Regulation in review

With the instability that overshadowed 2022 and countries globally implementing sanctions measures, there has been much for practitioners to contend with in the regulation and compliance space over the course of 2023.

Although the EU sanctions against Russian individuals have been extended until 15 March 2024, these measures have largely bedded in and become part of practitioners’ day-to-day business.

‘Over time, new sanctions could be expected in the form of additional designated people and entities being targeted,’ says Paolo Panico TEP, Adjunct Professor,[1] who authored STEP’s Position Paper on the EU sanctions packages.[2] ‘But “technical” sanctions in relation to professional services, companies and trusts appear to have reached a comprehensive status in the EU, UK and US. I do not think that any significant change can be expected in 2024.’

Nonetheless, with sanctions compliance now on the list of ever-increasing transparency and reporting, practitioners and their clients have had to continue to evolve.

Robert Reymond TEP[3] observes that many families he works with in Latin America have ‘accepted that the world is more transparent’ and are planning their asset management accordingly to ensure compliance.

‘Brazil is proposing significant new rules on taxing individuals on their income gains from foreign structures, which could lead to some families reconsidering their residency,’ he acknowledges. ‘However, across the region any motivation to move jurisdiction is far often more tied to political shifts than to regulation and transparency agendas.’

Progress reports

This trend is supported by the OECD report Tax Transparency in Latin America 2023,[4] which noted the ‘major achievements’ made by 16 Latin American countries in transparency and the automatic exchange of information (AEOI) for tax purposes.

On a broader international basis, the OECD has also released its fifth annual peer-review report[5] examining how countries are addressing base erosion and profit-shifting (BEPS). The particular focus is on the implementation of the Action 6 minimum standard, relating to the prevention of treaty abuse under the OECD/G20 BEPS Project. The report found that most of the reviewed jurisdictions ‘are respecting their commitment to implement the minimum standard … [and] also highlights that the BEPS MLI [multilateral instrument], which has been the main tool used to implement the minimum standard, has continued to have a significant and increased effect … Moreover, this year’s peer review shows progress made by jurisdictions to develop and give effect to plans to implement the minimum standard where one was called for.’

Despite the progress that the OECD has seen, the Financial Action Task Force (FATF) and EU so-called ‘grey lists’ still show areas that need to be addressed. The EU list of non-cooperative jurisdictions for tax purposes comprised 16 jurisdictions as of February 2023. As of June 2023, 26 jurisdictions remained under FATF increased monitoring, with three on its list of high-risk jurisdictions subject to a call for action. At its plenary meeting the same month, FATF also warned that several jurisdictions had not yet met the agreed deadlines for tightening their anti-money laundering (AML) regulations.

Nonetheless, many countries have taken steps to improve their AML measures over the course of 2023. Some are even asking for industry opinion on new measures. In March and April respectively, New Zealand and Australia both consulted on expanding their AML and counter-terrorism financing (CTF) regimes. In August, Switzerland’s government consulted on proposals that would impose due-diligence obligations on professionals giving legal advice. Most recently, the UK treasury consulted on reforms to its AML and CTF supervision rules and regulatory bodies. STEP responded to this consultation in September 2023.[6]

Other countries have already implemented changes. Jersey now requires all private trust companies (PTCs) and other corporate bodies acting as trustees of an express trust to register the jurisdiction’s AML regime. India has also widened the scope of its regulation to include more professional service providers. The Bahamas, meanwhile, has updated its regulatory framework on the economic presence of corporate entities.

Registering a change

Another key AML focus of many countries in meeting international standards has been the implementation of registers of beneficial ownership.

South Africa and Australia’s beneficial ownership registers came into force in April and July 2023 respectively, compelling recording of trust and company beneficial ownership information and foreign ownership of assets. At the beginning of the year, Germany expanded its transparency register to include foreign companies that already hold property in the country. The Cayman Islands is also proposing legislation to enhance and consolidate its existing beneficial ownership legislative framework. Other countries are just now embarking on the journey: regulations for the creation and operation of Spain’s central public beneficial ownership registry have been gazetted and the US regime comes into force from January 2024.

Although this shows great progress in international regulation, the move has not been without controversy. ‘A milestone in the area of beneficial ownership registers was the November 2022 decision by the Court of Justice of the European Union,[7] which stated that unrestricted public access to such registers is illegal as it breaches the fundamental right to privacy,’ says Panico.

‘This decision was an important assertion of the rule of law and of the necessity to balance any increased appetite for transparency with the respect of some fundamental rights of the individuals,’ he adds. ‘This landmark decision has affected the policies of many jurisdictions around the world, as well as EU member states, with many countries taking their registers offline as a result. Some harmonisation will be required, possibly in the form of an EU regulation.

‘The question now is whether the EU will move forward with further proposals that give access to people who have a legitimate interest,’ asks Reymond. ‘In 2024, will the definition of “legitimate interest” itself be broadened?’

Setting new standards

Countries are making a concerted effort to keep their regulation in line with ever-evolving international standards on ownership registers and economic substance requirements. However, there is still a way to go with regulation in the far newer area of virtual assets.

‘This year has seen the adoption of the Crypto-Asset Reporting Framework (CARF) as a new international standard alongside the updated CRS,’[8] notes Philip Kerfs, Head of the International Cooperation Unit at the OECD Centre for Tax Policy and Administration. ‘Now that most of the technical work is completed, the focus will be on ensuring its widespread implementation.’

The OECD consulted with governments and professional bodies including STEP on CARF, which sets out a plan for tax administrations to collect and exchange information about persons engaging in crypto-asset transactions and aims to ensure that entities providing such assets apply standard due-diligence procedures. At the same time, the EU Council of Ministers has reached agreement on the draft Directive for Administrative Cooperation in taxation (Directive 2011/16/EU, DAC8), amending it to require reporting and AEOI on revenues from crypto-asset transactions.

However, as late as July 2023, FATF was reporting that three-quarters of its member countries either do not comply with its Recommendation 15 on regulation of virtual asset service providers or are only partially compliant with it.

This will surely be a significant focus of 2024. Nonetheless, other regulatory areas are also on the agenda. Kerfs gives one such example: ‘The G20 has asked the OECD to look into possible approaches for enhancing transparency in connection with the legal and beneficial ownership of real estate, so we will be scoping potential further work in this area.’

Reymond, meanwhile, points to a continued EU push on transparency through its Securing the Activity Framework of Enablers policy, which seeks to regulate non-EU enablers who assist on EU-related structures and tax advice. A directive on this, he says, is expected later in 2023 or in early 2024.

As regulatory requirements show no sign of slowing down, compliance becomes ever-more onerous for clients and advisors. Panico believes that professional bodies have a vital role in driving the transparency agenda in 2024 and beyond.