Trusts and Company Service Providers

1. Why Trusts and Company Service Providers Matter in AML/CFT

Trusts and Company Service Providers (TCSPs) sit at one of the most sensitive points in the global financial system. They are the professionals who create, administer and often front the legal structures that money launderers, tax evaders, sanctions evaders and corrupt officials use to disguise who really owns and controls assets. For this reason the Financial Action Task Force (FATF) classifies TCSPs as Designated Non-Financial Businesses and Professions (DNFBPs) and treats them as gatekeepers to the financial system, alongside lawyers, accountants, notaries, real estate agents, casinos and dealers in precious metals and stones.

The importance of this topic for the CAMS exam cannot be overstated. Almost every major laundering scandal of the past two decades involved legal persons or legal arrangements created or administered by a TCSP. The Panama Papers (2016, Mossack Fonseca), the Paradise Papers (2017, Appleby) and the Pandora Papers (2021, fourteen offshore providers) all exposed how corporate service providers mass-produced shell companies, supplied nominee directors and shareholders, and provided registered office addresses with little or no due diligence on the true beneficial owners. The Danske Bank Estonia case, the Troika Laundromat and the Russian Laundromat all relied heavily on UK limited liability partnerships and Scottish limited partnerships registered through formation agents.

From a laundering-cycle perspective, TCSPs are most heavily exploited in the layering stage. A chain of companies in several jurisdictions, each with nominee officers and each owned by a trust or foundation, creates distance between the criminal and the proceeds while giving every individual transaction an appearance of ordinary commercial activity. Because the structures are legal and widely used for legitimate purposes (estate planning, asset protection, joint ventures, holding structures), illicit use is extremely hard to distinguish from legitimate use without strong beneficial ownership transparency.

2. What Is a TCSP? The FATF Definition

FATF defines a TCSP as any person or business that is not already covered elsewhere in the Recommendations and that, by way of business, provides any of the following services to third parties:

1. Acting as a formation agent for legal persons (incorporating companies, partnerships, foundations).
2. Acting as, or arranging for another person to act as, a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons.
3. Providing a registered office, business address, correspondence or administrative address for a company, partnership or any other legal person or arrangement.
4. Acting as, or arranging for another person to act as, a trustee of an express trust or performing the equivalent function for another form of legal arrangement.
5. Acting as, or arranging for another person to act as, a nominee shareholder for another person.

Remember these five functions. Exam questions frequently test whether a particular activity falls inside the definition. Note the phrase by way of business: an individual who agrees to be a trustee of a family trust without charging fees is not a TCSP, but a firm that offers trusteeship services commercially is.

TCSPs range from large international fiduciary groups with thousands of staff to a single lawyer or accountant offering company formation as a sideline. Many lawyers, notaries and accountants perform TCSP functions, so the categories of DNFBPs overlap. In some jurisdictions TCSPs are licensed and supervised (for example, Jersey, Guernsey, Cayman Islands, Hong Kong, the United Kingdom through HMRC registration, and EU member states under the Anti-Money Laundering Directives). In others, company formation is essentially unregulated, which is itself a risk indicator.

3. Key Concepts: Legal Persons and Legal Arrangements

Legal persons are entities other than natural persons that can establish a permanent customer relationship with a financial institution or own property: companies, corporations, foundations, partnerships, associations. Legal arrangements are express trusts and similar structures such as fiducie, treuhand, waqf and fideicomiso.

The trust relationship. A trust is created when a settlor transfers assets to a trustee, who holds legal title and manages the assets for the benefit of beneficiaries in accordance with the trust deed. Many trusts also have a protector (sometimes called an enforcer) who can veto trustee decisions or replace the trustee. Anyone else with effective control, such as a person holding a power of appointment or the author of a binding letter of wishes, is also relevant for AML purposes. FATF Recommendation 25 and the FATF Interpretive Note require that beneficial ownership information for a trust cover all of these parties: settlor, trustee(s), protector, beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control.

Shell companies have no independent operations, significant assets, ongoing business activities or employees. Shelf companies are pre-incorporated entities that sit dormant and are sold later so the purchaser can present an entity with an apparent corporate history. Front companies do carry on genuine business but are used to commingle illicit funds. Nominee directors and shareholders appear on public records in place of the real controller, often with undisclosed agreements or undated resignation letters held by the beneficial owner. Bearer shares transfer ownership by physical delivery of the share certificate and have been largely abolished or immobilised under FATF pressure. Private foundations (common in Panama, Liechtenstein, the Netherlands Antilles) combine corporate personality with trust-like beneficiary arrangements and are frequently used as the apex of multi-layered structures.

4. How TCSPs Are Exploited: Typologies and Mechanics

Obscuring beneficial ownership. The core abuse is separating the criminal from visible ownership. A typical structure: a Belize or BVI company is owned by a Nevis trust whose trustee is a Cyprus corporate trustee; the company has a nominee director supplied by the TCSP, a registered address in a serviced office, and a bank account in a third jurisdiction. Each layer sits in a different legal system, so a single subpoena or information request will not reveal the full chain.

