Privacy is a fundamental human right, one of the pillars of the human integrity. The right to privacy can be found in all of the major international and regional human rights declarations. Most prominently it can be found in the United Nations Declaration of Human Rights from 1948, in Article 12. “No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honor and reputation.”
Privacy is essential for individuals to operate and thrive without fear of scrutiny or reprisal. Information is power, and the more information others have, the more potential they have to wield power over you. With limited amounts of personal information, criminals can commit many types of fraud, even going so far as identity theft. With scraps of economic information, or whiffs of personal inclination, competitors can get a leg up on you. Other information about your personal life can lead to creditors giving you poorer rates on credit, or deciding to recall the debt that is owed. In regimes with fewer rights and personal liberties, governments can even use information about you to restrict access to travel, healthcare or even legal representation. Privacy between individuals and society is essential, but some even advocate for it going down to the individual level, even between family members. For instance, in the case of a divorce, a spouse could use incriminating information against their partner to make their own case stronger. These instances are true for everyone, but especially for wealthier individuals who potentially have more to lose through the use of their personal information against them.
Arguments largely in favor of greater privacy control largely focus on data protection. As internet browsers and applications have become more sophisticated, more of our personal data is being siphoned off and sold to major corporations in an attempt to understand us better than we know ourselves for the purposes of marketing and manipulation. But recently we’ve seen greater awareness of this by the general public, and companies have been forced to reckon with the backlash, making people aware of when their data is being used and giving them the option to opt out. However, the movement for greater control of our privacy only seems to extend to our personal information generated by our digital footprint, and not our economic information.
In this regard, the safeguards of our economic information seem to be receding in the face of a global transparency regime. Largely under the auspices of anti-money laundering regulations, this regime has taken form in the Register of Beneficial Ownership (RBO), the Common Reporting Standard (CRS), and the Foreign Account Tax Compliance Act (FATCA).
The RBO requires that private companies create a register of “people with significant control,” and make that register available to the public. A “beneficial owner” or “ultimate beneficial owner” is a natural person who enjoys the benefits of ownership of an asset, even if the title to the property is marked with another name. Prior to this, a company or trust could own an asset, such as a piece of real estate, but the ultimate beneficiary of that asset, or the person who owns and benefits from the earnings, was kept private. The RBO was first enacted in the UK in 2016, with the European Union requiring it in many of its countries by the following year, although many neglected to meet that deadline.
Next, the CRS is a global standard for the automatic exchange of financial account information, created by the Organization for Economic Cooperation and Development (OECD) and put into effect in 2016. Designed to increase transparency about tax matters on a global scale, it requires financial institutions to identify accounts held directly or indirectly by persons who are not tax residents in the country where their account is opened.
Finally, FATCA, a US federal law enacted in 2010, requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their US account holders. In fact, CRS was put into place as a corollary of FATCA.
In order to account for this global transparency regime encroaching on financial privacy, high net worth individuals have a few tools at their disposal, for instance the so-called “hybrid trust” available in the EU, in Hungary. Trusts were first implemented into the Hungarian Civil Code in 2014, after which legislators introduced the asset management foundation (“AMF”), as another solution for wealth planning in 2019. The AMF is a unique hybrid vehicle which entwines the concepts of a trust and a foundation. Ultimately, this means that the AMF is a special kind of foundation, which may perform asset management, including trust relationships, as its main activity. It is this classification of a foundation and the unique definition of its constituents that enables solutions for RBO and CRS.
Despite having aims very similar to that of a trust, the ownership structure in a foundation is different. As a consequence, the combination of an AMF as a legal person without owners pursuing private interests as well as long-term goals results in a very different ownership structure. In the end, this also affects the determination of the beneficial ownership. It is thus the combination of the two structures that provides for unique privacy protection. Ultimately, the founder of the AML can transfer his rights to the foundation board, at which point the board members qualify as beneficial owners of the trust relationship instead of the economic founder who transferred assets into the trust.
With regard to CRS, every financial institution is obliged to report information about its cross-border clients. However, foundations are generally excluded from providing financial services, as only share companies and limited liability companies are allowed to obtain any license for the provision of financial services. Consequently, with regard to the definition of custodial institutions under the CRS, an AMF acting as trustee of a trust relationship cannot be classified as an entity that primarily conducts business investment activities or operations on behalf of other persons.
With these provisions that enable solutions for the new global transparency regime, high net worth individuals should seriously consider the hybrid trust as an effective means of maintaining their financial privacy.