Money Laundering via Trusts
The misuse of trusts for the purposes of laundering criminal proceeds has been recognized as a global problem by the Financial Action Task Force (FATF), which has identified characteristic anti-money laundering (AML) vulnerabilities of trusts that include (1) problematic relationships among the grantor, trustee, and beneficiary of a trust; (2) use of specific trust provisions to obscure relevant facts; and (3) use of trusts to take advantage of jurisdictional differences. Trusts have traditionally been exploited by sanctioned individuals and tax evaders, which continue to be a problem, however, law enforcement has more recently seen an increase in this methodology used by individuals involved in public corruption, narcotic trafficking and fraud schemes.
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Grantor/Trustor/Settlor – Creates agreement & grants the trustee control over their assets.
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Trustee – Person or organization responsible for managing the trust.
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Beneficial Owner – People who receive benefits of the trust.
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Trust Company - A legal entity that acts as a Trustee on behalf of a person/business for the purpose of administration, management, and transfer of assets to a beneficial party.
A trust can hold assets directly (such as real estate), which is traditionally used among families. For example, a married couple, using their local lawyer, may establish a trust in the family name to leave their home to their children who are named beneficiaries. Their trustee is likely a reliable family member who can make smart financial decisions on the children’s behalf. Their trust is likely created in their home state.
A trust can also hold assets through underlying trust-owned entities such as corporations or investments. As an example, the leader of a drug trafficking organization hires a lawyer to create a shell company. The lawyer then hires a trust company to establish and manage a trust that holds the shell company, real estate properties and other income generating holdings. In a normal trust structure, the trust company (as the trustee) is supposed to act in the best interest of the beneficiary, however in this case, a second shell company is created whose director advises the trust company on where and when to move funds. Lastly, the beneficiary is a third company that can buy real estate, cut “fees” to corrupt individuals or make other types of payments. The entities involved often have ties to tax havens and/or countries with strong secrecy laws.
It is important to note, there are scenarios where layered and profoundly complex schemes exist for legal purposes (i.e., security risks/asset protection), however, these scenarios often involve nefarious activity and require further scrutiny.
While the above scenario is deeply layered and difficult to unravel, it is possible to peel away layers and identify predicate offenses and responsible parties. Financial institutions must do their part in applying Know Your Customer/Customer Due Diligence (KYC/CDD) to beneficiaries and not just trustees, while law enforcement should methodically identify and examine Bank Secrecy Act (BSA) data related to all factions of the trust structure.
- What is the purpose of the trust?
- Where did the money in the trust come from?
- If it came from outside the trust, can I dig deeper into that source?
- If it was grown from within (investment/revenue), can I further verify that source?
- Does the trust structure make sense?
- Am I dealing with the trustee directly?
- Are there unusual or complex relationships among participants?
- Are there multiple beneficiaries?
- Is there Politically Exposed Person (PEP) involvement (in any portion of the structure)?
- Does negative media (including foreign media) exist?
- Does the trust structure involve businesses and accounts in jurisdictions with strong corporate secrecy laws and low international cooperation?
- Do the entities involved have strong ties to tax havens? List of the world's most notorious tax havens (worlddata.info)
- Is there trust company involvement?
- Are they affiliated with a local/small bank?
- Are they located in a notorious privacy state (i.e., South Dakota, Wyoming, Delaware, Alaska, Nevada)?
- Are they reluctant to report identities or information related to their clients?
Money launderers utilizing shell companies (an essential element of the trust structure), are due to face upcoming challenges. The Corporate Transparency Act (CTA) establishes uniform beneficial ownership information reporting requirements for certain types of corporations, LLCs, and other similar entities created in or registered to do business in the United States. The CTA authorizes FinCEN to collect that information and disclose it to law enforcement and financial institutions.
What does this mean? As of January 2024 (for new companies) and January 2025 (for already established companies), this new dataset of beneficial ownership information will begin to be collected by FinCEN. While trusts are not considered a reporting company under this ruling, entities owned or created by trusts will be, which will aid law enforcement in detangling the trust structure web. Additionally, trust companies will face regulatory pressure to identify and report on their clients and will no longer be able to turn a blind eye or claim ignorance. Between now and January 2025, financial institutions and law enforcement should be on the lookout for a significant shift in structure of shell companies to circumvent these new requirements. Those engaged in nefarious activity may choose to dissolve a company and reopen another, paying closer attention to the parties involved, or they may make modifications to officers, directors, and/or shareholders. These behaviors may be an indicator of money laundering and should be closely examined.
 In addition to the above-mentioned preventative measures that are soon to take place, FinCEN also engaged in their first enforcement action against a trust company. In April 2023, FinCEN assessed a $1.5 million civil money penalty against The Kingdom Trust Company of South Dakota for willful violations of the BSA. It was reported the trust company failed to report suspicious activity, some of which was purportedly related to trade-based money laundering and securities fraud schemes.
These actions taken by FinCEN are a step in the right direction in conveying the message that the U.S. Department of the Treasury and other federal agencies are aware of problematic loopholes involving trusts and are willing to act against those who exploit them. In order to protect the integrity of the United States financial system, financial institutions and law enforcement agencies must stay current on new methods and innovative trends money launderers and criminal organizations are employing.
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