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Does AUSTRAC require settlors to be identified and KYC as part of a trust CDD?

Every settlor must be identified; however full KYC is only required where the settlor retains control over the trust.

Every settlor must be identified as part of trust CDD, the reporting entity must review the trust deed to establish whether the settlor holds significant power or control. This can only be obtained by reviewing the deed.

Where the settlor retains no power, or is listed in the class of excluded parties, full KYC is not required.
Where the settlor has explicit powers or control, as set out in the trust agreement, full KYC is required, as they have the ability to make decisions which will affect the trust and the parties in the structure.

This is the risk-based application of AUSTRAC's beneficial owner concept for trust customers.

The two-step obligation

Step 1 - Identify every settlor (always required).

The settlor is one of the defined roles of a trust and must be identified from the trust deed in every case. Identification at this step means recording the settlor's name from the trust deed. This is non-negotiable and applies even where the settlor is a stranger to the trust (a solicitor or accountant who contributed a nominal sum to establish it), is deceased, or has no further role.

Step 2 - Assess whether the settlor retains control.

The settlor falls within AUSTRAC's beneficial owner concept only to the extent they retain control over the trust. AUSTRAC's guidance is explicit on this:

"the identity of any beneficial owner of the customer. This may include any trustee, settlor, appointor, guardian or protector of the trust, or any other individual who retains control over it."

The reporting entity must therefore make a positive assessment of whether the settlor retains any control - through powers reserved in the deed, a continuing role, the ability to remove trustees, the ability to revoke or amend the trust, the ability to direct distributions, or any other mechanism.

Outcome A - Settlor retains no control

Where the assessment concludes the settlor retains no control, the reporting entity:

  • records the settlor's identity from the deed;
  • documents the basis for concluding no control is retained (e.g. settlor was a stranger to the trust, the deed reserves no powers to the settlor, the settlor is deceased);
  • screens the settlor against PEP and sanctions databases as part of the standard screening of named individuals connected with the trust;
  • does not carry out full KYC verification on the settlor.

Outcome B - Settlor retains control

Where the assessment concludes the settlor retains control, they are a beneficial owner and the reporting entity must verify their identity to the same standard as any other controlling person of the trust. This means:

  • full KYC verification using reliable and independent data;
  • collection and verification of source of funds and source of wealth where the trust is high risk;
  • PEP and sanctions screening;
  • inclusion in ongoing CDD and monitoring.

This is the same treatment that applies to a trustee, appointor, guardian, or protector with control.

Where control may be retained

A settlor may retain control where the deed:

  • reserves powers of revocation or amendment to the settlor;
  • gives the settlor the ability to appoint or remove trustees;
  • gives the settlor the ability to add or remove beneficiaries;
  • names the settlor as appointor or guardian (or otherwise assigns the settlor a continuing role);
  • gives the settlor the ability to direct or veto distributions.

if any of these powers are identified the trust deed, then settlor will be viewed as a controlling partner and therefore require full KYC.

Common misconceptions

  • "Settlors don't need to be identified because they only paid a nominal sum to establish the trust." Incorrect - every settlor must be identified by name from the deed, regardless of whether they retain a controlling role.
  • "Settlors always need full KYC because they are listed as beneficial owners by AUSTRAC." Incorrect - AUSTRAC's guidance qualifies inclusion in the beneficial owner concept by reference to retained control. A settlor with no control is identified but does not require full KYC verification.
  • "If the settlor is dead, we can skip the analysis." Incorrect - the settlor's identity must still be recorded from the deed. The fact of death is part of the documentation that they retain no control.

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