has changed.

LOUIS VAN VUREN: The change to the Trust Property Control Act relating to beneficial ownership entails a new definition that was inserted into Section 1 of the Trust Property Control Act. The definition of ‘beneficial owner’ includes the founder of the trust, all trustees of the trust, and all beneficiaries mentioned by name in the trust in the trust instrument; that is, the trust deed, the court order, or the will of deceased person if it is a testamentary trust.

Now, the implications of this are that the trustee, under the newly inserted Section 11(a) of the Trust Property Control Act, will have to hold a register of all the beneficial owners of all the trusts that such a trustee is a trust on.

Also under the regulations in the process of being promulgated under the Trust Property Control Act [is that the trustee] will have to report this into an online facility at the Master of the High Court.

The ‘beneficial owner’ not only [includes] those persons that I mentioned, the founder, the trustees, and all beneficiaries mentioned by name but, if any of these happens to be a legal person, then what is also required of the trustee is to establish who the natural person or persons happen to be who are in effective control, or who are the owners of such an entity which qualifies as a beneficial owner.

The problems with that are, of course, you can imagine, if the trustee is a beneficial owner, and that trustee is a company which is part of a group of companies, it can become quite impractical and almost impossible to find out who the natural persons are that are the effective owners of a listed company, for instance.

AMANDA VISSER: Louis, perhaps you could give us a practical example of why that is a problem.

LOUIS VAN VUREN: Well, let’s assume that the trustee or one of the trustees of a trust is a trust company, and that that trust company is a subsidiary of, let’s say, one of the big banking groups in South Africa. If you now have to find out who the natural persons, who the owners of that banking group are, that basically means the whole share register of the listed company.

AMANDA VISSER: How will this impact the role of trustees, then?

LOUIS VAN VUREN: Well, it will severely increase the compliance burden on trustees.

There are other examples of where the compliance burden could become quite impractical.

For instance, [say] one of the parties listed as a beneficial owner under this new definition is the founder of the trust. Now, in practical terms, that could [make it] quite impossible to comply with the legislation and the regulations, because to record the particulars of that beneficial owner – the founder of the trust – can be almost impossible in certain circumstances.

I’ve recently been informed of a very practical example of this, where the trust was originally set up in the early 1990s. The professional trustee took up trusteeship of this trust in 2015. I think the trust was initially set up in 1991, [so 2015 is] 24 years after the setup of the trust. This professional trustee now has to establish the contact details and the personal details of the founder of this trust.

In this particular case nobody knew who the founder was, because in the early 1990s it was quite common practice for, let’s say, the legal secretary of the attorney who drafted the trustee to act as founder of the trust.

There were very particular reasons for that in those days, but you can understand that it is now almost impossible for somebody who takes up trusteeship on an old trust like that to establish who that person was and what that person’s personal details – contact details, address, telephone numbers, email address, etc – would be.

A further example where we believe the requirements of the legislation are not very practical, is [where] one of the sources of a trust in South Africa is a court order.

That is particularly used in the case of medical negligence and Road Accident Fund claims, where a trust is set up for the beneficiary of such a claim, and that trust is set up via a court order. The question arises as to who the founder of that trust is.

Is it the court, the institution, is it the particular judge who issued the court order? We simply don’t know. And the level of detail required to be reported under the draft regulations will make it extremely difficult for a trustee to comply with the requirements of the legislation and the regulations.

AMANDA VISSER: Louis, this sounds like an absolute nightmare, but what will this mean for trusts going forward?

LOUIS VAN VUREN: Well, as I said, it will make the job of a trustee much more difficult, but it also has the potential of infringing on the rights of trust beneficiaries, of founders of trusts, of the trustees.

As an example, [often] in a discretionary trust the trustees have the power under the provisions of the trust instrument – the deed, the court order, or the will of a deceased person – to add and remove beneficiaries.

There are very good, valid and legal reasons why this should be done. As an example, a grandfather could leave in his will assets to a testamentary trust to be formed, and the beneficiaries of such a trust could be that grandfather’s grandchildren. But the trust instrument could stipulate that, if a particular grandchild inherits money from another source, that child could be removed as a beneficiary of that trust.

