The sector in brief
A trust is an arrangement under which one person, the trustee, holds assets for the benefit of others, the beneficiaries, according to terms set by a settlor. Trusts are used for family planning, inheritance, charity and asset protection, all of them legitimate.
The same features make trusts useful to people who want to hide ownership. Because legal title sits with the trustee, a quick look at a register may not reveal who benefits. A trust service provider that sets up or administers trusts is in a position of trust, and also of responsibility.
Supervisors expect trust service providers to identify and verify everyone connected with a trust, to understand why the trust exists and where its assets come from and to keep records that would allow an investigator to follow the trail. The DFSA authorises trust service providers in the DIFC, and similar duties apply under other regimes.
Where the risk sits
Hidden beneficial owners
A trust's settlor, trustees, protectors and beneficiaries may be spread across countries. Without a full picture, the real person in control may not be visible.
Discretionary and flexible terms
Where trustees have discretion over who benefits, and when, the actual beneficiaries may change over time, which makes ongoing checks more important.
Source of the trust assets
The settlor's wealth is the foundation of the trust. If its origin is not clear, the trust becomes a way of washing it.
Layering through companies
Trusts often hold assets through companies in other jurisdictions, adding steps between the owner and the asset.
Distributions
Payments to beneficiaries, particularly in other countries or to third parties, are a key exit point.
Who supervises you
Trust service providers in the DIFC are supervised by the DFSA. Providers in other zones or onshore are supervised by the authority that licensed them, and the rules may differ. Check the activities on your licence, because some firms act as trustees while others only administer trusts or provide registered offices.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A compliance officer or MLRO with an understanding of trust structures and authority to refuse a settlor or beneficiary.
- A business risk assessment that considers the types of trust, clients, countries and assets involved.
- Identification and verification of settlors, trustees, protectors, beneficiaries and any person with effective control.
- Source of wealth and source of funds enquiries on the settlor, supported by documents.
- Understanding of the purpose of the trust and its structure, and a record of why complex arrangements are needed.
- Sanctions and politically exposed person screening of all parties, with review of matches.
- Ongoing review, monitoring of distributions, reporting through goAML, training, record keeping and independent testing.
Red flags to watch
- A settlor who cannot or will not explain where the assets came from.
- A trust with no clear purpose beyond privacy.
- Frequent changes to beneficiaries or trustees without explanation.
- Distributions to unrelated third parties or high-risk countries.
- Pressure to set the trust up quickly, or to avoid checks.
- A structure that has a trust, several companies and a foundation, with no commercial reason.
A worked example
A family trust with a discreet protector
A client asks a provider to set up a discretionary trust for his family, naming an unconnected individual abroad as protector and asking that the protector not appear in any documents the firm keeps. The provider explains that it must identify everyone with a role, including the protector, and asks why he wants the person's involvement to be hidden. If the client will not agree to the identification, the provider should decline the work. The refusal and the reasons should be recorded, and the compliance officer should consider whether a report is required.
How Adventant helps
Questions answered
Who must be identified in a trust?
Generally the settlor, the trustees, any protector and the beneficiaries or classes of beneficiaries, plus anyone with effective control. The detail depends on the rules that apply to your licence.
Is a trust a sign of money laundering?
No. Trusts have many lawful uses. The point is that they can hide ownership, so you need to understand the purpose and know the people involved.
How should we deal with a discretionary trust where beneficiaries are not named?
Identify the class of beneficiaries and anyone who actually receives benefits, and review as circumstances change. Ask the client how the trustees will decide on distributions.
Do we have to check the source of the trust assets?
Yes, in proportion to the risk. The settlor's wealth is the base of the trust, so you need to understand how it arose and where the assets come from.
What if we find that a trust is being used for something improper?
Escalate to the compliance officer, avoid tipping off the client and consider a report. Do not carry on as if nothing has happened.