Category: Beneficial Ownership

Legal Arrangement

Also known as: Trust, Fiducie, Treuhand, Fideicomiso

Simply put

A legal arrangement is a relationship, such as a trust, created through a legal instrument in which the ownership of assets is separated from their control or management. In many jurisdictions this typically involves one party holding or managing assets on behalf of others. Because ownership and control can be split, legal arrangements are of particular interest in efforts to identify who ultimately benefits from or controls assets.

Formal definition

A legal arrangement generally refers to a trust or similar structure, such as a fiducie, Treuhand, or fideicomiso, established through a legal instrument in which the ownership of assets is separated from their control, administration, or management. Unlike legal persons, legal arrangements are relationships rather than incorporated entities, though terminology and the specific structures recognized vary by jurisdiction (for example, trusts are recognized in the Virgin Islands, while civil-law systems may use analogous forms). In an AML context, legal arrangements are assessed for money laundering risk in part because the separation of legal ownership from control can obscure beneficial ownership; the FATF also addresses risks arising from administering, managing, or otherwise operating a legal arrangement established or settled in a foreign jurisdiction. Note that this term should be distinguished from a 'scheme of arrangement,' an unrelated concept referring to a formal debtor-creditor repayment agreement.

Why it matters

Legal arrangements matter to AML professionals because they can separate the legal ownership of assets from their control, administration, or management. When one party holds or manages assets on behalf of others, it can become difficult to identify who ultimately benefits from or controls those assets. This separation is precisely what makes legal arrangements a focus of beneficial ownership transparency efforts, since the party named as legal owner may not be the person who truly benefits from or directs the use of the assets.

The FATF, whose Recommendations are international standards rather than binding law, addresses the money laundering risks associated with legal arrangements, including risks arising from administering, managing, or otherwise operating a legal arrangement that has been established or settled in a foreign jurisdiction. Because the specific structures recognized and the terminology used vary considerably by jurisdiction, trusts in common-law systems, and analogous civil-law forms such as fiducie, Treuhand, or fideicomiso, compliance teams cannot assume a single, uniform treatment applies everywhere. The exact obligations attaching to any given arrangement should be confirmed against the applicable regime.

It is important to note that the presence of a legal arrangement is not, in itself, evidence of wrongdoing. Trusts and similar structures serve many legitimate purposes. The compliance concern is that the split between ownership and control can obscure beneficial ownership, which is why these arrangements warrant careful assessment as part of a risk-based approach rather than automatic suspicion.

Who it's relevant to

Compliance Officers and CDD Teams

Professionals conducting customer due diligence on trusts and similar arrangements need to look beyond the legal owner to identify who ultimately benefits from or controls the assets. Because the separation of ownership from control can obscure beneficial ownership, these arrangements often warrant closer scrutiny, with the exact requirements determined by the applicable jurisdiction's rules.

Trust and Company Service Providers

Those who administer, manage, or otherwise operate legal arrangements, particularly arrangements established or settled in a foreign jurisdiction, should be aware that the FATF specifically addresses the risks associated with these activities. The precise legal obligations vary by jurisdiction and should be confirmed against the local regime.

Financial Intelligence Analysts and Investigators

Analysts examining ownership structures need to distinguish legal arrangements, which are relationships rather than incorporated legal persons, and to recognize equivalent civil-law forms such as fiducie, Treuhand, or fideicomiso. Identifying the split between legal ownership and control can be central to tracing who ultimately benefits from assets, though the presence of such an arrangement is not itself proof of wrongdoing.

Legal and Risk Professionals

Advisers should be careful to distinguish a legal arrangement (a trust or similar structure) from an unrelated 'scheme of arrangement,' which refers to a formal debtor-creditor repayment agreement. Given that the structures recognized and the terminology used differ across common-law and civil-law systems, jurisdiction-specific analysis is essential.

Inside Legal Arrangement

Express Trust

A trust deliberately created by a settlor, typically through a written instrument, whereby a trustee holds and administers assets for the benefit of one or more beneficiaries or for a specified purpose. Express trusts are the most commonly referenced form of legal arrangement in AML frameworks, including the FATF Recommendations, though the treatment of trusts varies significantly across common-law and civil-law jurisdictions.

Similar Legal Arrangements

Structures functionally comparable to express trusts, which may include instruments such as fiducie, treuhand, fideicomiso, or Waqf depending on the jurisdiction. FATF Recommendation 25 addresses these arrangements alongside trusts, but the specific structures recognized and regulated differ by national legal system.

Parties to the Arrangement

The roles that typically define a legal arrangement, generally including the settlor (who establishes it and contributes assets), the trustee (who holds legal title and administers assets), the beneficiaries (who hold an interest in the assets), and, where applicable, a protector or other person exercising control. Identifying these parties is central to beneficial ownership determination for arrangements.

Distinction from Legal Persons

A legal arrangement is conceptually distinct from a legal person (such as a company or foundation). A legal arrangement generally does not have separate legal personality in the way a corporation does; obligations and control are exercised through the parties to the arrangement rather than through an incorporated entity. AML regimes address the two categories under separate but related requirements.

Beneficial Ownership Relevance

For AML purposes, obliged entities are generally required to identify the beneficial owners of a legal arrangement. This typically involves identifying the natural persons behind the various roles rather than relying solely on legal ownership of assets. The exact approach to identifying beneficial owners of arrangements varies by jurisdiction and is informed by FATF standards and instruments such as the EU AML framework.

