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Five months after a Dutch investigative parliamentary inquiry revealed that resident trust agencies are failing to comply with their legal obligations for curbing tax avoidance and money laundering, outgoing Dutch Minister of Finance Jeroen Dijsselbloem has offered a sneak peek at the more stringent rules envisioned by lawmakers.
Trust companies are viewed by local lawmakers and regulators as the gatekeepers to the Dutch financial system, and a 2003 law introduced a number of rules requiring trust agencies to essentially take up that role, and prevent the Dutch financial system from being used for the purposes of money laundering or the financing of terrorism.
A series of hearings conducted over eight days in June, however, revealed that De Nederlandsche Bank (DNB)—the Dutch watchdog tasked with surveilling local trust companies—is struggling to ensure that the country’s 227 licensed trust companies meet their obligations under the 2003 Law for the Oversight of Trust Companies (Wet Toezicht Trustkantoren). Their obligations include performing client due diligence and adequately monitoring client transactions.
In a position paper DNB submitted in preparation for its testimony, the bank warned that “the integrity of the Dutch financial system was at issue” because of trust agencies’ failure to adequately perform their gatekeeping role.
Although the Parliamentary Investigative Committee on Tax Schemes wasn’t allowed to make recommendations or suggestions to the House of Representatives, its findings appear to have spurred lawmakers to make changes to a forthcoming law proposal aimed at updating the 13-year-old law.
In an Oct. 24 letter to lawmakers, Dijsselbloem said that the recent “signals” that trust agencies aren’t meeting their legal obligations as well as the sector’s unwillingness to comply both with the letter and spirit of the trust law were “partially the impetus to tighten the applicable legislation.”
The letter drafted by the outgoing minister of finance provides a first glance at the tighter regulations lawmakers aim to impose. He said that three of the suggestions to amend the current legislation, made by DNB during the June hearings, “were given a direct place” in the draft law. The draft law, he said, now includes provisions:
Dijsselbloem also said in his letter that lawmakers will review, together with DNB, whether trust companies should outright be forbidden from providing “services to certain legal entities with inherent integrity risks.”
Anne Scheltema Beduin, office director at Transparency International Netherlands, said that Dijsselbloem might be hinting at a provision that would prohibit trust agencies from providing nominee director services. Such services see trust companies acting as the owner and beneficiary of the legal entity, which makes it harder to identify the ultimate beneficiary owners, she told Bloomberg Tax Oct. 27.
“It’s not stated in the letter but, honestly, I think that’s what this is referring to,” she said referring to the integrity risk sentence, adding that Transparency International Netherlands also recommended such a ban on nominee director services in the paper it submitted in preparation for its testimony during the hearings. “That’s what we hope at least,” she added.
Directors ultimately hold responsibility for the entity they are overseeing, she said. “It’s really very odd that it was ever possible to give this title to someone who otherwise knows nothing about and is not connected” to the entity, she added.
Scheltema Beduin was skeptical that the forthcoming legislative proposal would succeed in getting trust companies to start playing by the rules. “I don’t think this will be anywhere near enough, but it’s undoubtedly a first step.”
She noted that the letter also sent a mixed message as Dijsselbloem on the one hand conceded that the trust sector was failing to effectively self-regulate, but on the other appeared to be giving the sector yet “another chance to fiddle in the margins.”
“Wouldn’t now be the time to say: ‘OK, you’ve failed to self-regulate; we’re taking over’?” she asked.
As financial service providers, trust companies play a critical role in the 4 trillion euros ($4.65 trillion) shifted in profits through the Netherlands every year, according to the research firm SEO Economisch Onderzoek. They allow typically foreign clients to create a financial entity in the Netherlands, for instance, a public limited company, a private limited company or a foundation, and manage these entities for their clients. They are often interposed in complex international set-ups designed by tax advisers and law firms, according to the DNB hearing paper.
“This is where the mailbox terminology comes from,” said Scheltema Beduin, who added that trust companies create a “a fiction of sorts that the company is located” in the Netherlands, when that company isn’t necessarily “engaging in activities.”
By having for instance a public limited company in the Netherlands, registered in the address of the trust agency and managed by it, individuals and companies based abroad can become residents of the Netherlands for tax purposes, which in turn allows them to access the country’s many bilateral tax agreements.
According to the paper Transparency International Netherlands submitted to the parliamentary committee, Netherlands counts some 12,000 “special financial institutions, or the so-called mailbox companies.”
A consultation version of the updated trust law was released May 2, 2016, but lawmakers currently are preparing changes to that draft law in accordance with the EU’s Fourth Anti-Money Laundering Directive.
Melis van der Wulp, a partner at Libertas Lawyers who wrote a PhD on the Dutch trust sector regulations, said the forthcoming law proposal represented an important expansion of trust companies’ client investigation and other obligations. In an email statement sent to Bloomberg Tax Oct. 31, he said that the draft law simultaneously offered DNB the possibility to publicize sanctioning actions it has taken against trust companies found in infringement of the rules.
“It’s this combination—the expanded requirements combined with the expanded possibilities to publicize sanctioning actions—that are in my view of significance to how DNB will enforce” the forthcoming legislation, he said.
According to Dijsselbloem’s letter, the draft law will likely be sent to the House of Representatives “early next year.”
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The Finance Minister’s letter is at
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