All good and well, the trustees will then obviously have the power to remove such a beneficiary – except we have case law in South Africa, a 2011 Supreme Court of Appeals judgment in the case of Potgieter v Potgieter, where the Supreme Court of Appeals stated the trust law in South Africa to mean that once a beneficiary has accepted benefits, that beneficiary cannot be removed.

Now consider the following possibility. A grandchild, such as the one in my example, learns through this reporting [what] the trustee now has to do, and learns that I am a beneficiary in this trust. The beneficiary decides this is very good and writes an email to the trustees saying: ‘Thank you very much. I accept the benefits.’ Once that is done, that beneficiary can never be removed again.

So the concern is that the records that are kept may not be secure enough at the offices of the Master [to ensure] that the information will not leak out to a beneficiary of a trust. And once the beneficiary knows, the beneficiary can accept and can then never be removed as a beneficiary of that trust again, according to the case law that I referred to.

AMANDA VISSER: Is there also concern about the privacy of beneficiaries and the potential danger to them?

LOUIS VAN VUREN: Absolutely. The European Court on Human Rights delivered a judgment in 2022 where the particulars of a well-known business person had to be reported, under Luxembourg law, to the equivalent in Luxembourg of our Financial Intelligence Centre, and the law there provided for such particulars to be public information.

The European Court for Human Rights ruled that that was an unacceptable infringement of the privacy of such a person.

The argument by this business person was that it exposes the person and his or her family to the risk of attack and kidnap, and the European Court for Human Rights agreed with that, and ordered Luxembourg to change its disclosure laws.

The other concern is, of course, that the draft regulations published under the Amended Trust Property Control Act require that the Master of the High Court must create an online facility where trustees can report the particulars of any beneficial owner of the trust, and in the draft regulations those particulars include the full names, the date of birth, the nationality, the ID number, the residential address, the address for service of notices and legal documents, other means of contact, the grounds on which the person is a beneficial owner of the trust, the date on which the person became a beneficial owner of the trust and, where applicable, the date on which the person ceased to be a beneficial owner of the trust.

Now we’ve already had a ransomware attack on the systems of the Master of the High Court in September/October 2021.

Therefore the risk of a data breach is always there, and now having this on an online system obviously creates risk for not only the trustee but also the beneficiaries of all trusts.

Let me just pause here to also say that this whole concept of a ‘beneficial owner of a trust’ is totally foreign to South African trust law. It is a term that was taken over from the Anglo American legal systems, the legal systems of Britain, and [those of] the United States. It actually materially in South African law means nothing. The South African law of property recognises universal ownership which is functionally indivisible. You cannot have a legal owner and a different beneficial owner of property in South African property law.

AMANDA VISSER: Louis, given what you’ve just told us, do you foresee the possibility that these amendments may be challenged in court?

LOUIS VAN VUREN: I think it’s certainly possible if the particular regulation can be shown not to be rationally connected to the purpose of the legislation, and the legislation itself cannot be rationally connected to the purpose for which it was promulgated.

Our concern is around the fact that the same information is required repeatedly [by] different state entities and state departments. The same information that is required by the Master of the High Court when a trust is registered has to be reported again to the Master. If the trustee is also an accountable institution – and there are certain requirements for that in the Financial Intelligence Centre Act – the trustee also has to report information to the Financial Intelligence Centre.

There is also information that is required to be reported to Sars [South African Revenue Service] for tax purposes. It is reporting the same information over and over again on different platforms to different organs of state, and it is quite possible, I think, that somebody somewhere down the line is going to say: ‘This is just becoming too much; let’s test this in court.’ What the outcome of that could be is anybody’s guess.

AMANDA VISSER: Some serious food for thought there. Thank you. Louis van Vuren is CEO of the Fiduciary Institute of Southern Africa.

Brought to you by the Fiduciary Institute of Southern Africa (Fisa).

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