Managing Risk: Trustee Reporting and Beneficiary Confidentiality in South Africa

In the ever-changing landscape of global finance, South Africa is currently navigating the turbulent waters of greylisting.

As the country grapples with the complexities of this international challenge, trustees face an equally demanding task: balancing trustee reporting with maintaining beneficiary confidentiality.

The spotlight is firmly fixed on trustees, and the risks are now more significant than ever.

Effective April 1, 2023, a crucial change occurred: Trustees were mandated to submit and maintain precise records of their trust's beneficial ownership.

In conjunction with existing Financial Intelligence Centre (FIC) registration requirements and the impending implementation of new South African Revenue Service (SARS) mandates for trusts, this new regulation sends a clear message—sloppy trust administration is no longer acceptable.

Let's delve into some of the key considerations trustees must note to successfully navigate this storm.

1. Legislative Changes and Tax Reporting:

The recent amendments to the Trust Property Control Act in South Africa have brought significant changes in trust governance.

These changes aim to solve the problem of unclear instructions for trust management and the absence of penalties for non-compliance, which resulted in poorly managed trusts. As of 1st April 2023, all trustees must comply with the new legislation.

Failure to adhere to the new rules may result in fines of up to R10 Million, imprisonment for a maximum of five years, or both. It is crucial for trustees to familiarise themselves with the updated legislation to ensure effective and compliant trust management.

2. Grey Listing and Its Implications:

To ensure compliance with international anti-money laundering and counter-financing of terrorism standards, the global finance and banking industry often uses a measure called greylisting. This involves carefully examining specific entities or jurisdictions and monitoring them for any non-compliance issues that may arise. Greylisting is used when an entity or jurisdiction is not immediately blacklisted.

In February 2023, South Africa was placed on the greylist by the Financial Action Task Force (FATF), a global financial crime overseer. This happened after South Africa failed to comply with international standards regarding preventing money laundering, terrorist financing, and proliferation financing.

Greylisting can significantly impact trust structures, compliance, and international perceptions in South Africa. It leads to increased scrutiny of financial transactions and entities, complex reporting requirements for trustees, and the need for stricter regulations and compliance measures.

3. Increased Responsibility for Trustees:

As of March 31, 2023, new regulations require trustees to keep detailed records of the "beneficial owners" of a trust. Trustees must ensure they have current information on these individuals and update the Beneficial Ownership registers on the Master's portal regularly.

What does it all mean?

Trustees hold a crucial role in the administration of trusts, as they oversee and manage the assets on behalf of beneficiaries.

However, this role goes beyond mere administration; trustees are now entrusted with a higher level of responsibility.

Trustees must actively engage in ensuring compliance with regulations, maintaining transparency, and safeguarding the best interests of beneficiaries. This requires them to stay informed about legal and financial developments, make well-informed decisions, and effectively communicate with all stakeholders involved in the trust.

4. Accountability and Transparency:

Trusts can no longer operate in secrecy. It is important for trustees to prioritise accountability and transparency in their operations. This involves regular and open communication with beneficiaries and regulatory authorities.

As per the Income Tax Act, all trusts in South Africa are legally required to register as taxpayers. Trustees are strongly advised to ensure compliance by registering all trusts as taxpayers promptly, to avoid any penalties from SARS.

The new regulations hold each trustee individually accountable, thus emphasising the importance of transparency and cooperation among trustees.

To promote effective collaboration, it is recommended that a central place of information be established and accessible to all trustees!

5. Protecting Assets and Risk Mitigation:

Protecting trust assets and mitigating risks has become increasingly critical in light of the recent spotlight on trusts. Trustees need to implement robust risk management strategies to preserve the interests of beneficiaries.

The challenges facing trustees in South Africa today are undeniably daunting. As the country navigates the greylisting storm, trustees must navigate the intersection of trustee reporting and beneficiary confidentiality.

The new regulations now require the submission of precise records of beneficial ownership, in addition to existing FIC registration requirements and upcoming SARS mandates. This highlights the need for meticulous trust administration.

6. The Need for Professional Assistance:

In the past, estate planners used to appoint trustees for family business trusts from among their family members, friends, attorneys, or accountants. However, this approach led to cases of trust abuse and inadequate knowledge. As a solution, independent trustees are now required for family business trusts.

Independent trustees are responsible for ensuring that the trust functions properly and adheres to its provisions. While they don't necessarily have to be professionals, they must understand and accept their responsibilities. Professional accountants, attorneys, advocates, trust companies, and fiduciary practitioners can all serve as independent trustees.

The spotlight may be unwavering, but trustees who navigate these challenges with diligence, expertise, and a commitment to their beneficiaries will emerge as beacons of trustworthiness in South Africa's evolving financial landscape. In doing so, they will play a pivotal role in ensuring the continued integrity and success of trusts in the country.

Gone are the days when trusts are merely vehicles to manage assets, and trustees may occasionally attend to their obligations on behalf of the beneficiaries.

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20 September | 11 am SAST