Trustees warned of strict new regulations

These amendments require trustees of beneficiary estates – and in due course directors - to capture ‘beneficial ownership’ details on the Master’s portal.

Having been Gazetted one day before its effective date, it left trustees and trust service providers with no time at all to comply but exposes them to fines of up to R10 million or five years imprisonment. Nor was the portal even in place for the uploading of reporting documents, so rushed was this legislation.

Trustees cannot afford to ignore the consequences, notwithstanding how ham-fisted it has been introduced.

In fact, this represents a watershed moment for the South African fiduciary industry. If it appears rushed, it was for good reason: these amendments combat money laundering and terrorism, and are one of the major steps towards reversing South Africa’s recent grey-listing by the Financial Action Task Force (FATF), a consequence of us falling short of certain international standards. However, it will not be so easy to get off the grey list as FATF will first want to see enforcement and prosecutions follow rather than just having a law on the statute books. Getting off the grey list will require effectively turning around our entire justice system to enable prosecutions.

While the purpose is to introduce transparency as to beneficial ownership, I believe a by-product will be to lead to the professionalisation of the fiduciary management of trust assets - to the ultimate benefit of beneficiaries.

This will align us more closely with the overseas model whereby trusts are mostly run by independent professional trustees, whereas in South Africa trusts are mostly run informally when a trust creator might typically appoint a wife, mom or dad as trustee, with no proper records kept. The amount of information that trustees will now have to report and maintain will compel many to become more professional. It will otherwise be exceptionally hard to be compliant.

The actual information required is not in itself particularly onerous – it is on a par with that which banks require for FICA purposes. Primarily, the natural beneficial owner of a trust’s assets has to be disclosed. That implies trustees have to be familiar with their clients.

The regulations are contained in a ‘General Law Act 2022’ passed in December that covered most of the issues required to avoid the grey-listing.

Make no mistake, having these laws is a very good thing: the only problem is that few people yet even know what have to comply with. In the event of money-laundering or terrorism, the amendments facilitate piercing the corporate or trust ‘veil’, to identify the natural beneficiaries, with the result that justice can more rapidly proceed as in the developed world.

Even though the average instance of non-compliance will unlikely involve anything as ominous as money laundering or terrorism, the scale of penalties means trustees outside the profession who unwittingly accepted the position will face sleepless nights. I have no doubt that having passed the regulations, the Masters’ Office will be keen to set a precedent and prosecute trustees – and will in the process increase their coffers with fines. 

I believe they will as soon as possible start issuing penalties to such non-compliant trustees. Consequently, I would advise trustees as their first action prepare the return as required in terms of the Trust Act amendment and submit it to the Master – just to get you compliant. Their next action should be to assess whether they are capable of managing the trust to the standard the amended law now requires. My advice to existing trustees is to contact their professional advisers on what they have to do in order to be compliant, and if that proves too onerous for them, to seek a professional trust company to shoulder that responsibility.

Over and above this, there is an additional imminent burden from SARS: the finance minister in his National Budget Speech targeted SARS to require trustees to issue tax certificates to SARS directly upon any payments and all income received by a beneficiary – with, of course, further penalties for non-compliance.

It may seem an expense commissioning professional trustees at a bank, professional services firm or law practice, but it's better to pay that fee than risk million-rand penalties for non-compliance.

There are not enough professional trust companies in South Africa compared to other countries – but I am expecting this ratcheting up of reporting requirements to alter that dynamic as companies scale up their resources and software.

The Master approves trustees in the same manner as it does directors of companies as to qualification and experience, and there are a number of factors which bar a person from being a trustee: they cannot be of unsound mind or insolvent, nor been found guilty of fraud or other misconduct.

The FATF has said it wants to see real implementation of the law before reconsidering South Africa’s grey-listing, to determine whether the laws have real teeth. Herein lies the quandary: the Master’s Office has been appointed to implement and police the new regulations and our experience tells us that even with its existing caseload it is sorely understaffed. We receive regular requests from the Office telling us not to send any more applications and not to visit the Office. Nonetheless, transgressors are relatively easy to identify, and the financial penalties represent a considerable source of new income with which it may resource itself.

These same administrative requirements will soon become part of the Companies Act, with directors of companies having to similarly comply.

This article was published on Moneyweb here.

Author:

Hymie Swanepoel, Partner 

19 April 2023