News 28th Jun 2024

For what purpose? Why Scotland's new trusts law is bad for transparency

Juliet Swann

Nations and Regions Programme Manager

Juliet (she/her) is based in Edinburgh and leads our work in Scotland. She also monitors Wales and Northern Ireland to identify opportunities for TI-UK in those countries. She is Chair of the Open Government Partnership Scotland Civil Society Steering Group, working collaboratively with government on transparency of and public participation in decision making.

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Earlier this year the Scottish Parliament passed the Trusts and Succession (Scotland) Act. The Act passed without much controversy with the stated aim of the legislation to simply update and clarify existing trust law in a single Act.  

Because it was based on a report and draft Bill from the Scottish Law Commission (SLC) it was even deemed ‘non-controversial’ and underwent a less rigorous procedure at the Scottish Parliament than other Bills.  

The Act, however, includes provisions which legislate for something called private purpose trusts, which can be used as a form of company or property ownership structure that are open to abuse and could allow Scotland to become a hub for dirty money.  

What are private purpose trusts? 

Private purpose trusts enable the anonymous holding of assets without having to disclose a beneficiary. They allow for assets to be made “ownerless” and thus inaccessible (or at best difficult to access) for creditors, taxation requirements, government regulations, or indeed possible heirs. Similar structures already exist in jurisdictions in locations such as the Cayman Islands called Special Trusts Alternative Regime (STAR) trusts, and in the British Virgin Islands called Virgin Islands Special Trusts (VISTA). Lawyers advertise this ability to make these trusts "ownerless" and therefore for them to be used as secrecy vehicles for those wanting to hide their wealth from public view. 

Research by TI-UK and others has already found instances of trusts being used by sanctioned oligarchs and corrupt politicians to hide their ill-gotten gains. 

Why are we concerned? 

Transparency International UK has a long-standing interest in how trusts are used to enable illicit finance transactions.   

The UK is a hot spot for international money laundering, and Scotland is not immune. Since 2017, we have been tracking property bought with suspect funds. Our research has uncovered examples of trusts being used by sanctioned oligarchs and corrupt politicians to hold property here in the UK.  

We have campaigned to close loopholes and for increased transparency. We welcomed the introduction of the UK Register of Overseas Entities (ROE) and the Scottish Register of Controlled Interests in Land (RCI) as important measures to tackle the UK’s dirty money problem.   

But opacity around the ultimate beneficiaries of trusts used to control assets weakens these transparency mechanisms as acknowledged by the Secretary of State for Levelling Up, Housing and Communities in late 2023. All parts of the UK should be working to ensure they make trust ownership information more transparent, rather than creating new secrecy vehicles. Private purpose trusts, with no identifiable beneficiaries are the wrong direction of travel.  

How did this happen? 

We looked back through the history of the development of this legislation to try and find out the rationale for this mimicking of offshore trust creation.  

As mentioned above, the reviewing of laws around trusts in Scotland started with a 2014 Scottish Law Commission report on trust law. This report noted that private purpose trusts were introduced in Bermuda, the Cayman Islands, Guernsey, and the Bahamas. They acknowledge that while purpose trusts are not recognised in England and Wales, the SLC considered that they do exist in Scots common law, and therefore legislating for them is a sensible next step.  

Setting aside for one moment how wise it is to mimic financial mechanisms that are primarily used in jurisdictions generally described as tax havens, we were interested to follow the thread of the argument that purpose trusts already exist.  

If you don’t like what one lawyer tells you, ask another. 

As mentioned, the Scottish Law Commission considered that private purpose trusts already exist in Scots common law and wanted to legislate in order to confirm this. However, what started as “make it clear beyond doubt they are competent” (suggesting that there is room for doubt) and the statement in the Explanatory Notes to the Bill that “such trusts are arguably already recognised under Scots law” has become a statement of fact when the Scottish Government were asked for comment: “Private purpose trusts are already used”. The SLC also referenced input from one legal academic that led them to draw this conclusion. However, a simple google search throws up other legal academics who disagree.  

Also, it seems the purpose trusts in existence are primarily for commercial purposes or to maintain a trust where the beneficiaries are unknown but determinable, as in the case of for example, the Nuclear Liabilities Fund. However, the legislation provides for something that goes beyond this, is a lot less defined, and therefore a lot more open to abuse.  

And finally, even if the argument is correct and purpose trusts can already be created, then in legislating for them there is a clear opportunity to include provisions in the Act to prevent them being abused and used for money laundering and other illicit finance flows. The law as currently drafted has failed to do this.  

Indeed, we searched all the associated documentation attached to the legislation and found the Equality Impact Assessment, the Islands Communities Impact Assessment, and the Business and Regulatory Impact Assessment. We did not find any sort of corruption risk assessment. 

What next? 

The creation of private purpose trusts as outlined in the Act includes no effective transparency over who created the trust and what rights they maintain, nor any potential beneficiaries nor the purpose of the trust itself. This opens the concept to abuse and risks Scotland becoming a target market for money launderers, tax evaders and sanctioned individuals who want to hide their ownership of assets behind a trust. It is essentially onshoring the offshore.   

The part of the Act that introduces private purpose trusts is not yet in force, so the Scottish Government can still act to prevent Scotland creating new secrecy vehicles and tarnishing our reputation. Given there appears to have been scant consideration about how these trusts could be used to enable money laundering, the Scottish Government should not commence these provisions, and consider whether private purpose trusts (if they are permitted in common law) should be instead banned by statute. 

Transparency International UK, Spotlight on Corruption, and The Centre for Public Data have written to the Cabinet Secretary for Justice expressing our concerns and offering to meet.