Complex multi-jurisdictional layering. Launderers deliberately use jurisdictions with strong secrecy laws, slow or no mutual legal assistance, no public registers, and permissive rules on corporate directors (companies acting as directors of other companies) and corporate shareholders.

Mass incorporation. Some providers register hundreds of companies at the same address with the same handful of nominee officers. Laundromat schemes used UK LLPs and SLPs with partners that were themselves offshore companies, producing entities with no identifiable human owner.

Trust-specific abuses. Discretionary trusts where the beneficiary class is broad and unnamed; flee clauses that automatically move the trust to another jurisdiction if authorities make inquiries; settlors who retain extensive powers so the trust is a sham; trusts used to hold shares in operating companies so the settlor is invisible on corporate registers; and letters of wishes that effectively give the settlor control despite the trustee holding title.

TCSP as the account opener. The TCSP, rather than the beneficial owner, interacts with the bank. The bank may rely on the TCSP for customer identification, which is dangerous if the TCSP performed weak or no due diligence. In the worst cases the TCSP itself is a witting participant or a professional money launderer.

Facilitating sanctions evasion, tax evasion, corruption and fraud. Oligarch asset-hiding after the 2022 Russia sanctions, the 1MDB scandal, and numerous grand corruption cases all involved service-provider-formed vehicles. Trade-based money laundering also relies on shell companies to issue and receive fake invoices.

5. Red Flags Associated with TCSPs and the Structures They Create

Red flags relating to the customer or structure:
- Unnecessary complexity in the ownership chain with no clear commercial, legal or tax rationale.
- Use of multiple jurisdictions, especially those with low transparency or weak AML regimes.
- Nominee directors and shareholders, particularly where the nominee is a corporate entity or acts for hundreds of companies.
- Beneficial owner unwilling to be identified or TCSP refusing to disclose the owner, citing confidentiality.
- Shelf company with an apparently long history but no corresponding business activity.
- Registered address that is a mail drop or hosts an unusually large number of companies.
- Frequent changes of directors, shareholders, registered agent or jurisdiction of the entity.
- Politically exposed persons, or close associates, appearing anywhere in the structure, or a PEP connection concealed behind a trust.
- Bearer shares or entities incorporated in jurisdictions that still permit them.
- Trusts with flee clauses, vague beneficiary classes, or settlors retaining control.
- Customer insists on using a specific TCSP that is known for low scrutiny or is itself under investigation.

Red flags relating to transactions through TCSP-created entities:
- Account activity inconsistent with the stated purpose of the entity (for example, a holding company receiving numerous third-party payments).
- Round-amount transfers between related shell companies with vague descriptions such as consulting or loan.
- Rapid pass-through of funds with little balance retained.
- Payments to or from high-risk jurisdictions unrelated to the business purpose.
- Company revenue far exceeding what its stated staff, premises or sector could generate.

Red flags for a bank onboarding a TCSP as a customer:
- TCSP is unlicensed or unregistered in a jurisdiction that requires registration.
- TCSP uses pooled or omnibus accounts for many client entities without the ability to identify underlying clients.
- TCSP has a history of regulatory findings, adverse media or involvement in leaks.
- TCSP markets anonymity, secrecy or asset protection from creditors and authorities.

6. The Regulatory and Control Framework

FATF Recommendations. Recommendation 22 extends CDD and record-keeping obligations to DNFBPs including TCSPs when they prepare for or carry out the listed transactions. Recommendation 23 requires TCSPs to file suspicious transaction reports, apply internal controls and conduct enhanced due diligence on higher-risk countries. Recommendation 28 requires that DNFBPs be subject to supervision or monitoring. Recommendation 24 (transparency of legal persons) and Recommendation 25 (transparency of legal arrangements) require countries to ensure adequate, accurate and up-to-date beneficial ownership information is available to competent authorities in a timely manner. FATF revised Recommendation 24 in 2022 to require a multi-pronged approach, typically including a beneficial ownership registry, and strengthened Recommendation 25 in 2023 to clarify trustee obligations and the definition of beneficial owner for trusts.

TCSP obligations. A compliant TCSP must identify and verify the customer and the beneficial owner; understand the purpose and intended nature of the structure; apply enhanced due diligence to PEPs, high-risk jurisdictions and complex structures; conduct ongoing monitoring; keep records for at least five years; report suspicious activity; screen against sanctions lists; train staff; and appoint a compliance officer. A trustee must maintain information on all parties to the trust and on any regulated agents or service providers to the trust, and must disclose its status as trustee to financial institutions when forming a business relationship.

Regional implementation. In the European Union the Fourth, Fifth and Sixth AML Directives require TCSPs to be licensed or registered, subject fit-and-proper tests on owners and managers, and establish beneficial ownership registers for companies and trusts. The United Kingdom requires TCSPs to register with HMRC (unless supervised by a professional body) and operates the People with Significant Control register and the Trust Registration Service. In the United States, the Corporate Transparency Act of 2021 created a beneficial ownership reporting requirement administered by FinCEN, closing a long-criticised gap that made US states such as Delaware, Nevada and Wyoming attractive for anonymous shell companies. Offshore centres such as Jersey, Guernsey, Isle of Man, Cayman and BVI operate licensing regimes with on-site inspection.

