The intricate veil of trust deeds and formal legal structures may no longer be an impermeable shield against European Union sanctions or stringent anti-money laundering (AML) transparency obligations, according to two landmark rulings from the Court of Justice of the European Union (CJEU) in May. These decisions, commonly dubbed the "Italian cases," signal a significant judicial endorsement of the EU’s "substance-over-form" approach, compelling trustees, fiduciary service providers, and compliance professionals across member states to re-evaluate their understanding of asset control and beneficial ownership. Henry Mander and Aki Corsoni-Husain of Harneys provide a comprehensive analysis of these pivotal judgments and their far-reaching implications.
The Genesis of the "Italian Cases"
The legal challenges that culminated in these CJEU judgments originated from preliminary references made by Italian courts, grappling with the application of EU restrictive measures and AML directives to complex trust structures. The core of the dispute lay in determining whether assets held within trusts, particularly those established under foreign law, could be subjected to asset freezes or if their beneficial ownership needed to be disclosed to the public, even when formal legal ownership appeared to reside with an unrelated entity or individual.
The first set of decisions, encompassing Case C-483/23 and Joined Cases C-428/24 and C-476/24, directly addressed the freezing of assets held through trusts under EU sanctions law. Specifically, Italian authorities sought to impose asset freezes on funds and economic resources held within Bermuda-law trusts. These trusts were linked, albeit indirectly, to individuals designated under Council Regulation (EU) No 269/2014, a key piece of legislation enacted in response to Russia’s military aggression against Ukraine. The Italian authorities’ actions were taken despite the existence of trust instruments that ostensibly prohibited the transfer of assets to, or control by, the sanctioned individuals. This presented a direct challenge to the conventional understanding that a well-drafted trust deed could insulate assets from sanctions.
The second set of decisions, Joined Cases C-684/24 and C-685/24, focused on the beneficial ownership transparency requirements mandated by the EU’s Fourth Anti-Money Laundering Directive (4AMLD) for Italian trust mandates, known as mandati fiduciari. Italian fiduciary companies contested the obligation to disclose beneficial ownership information to members of the public demonstrating a legitimate interest. Their argument centered on the premise that mandati fiduciari do not involve a formal transfer of ownership in the same way as traditional trusts, and therefore should be excluded from the directive’s scope. This raised questions about the definition of "trusts" and similar legal arrangements within the EU regulatory framework.
CJEU’s Broad Interpretation of "Belonging To" and "Control" in Sanctions Law
In a decisive move, the CJEU held that the concepts of "belonging to" and "control" as stipulated in Article 2 of Council Regulation (EU) No 269/2014 must be interpreted broadly. This expansive interpretation moves beyond a narrow, formalistic reading of legal titles and instruments. The Court affirmed that these concepts encompass all forms of power or influence exercised over funds and economic resources, even in the absence of a formal, direct legal link between the assets and the designated person.
The implications for trust structures are profound. The CJEU indicated that assets can be deemed to belong to, or be under the control of, a settlor or beneficiary if those individuals retain the ability to utilize, benefit from, or dispose of the resources. Crucially, the Court also highlighted that the capacity to exert influence over the trustee’s decisions is a significant factor. This means that even if a trustee acts with apparent independence, if the settlor or a beneficiary can demonstrably sway or direct the trustee’s actions, the assets may be considered under their control for sanctions purposes.
This judicial stance directly challenges the efficacy of trust structures designed purely for asset obfuscation or to circumvent sanctions regimes. It signals a clear intent by EU judicial bodies to look beyond the literal wording of trust deeds and examine the practical realities of control and benefit.
Reinforcing Beneficial Ownership Transparency in AML Frameworks
On the AML transparency front, the CJEU’s rulings in Joined Cases C-684/24 and C-685/24 provided a robust validation of the EU’s commitment to uncovering beneficial ownership. The Court confirmed the validity of the access regime for beneficial ownership information under 4AMLD, finding it compatible with Articles 7 and 8 of the EU Charter of Fundamental Rights. This means that member states can indeed require the disclosure of such information to the public when a legitimate interest can be demonstrated.
Crucially, the CJEU accepted that member states have a degree of discretion in classifying domestic legal arrangements as "other types of legal arrangements" that possess a structure or functions similar to trusts for transparency purposes. This allows for the inclusion of arrangements like Italian mandati fiduciari within the ambit of 4AMLD, even if they do not involve a formal transfer of legal ownership. This decision builds upon the Court’s earlier ruling in Sovim v Luxembourg (Case C-37/20), further solidifying the EU’s expansive interpretation of what constitutes a trust-like arrangement for AML purposes.
The Court did, however, acknowledge the importance of proportionality and the need for interim judicial protection where exemptions to disclosure are refused. This ensures that the transparency regime does not unduly infringe upon fundamental rights, while still prioritizing the identification of beneficial owners to combat money laundering and terrorist financing.
Key Takeaways for EU Sanctions and AML Regulation
The "Italian cases" collectively underscore a significant shift in regulatory philosophy. The CJEU’s judgments are not merely technical interpretations of existing law; they represent a clear and deliberate move towards an effects-based enforcement approach.
Rejection of Formalism in Sanctions Enforcement: The sanctions ruling explicitly rejects a purely formalistic approach. The Court has made it unequivocally clear that the factual indicators of influence and control are paramount, superseding the strict terms of a trust deed. This implies that a thorough due diligence process must now extend beyond the documentation of a trust to encompass a comprehensive assessment of the relationships between settlors, beneficiaries, trustees, and any other parties with the power to influence asset management.
Identifying Factual Indicators of Control: The CJEU’s reasoning points towards a multi-faceted analysis of control. Relevant indicators include:
- Interpersonal Relationships: The nature and strength of relationships between beneficiaries or settlors and the trustee or other power-holders. Close personal ties or family connections can be indicative of influence.