Common questions

Answers to the questions practitioners most commonly ask about Legal Arrangement.

Is a legal arrangement the same thing as a legal entity or a company?

No. A legal arrangement, such as a trust or a similar fiduciary structure, is conceptually distinct from a legal entity like a company or foundation. A legal entity typically has its own legal personality and can hold assets and enter obligations in its own name. A legal arrangement generally does not have separate legal personality in the same way; instead it reflects a relationship in which one party holds or administers assets for the benefit of others. Because of this difference, the beneficial ownership analysis and the identification of relevant parties differ between the two, and jurisdictions may treat them under separate provisions. Exact definitions and treatment should be confirmed against the applicable regulation.

Does identifying the legal owner of assets in a trust satisfy beneficial ownership requirements?

Not on its own. Legal ownership and beneficial ownership are distinct concepts. In a trust or similar arrangement, the party holding legal title to the assets is generally not the same as those who ultimately own or benefit from them. Identifying beneficial ownership of a legal arrangement typically requires looking beyond legal title to the natural persons connected to the arrangement in the relevant capacities. Establishing legal title alone does not discharge beneficial ownership obligations, and the specific parties who must be identified depend on the applicable regime.

Which parties to a legal arrangement generally need to be identified as part of customer due diligence?

For a trust or similar arrangement, obliged entities are generally expected to identify the natural persons associated with the various roles in the arrangement, which for a trust typically include those who create it, those who administer it, any party exercising control or oversight, and those who benefit or are intended to benefit. Other classes of persons exercising ultimate control may also be relevant. The precise categories of parties, and how they are described, vary by jurisdiction and by the type of arrangement, so the applicable regulation should be consulted to confirm scope.

How should an obliged entity approach due diligence when a customer is, or acts on behalf of, a legal arrangement?

As a general matter, customer due diligence in these situations extends to understanding the nature and purpose of the arrangement and identifying the relevant natural persons connected to it, rather than treating the arrangement as a single opaque customer. The depth of measures applied is typically informed by a risk-based assessment, which may point toward enhanced due diligence where risk factors are present. This is a measure to detect, deter, and manage risk rather than a guarantee against misuse. The specific obligations depend on whether the entity is within scope of the relevant regime and on the applicable thresholds and rules.

What information about a legal arrangement is typically expected to be obtained and kept?

Obliged entities generally seek information sufficient to understand who the relevant parties are and the purpose and structure of the arrangement, and to identify the natural persons behind the relevant roles. Record-keeping expectations typically require retaining the information and documentation obtained during due diligence. The precise data points, retention periods, and formats are set by the applicable regime and may differ across jurisdictions, so exact requirements should be confirmed against the relevant regulation.

Do legal arrangements face the same registration or transparency requirements as companies?

Not necessarily, and treatment diverges across regimes. Some jurisdictions have introduced registration or beneficial ownership transparency requirements applicable to certain trusts or similar arrangements, while the scope, triggers, and access conditions differ from those applying to companies and other legal entities. Whether a particular arrangement falls within such requirements depends on the applicable regime, the type of arrangement, and its connection to the jurisdiction. Because these frameworks are not uniform, obliged entities should confirm the specific obligations against the relevant local rules rather than assume a single global standard applies.

Common misconceptions

A legal arrangement is the same thing as a legal person or a company.

These are distinct categories in AML frameworks. A legal person, such as a company or foundation, is an incorporated or registered entity that typically has separate legal personality, whereas a legal arrangement such as an express trust generally operates through relationships between parties (settlor, trustee, beneficiaries) without such separate personality. FATF and many national regimes address them under separate, though related, requirements, and treating them as interchangeable can lead to gaps in beneficial ownership analysis.

The trustee's legal ownership of the assets means the trustee is the beneficial owner for AML purposes.

Legal ownership and beneficial ownership are not the same concept. A trustee typically holds legal title to assets but is not necessarily the beneficial owner. For AML purposes, identifying beneficial ownership of an arrangement generally requires looking across all relevant roles to identify the natural persons who ultimately own or control the arrangement or benefit from it, an approach that varies by jurisdiction.

The same rules for legal arrangements apply identically in every jurisdiction.

The FATF Recommendations set standards rather than binding law, and their implementation differs across regimes. Common-law and civil-law systems recognize different structures, and the specific arrangements captured, the information that must be obtained, and how beneficial ownership is determined vary. Exact obligations should be confirmed against the applicable national regulation.

Best practices

Determine at the outset whether a customer or structure is a legal arrangement or a legal person, since the applicable identification and beneficial ownership requirements differ between the two categories.

When dealing with a legal arrangement, identify and document all relevant parties, including the settlor, trustee, beneficiaries, and any protector or person exercising control, rather than relying on legal ownership of assets alone.

Distinguish clearly between legal ownership and beneficial ownership when assessing trusts and similar arrangements, and focus on identifying the natural persons who ultimately own or control the arrangement.

Confirm which specific arrangements are recognized and regulated in each relevant jurisdiction, recognizing that common-law and civil-law systems treat trusts and analogous structures differently.

Treat the FATF Recommendations as standards to be read alongside the binding national requirements that apply, and verify exact obligations, thresholds, and definitions against the applicable local regulation.

Apply enhanced scrutiny where a legal arrangement adds complexity or opacity to a customer relationship, while documenting the rationale and avoiding treating structural complexity alone as evidence of wrongdoing.