Financial institution controls when dealing with TCSPs or TCSP-created customers.
- Treat TCSPs as higher-risk customers warranting enhanced due diligence and senior management approval where appropriate.
- Look through every layer to the natural persons who ultimately own or control the entity; do not stop at a corporate shareholder or at the trustee.
- For trusts, identify settlor, trustee, protector, beneficiaries and any person with effective control; obtain the trust deed and relevant letters of wishes.
- Verify the TCSP is licensed or registered and assess the quality of its own AML program before placing any reliance on it; under FATF Recommendation 17 the ultimate responsibility for CDD always remains with the relying institution.
- Document the rationale for complex structures and challenge structures with no legitimate purpose.
- Apply transaction monitoring scenarios tuned to shell-company behaviour and to pooled TCSP accounts.
- Consult beneficial ownership registers, corporate registries, leaked-data search tools and adverse media.
- Escalate and file suspicious activity reports where beneficial ownership cannot be established or where the structure appears designed to evade scrutiny; consider exiting the relationship.

7. Exam Tips: Answering Questions on Trusts and Company Service Providers

Tip 1: Know the five FATF TCSP functions cold. If a question asks which of the following is a TCSP activity, the answer will be one of: forming legal persons, acting as or arranging a director/secretary/partner, providing a registered office or address, acting as or arranging a trustee, or acting as or arranging a nominee shareholder. Providing audit services or general legal advice alone is not a TCSP activity.

Tip 2: Always look through to the natural person. CAMS questions on beneficial ownership expect you to identify the ultimate natural person, never a corporate shareholder, nominee or the trustee alone. If an answer option stops at a legal entity, it is almost certainly wrong.

Tip 3: For trusts, identify everyone. When asked whom a financial institution must identify for a trust customer, the correct answer includes the settlor, trustee, protector, beneficiaries (or class) and any other person with effective control. An option that lists only the trustee, or only the beneficiaries, is incomplete.

Tip 4: Distinguish shell, shelf and front companies. Shell has no operations; shelf is a pre-formed dormant company sold for its age; front has real operations used to commingle illicit funds. Questions often hinge on this vocabulary.

Tip 5: Reliance on third parties does not transfer liability. If a scenario describes a bank relying on a TCSP for CDD, remember that the bank remains ultimately responsible, must be able to obtain the CDD information immediately, and must satisfy itself that the TCSP is regulated and supervised.

Tip 6: Complexity without rationale is the red flag. Many scenario questions describe a structure and ask for the most significant red flag or the best next step. The absence of a legitimate business, legal or tax reason for multi-layered, multi-jurisdictional ownership is the key indicator. The best next step is usually to obtain and document the rationale and identify the beneficial owners, escalating or filing a SAR if the information cannot be obtained; it is rarely to simply approve, and it is never to tip off the customer.

Tip 7: Link TCSPs to the layering stage. When asked which stage of money laundering is most associated with the creation of shell companies and trusts, choose layering, although placement and integration can also involve such vehicles.

Tip 8: Remember the Recommendation numbers. R.22 and R.23 (DNFBP CDD and other measures), R.24 (legal persons), R.25 (legal arrangements), R.28 (DNFBP supervision), R.17 (third-party reliance). Exam questions may cite these directly.

Tip 9: Recognise the real-world cases. Panama Papers, Paradise Papers and Pandora Papers are the classic illustrations of TCSP abuse; laundromat cases illustrate UK partnership abuse; the Corporate Transparency Act and the EU AMLDs illustrate the regulatory response. A question may describe one of these without naming it.

Tip 10: Apply a risk-based mindset, not a prohibition mindset. CAMS does not expect you to refuse all TCSP business or all trust customers. The correct answer usually reflects enhanced due diligence, senior management approval, ongoing monitoring and documentation proportionate to risk, rather than automatic rejection, unless beneficial ownership genuinely cannot be determined.

Tip 11: Watch for the strongest or most appropriate wording. When several options are plausible, choose the one that is most complete and most directly addresses the identification of the beneficial owner or the suspicious element in the scenario. Eliminate options that delay, that rely on the customer or TCSP assurances alone, or that involve informing the customer of an investigation.

8. Quick Revision Summary

- TCSPs form, administer and front companies, partnerships, foundations and trusts; they are DNFBPs and gatekeepers.
- Five FATF-defined functions: formation agent, director/secretary/partner, registered office or address, trustee, nominee shareholder.
- Core risk: concealment of beneficial ownership through layered, multi-jurisdictional structures, nominees, shelf companies, bearer shares and opaque trusts.
- Trust parties to identify: settlor, trustee, protector, beneficiaries, other controllers.
- Key standards: FATF R.22, R.23, R.24, R.25, R.28, R.17; EU AMLDs; UK HMRC registration and registers; US Corporate Transparency Act.
- Institution response: enhanced due diligence, look-through to natural persons, verify TCSP licensing, document rationale, monitor, escalate, report and never tip off.
- Exam approach: identify the beneficial owner, flag unexplained complexity, apply risk-based enhanced measures, and choose the most complete and responsible action.