- Economic Benefit: The allocation of trust resources to activities that primarily benefit a designated person, even if indirectly.
- Structural Complexity: The presence of needlessly complex legal structures that appear designed to obscure beneficial ownership or control.
- Ownership of Trustee: A majority shareholding in the trustee entity held by the beneficiary or settlor.
- Timing of Establishment/Reorganization: The establishment or reorganization of trust entities shortly before sanctions were imposed can raise red flags.
- Director Interconnections: Close personal or professional relationships between directors of frozen entities and the designated person.
This broad-brush approach to identifying control echoes recent developments in other jurisdictions. The English Court of Appeal’s Eurochem judgment in July 2025, which also looked beyond formal legal title to assess practical control over trust assets by sanctioned individuals, demonstrates a growing cross-jurisdictional consensus on effects-based enforcement. This convergence of legal interpretation suggests a global trend towards scrutinizing the economic reality of asset ownership rather than its legal veneer.
Broadening the Scope of AML Transparency: The confirmation that mandati fiduciari fall within the 4AMLD regime, even without a formal transfer of ownership, signifies an expansion of the directive’s reach. This is consistent with the EU’s broader objective of increasing transparency in financial transactions to prevent their abuse for illicit purposes. The willingness of the CJEU to allow member states flexibility in classifying domestic arrangements as "trust-like" for transparency purposes further strengthens this objective. This means that any legal arrangement that functions similarly to a trust in terms of holding or managing assets on behalf of others could be subject to beneficial ownership disclosure requirements.
Practical Implications for Trustees and Compliance Teams
These CJEU rulings necessitate immediate and concrete operational adjustments for trustees, fiduciary service providers, and compliance professionals involved with trust structures that have any nexus to EU-regulated persons or activities.
Enhanced Due Diligence and Ongoing Monitoring:
The emphasis on practical control demands a significant enhancement of due diligence procedures. This includes:
- Deep Dive into Relationships: Beyond standard checks, a thorough assessment of the relationships between settlors, beneficiaries, trustees, and any other influential parties is critical. This may involve looking into family ties, business associations, and any patterns of communication or decision-making.
- Tracing Economic Flows: A detailed analysis of how trust assets are utilized and who ultimately benefits from their use is now essential. This goes beyond simply reviewing financial statements to understanding the economic purpose and beneficiaries of all transactions.
- Scrutiny of Structure and Complexity: Structures that appear overly intricate or designed to obscure beneficial ownership should be subjected to heightened scrutiny. The rationale for such complexity must be clearly justifiable.
- Beneficiary Influence Assessment: Trustees must actively assess the extent to which settlors or beneficiaries can influence their decision-making. This requires documenting any instances of direct or indirect pressure, requests, or communications that could be interpreted as attempts to exert control.
Re-evaluation of Trust Deeds and Governance:
While trust deeds remain legally significant, their ability to unilaterally shield assets is diminished. Trustees should:
- Review Existing Trust Instruments: Regularly review trust deeds in light of evolving case law and regulatory expectations. Identify any clauses that might be interpreted as granting excessive control or benefit to settlors or beneficiaries who are, or could become, subject to sanctions.
- Strengthen Internal Controls: Implement robust internal controls and decision-making processes for trustees. Ensure that decisions are demonstrably made in the best interests of the trust and its beneficiaries, free from undue influence. Documentation of these processes is paramount.
- Training and Awareness: Ensure that all staff involved in trust administration and compliance are fully trained on the implications of these rulings and the evolving landscape of EU financial regulation.
Proactive Risk Management:
The shift towards substance-over-form necessitates a proactive approach to risk management. This involves:
- Regular Risk Assessments: Conduct regular risk assessments of trust structures, focusing on potential sanctions vulnerabilities and AML compliance.
- Scenario Planning: Develop contingency plans for scenarios where an asset controlled through a trust might be deemed subject to sanctions or where beneficial ownership disclosure is required.
- Legal Counsel Consultation: Seek expert legal advice to ensure that trust structures and administrative practices remain compliant with the latest interpretations of EU law.
A Broader Regulatory Trajectory: Substance Over Form
The "Italian cases" are not isolated incidents but rather crystallize a broader regulatory trajectory that has been gaining momentum across the EU for several years. Courts, legislators, and regulators are collectively moving away from a legal regime anchored in formal legal ownership towards one where practical control, influence, and economic benefit are the operative concepts. This shift is driven by a desire to enhance financial stability, combat illicit financial flows, and ensure that individuals and entities subject to sanctions cannot evade their obligations through sophisticated legal arrangements.
This fundamental change has profound implications for the industry. Structures meticulously designed for legitimate purposes such as estate planning, asset protection, or commercial transactions will increasingly be scrutinized not merely for how they appear on paper but for how they operate in practice. The crucial question for regulators and courts will no longer be solely "Who holds legal title?" but rather a more probing inquiry: "Who truly benefits, who makes the decisions, and who possesses the power to influence those decisions?"
For the compliance community, the message is unequivocal. Static assessments based solely on constitutional documents are no longer sufficient. A dynamic and ongoing monitoring of factual relationships, decision-making patterns, and economic flows is now the baseline expectation. Trustees and fiduciary providers who fail to adapt their governance and risk frameworks accordingly face not only significant enforcement risks but also the potential inability to demonstrate the lawfulness of their operations when challenged.
In essence, the "Italian cases" serve as a stark signpost, indicating a clear direction of travel for EU financial regulation. The path leads towards ever-greater scrutiny of substance over form, demanding that the compliance infrastructure surrounding trust and fiduciary structures evolve rapidly to meet these heightened expectations. The era of relying solely on the formal legal structure to insulate assets is rapidly drawing to a close.
