The Trusts and Succession (Scotland) Act 2024 passed into law by the Scottish Parliament created a new type of trust in Scotland: The Private Purpose Trust (PPT). The introduction of this form of trust has raised serious concerns they could become vehicles for money laundering, sanctions and tax evasion. With the Criminal Finances Act 2017 requiring all companies to have reasonable procedures to prevent tax evasion, PPT’s should be high on your compliance risk agenda.

What is the Trusts and Succession (Scotland) Act 2024?

The Act was introduced after recommendations from the Scottish Law Commission’s review of trusts led by former Solicitor General for Scotland Lord Pentland and former Court of Session judge Lord Drummond Young. This review recommended a number of updates to the main source of legislation which is over a hundred years old, the Trusts (Scotland) Act 1921. 

This Act gave legislative footing to a form of trust generally used in offshore jurisdictions, the Private Purpose Trust (PPT). While being enacted by the Scottish Parliament without controversy, a number of commentators and Scots law experts have raised concerns that PPT could become yet another vehicle for criminality. 

The Scottish Law Commission justified the creation of Private Purpose Trusts given the fact they are already in use and recognised in Scots law, just without a legislative basis. 

Non-charitable public trusts (known as mortifications) have long been accepted under Scots law, according to the Scottish Government. The Act also sets out the basic duty on trustees to provide information to beneficiaries and others for the first time. This is intended to reinforce the right of beneficiaries to hold the trustees to account, as opposed to publicly identifying or registering the beneficiary, which is not required in Scots law.

What is a Private Purpose Trust?

A Private Purpose Trust is a trust that is created for the furtherance of a private purpose as opposed to a public purpose or a charitable purpose. The PPT contrasts with a beneficiary trust for the exclusive benefit of identified beneficiaries. Examples given in the legislation for the purposes of PPTs include a trust set up by commercial developers to cover potential future environmental costs associated with the development, and football clubs.

PPTs are defined in the Act as “trust that exists for the furtherance of a specific purpose which is neither charitable or public nor for the trustee’s sole benefit.” The Act does not contain a definition of what is meant by ‘purpose,’ which suggests that all manner of purposes will be acceptable in Scotland including the purpose of holding a controlling interest in a company. Neither is there a requirement in the Act for the purpose of the trust to be lawful. This was recommended by the Scottish Law Commission but not included in the legislation. 

What are the compliance risks? 

Private Purpose Trusts will not have beneficiaries, so once it is established, it does not need to be documented. Therefore a PPT will not appear on public registers and are not required to file accounts.

Dan Neidle, a tax lawyer and the founder of the Tax Policy Associates, warned that PPT’s “create an amazing new legal vehicle for money launderers, tax evaders and sanctions busters.” He noted that Private Purpose Trusts have not previously been permitted in the UK, and similar vehicles have been used in other jurisdictions for illicit purposes. 

Transparency International also raised concerns, noting that Scotland “risks creating a new way for criminals, sanctioned oligarchs and money launderers to hide their wealth.”

The Scottish Law Commission sought inspiration for the Private Purpose Trust regime from the trust laws of the Cayman Islands and Guernsey, which in turn are influenced by the trust laws of Bermuda, the British Virgin Islands, the Isle of Man and Jersey which introduced these kind of trusts in the 1980s and 1990s. No other country in Europe has a similar Private Purpose Trust regime. 

Unlike the trust laws of Guernsey and the Cayman Islands, there is no requirement for Scottish Private Purpose Trusts to be in writing, meaning these trusts could be implied. Nor is there any requirement for the trust to declare as to which regime applies (PPT or otherwise).

There are no restrictions on who can act as a trustee, nor any requirement that trustees be based in Scotland or licensed to be a trustee in Scotland. Unlike the similar regime in Guernsey, the PPT does not need to appoint any supervisors who can enforce the trust.  

One of the main aims of the Trusts and Succession (Scotland) Act 2024 is to attract international trust business to Scotland, highlighting the beneficial differences between Scots and English law, such as the requirement in England for a trust to have an identifiable beneficiary in most cases, which is not required in Scotland. 

There is also no express requirement that the purpose of the trust needs to be lawful or certain, or that it must not be contrary to public policy. The SLC legislative proposal did include a requirement for the purpose to be lawful, but this was not carried through to the Act.

Given that Scottish trusts can be constituted for whatever duraton the truster decides (such as in perpetuity), it will be very difficult to terminate a PPT. For instance, a truster could set up a perpetual private purpose trust with no supervisor, or the truster themself is the sole supervisor, and therefore shield property from creditors. Neither do the assets have to be transferred to Scotland for the PPT to be established and governed under Scots law.

Given the purpose of the Act is to attract an international trust market to Scotland, there is a significant risk of Private Purpose Trusts being abused by potentially illicit actors, as has already been the case for other vehicles such as Scottish Limited Partnerships.

The abuse of Scottish Limited Partnerships

The Private Purpose Trust regime is not the only function of Scots law that has been open to abuse by criminals. Scottish Limited Partnerships (SLPs) have been the subject of significant concern for their abuse by money launderers, criminals and dictators. 

Unlike limited partnerships registered in the rest of the UK, SLPs have a legal personality of their own, distinct from that of its partners. That enables an SLP to own assets in its own name; borrow money and grant security over those assets and enter into contracts on its own behalf. An SLP can also sue and be sued as a separate legal entity. SLPs are governed by the Limited Partnerships Act 1907. 

SLPs are an attractive vehicle for illicit activity because they are subject to limited reporting obligations at Companies House. Depending on the structure, SLPs may not have to file annual accounts. 

General and limited partners themselves can be corporate entities, and if those entities are incorporated in a jurisdiction with opaque ownership information, ownership and control of SLPs can easily be masked. 

An analysis of Scottish Limited Partnerships found that out of the 631 companies examined, only three were formed by residents of Scotland, with the majority being owned by individuals or corporations based outside of the country. Nearly 80% of SLPs were registered at only three addresses in Edinburgh, some of which were linked to sanctioned individuals and ongoing embezzlement cases.

The investigation also found 777 corporations listed as partners, with the majority based in the UK, followed by Switzerland, the United States, and the Seychelles. Concerns were raised over the use of SLPs as tax avoidance vehicles, and the potential for these entities to be part of complex networks leading to secretive jurisdictions. 

At least 20 SLPs lay at the heart of “the theft of the century” where more than an eighth of Moldova’s annual Gross Domestic Product was stolen. Secretive Scottish firms are also reported to have been used to bribe politicians in the Parliamentary Assembly of the Council of Europe in order to suppress criticism of Azerbaijan’s human rights record. 

Reducing the compliance risk of private purpose trusts

To protect themselves from the risks associated with Scottish Private Purpose Trusts (PPTs) being abused for money laundering, tax evasion, and sanctions evasion, firms should take the following steps:

Enhanced due diligence: Conduct rigorous due diligence on trust creators, trustees, and the sources of assets. Given the lack of requirements for transparency and the potential for implied or unwritten trusts, firms should verify the legitimacy of the purpose of the PPT and all parties involved.

Risk assessment: Evaluate the risk profile of each PPT, especially considering the lack of oversight and potential for trustees to be based outside of Scotland. Firms should classify high-risk clients or trusts for enhanced monitoring.

Documentation and record keeping: Ensure that detailed records of the PPTs are kept internally, including information on trustees and the trust’s purpose. Although not required by law, maintaining a record can help mitigate risks and demonstrate compliance in case of future inquiries.

Monitoring transactions: Monitor the flow of assets and transactions involving PPTs. Be vigilant for unusual or complex arrangements, such as assets being transferred to or from jurisdictions with weak money laundering controls.

Comply with AML regulations: Apply AML regulations rigorously. PPTs are not required to file accounts or be listed on public registers, making them vulnerable to abuse. Firms should implement controls to detect potential misuse, such as unusually large or complex transactions without a clear commercial rationale.

Training and awareness: Provide training to staff on the unique risks associated with PPTs and the specific red flags to look out for, such as a lack of identifiable beneficiaries, opaque ownership structures, and the involvement of high-risk jurisdictions.

Engage supervisors and professionals: Where possible, advise clients to appoint independent supervisors to the PPT to provide an additional layer of oversight. Appointing reputable professionals as trustees can also enhance compliance.

Client education: Educate clients on the potential reputational and legal risks of using PPTs for illegitimate purposes. Encourage transparency and lawful use of trusts.

Worried about the risks of trusts and tax evasion? Join our free webinar on Preventing Tax evasion: staying compliant with the Criminal Finances Act on 12 February 2025 at midday UK time.