Historic EU Beneficial Ownership Initiatives Advance, but Public Access, Trust Issues Remain

Two key European Union committees approved landmark beneficial ownership measures to largely eradicate corporate opacity, a bastion of secrecy long exploited by corrupt politicians and organized crime groups and a nigh immovable stumbling block to investigators the world over.

The advancement Tuesday of the measures laid out in the European Union (EU) Fourth Directive – a broad update of the bloc’s chief countermeasures to thwart criminal money launderers and terrorist groups by illuminating their illicit networks – has not, however, occurred without conflict, even though the directive garnered wide support by council and parliament lawmakers.

The chief contention on the issue of beneficial ownership, though, came not from inside the EU, but from without, with the United Kingdom (UK) – a haven for a burgeoning trust industry fueled by foreign capital – strenuously resisting a proposal to create an in-country database of trusts detailing critical beneficial ownership details, an argument the island eventually won. Apart from trusts, ownership details will be public.

As part of the negotiations, the UK was able to craft a carve out for trusts, where only structures with tax consequences must be captured, a small minority of the sector, and even those will only be available to law enforcement and “obligated entities,” such as banks, but not to entities with a “legitimate interest,” an undefined term for groups like journalists and civil society groups.

The lack of clarity around legitimate interest will result in a lack of uniformity across the EU, a “patchwork of different setups that are not conducive to sharing information and making sure data gets to the people who need it,” said Nienke Palstra, EU policy officer for Transparency International in Brussels.

Criminals will exploit any loophole and “take the path of least resistance,” she said, noting that there should be similar levels of access across the EU, though it’s clear certain members “want a definition very narrow and restrictive.”

The latest changes in the directive, mindful of the recent Islamist terror attacks in France against a satirical newspaper, Charlie Hebdo, and against civilians, also require member states to not just create programs to calibrate and mitigate money laundering risks, but also do the same to uncover possible ties to terror attacks and their financial backers.

The directive also has provisions for those creating and operating trusts, companies, foundations or similar structures, company service providers, casinos and trading companies that receive 10,000 euros in cash at one time or through several linked transactions.

In addition, the directive would call for nations to build databases to identify natural persons who own 25 percent or more of the shares of corporations and require casinos, auditors, attorneys and real estate operations to create anti-money laundering and anti-terror programs, and related risk assessments and report suspicious activity to financial intelligence units and law enforcement.

The text defines beneficial owner as the person who actually owns or controls a company and its activities and ultimately authorizes transactions. The information being collected includes: beneficial owner’s name, month and year of birth, nationality, country of residence and ownership details, with exemptions only on a “case-by-case basis, in exceptional circumstances.”

Interpretation of ‘legitimate interest’ still a loose end

The directive “will for the first time oblige EU member states to keep central registers of information on the ultimate ‘beneficial’ owners of corporate and other legal entities, as well as trusts,” according to an EU announcement Tuesday, noting that the text has been endorsed in a Parliament/Council deal by the Economic and Monetary Affairs and Civil Liberties committees.

The committees also approved a strengthened funds transfer rule in which banks would identify the originators and beneficiaries of cross-border wire transfers.

The update noted that the idea of central registers was “not envisaged by the European Commission’s initial proposal, but were included by parliament members in negotiations.”

Law enforcement authorities and financial intelligence units will have unfettered access to the beneficial ownership information held in the new registries as will “obligated entities,” such as banks conducting customer due diligence duties.

Other entities, such as non-governmental organizations, civil society groups, journalists and the general public must demonstrate a “legitimate interest” in suspected money laundering, terrorist financing or other predicate offenses, such as corruption, tax crimes and fraud before being granted access to the data and could be charged an administrative fee.

That term is not defined and will be currently left up to member states, which could take a more restrictive view.

There are still several steps left, though the sense is that any changes now would not be substantive. The deals still need to be endorsed by the full Parliament, slated to occur in the next two months, and the Council of Ministers and then member states will have two years to transpose the directive into national law.

Though the process is “not completely over, it’s very unlikely anything will be changed. It’s basically rubber stamped,” said Tamira Gunzburg, the Brussels director of ONE, a campaigning and advocacy organization against poverty, disease and financial opacity.

The issue of what entity and reasoning would qualify as a “legitimate interest has been kind of a sticking point because that has not been defined,” she said. “The strict definition is up for grabs, left up to the individual member states to figure that out. That clearly does not just mean wide open to the public. But we would argue that everyone has a legitimate interest to access the data.”

Corporate opacity a magnet for criminals, the corrupt

Some of the main countries behind excluding the general public from getting access to the beneficial ownership details, and potentially civil society groups as well, are also some of the most powerful in the EU.

Germany, Spain, the Netherlands, Sweden and Luxembourg all voiced concerns about beneficial ownership details being widely accessible, according to a November report titled “Hidden Profits,” by the European Network on Debt and Development, or Eurodad, a non-governmental group focusing on managing financing, reducing poverty and tax justice.

“Almost every economic crime involves the misuse of corporate entities,” according to the group.

Moreover, in a review of 200 cases of grand corruption in developing countries, anonymous companies were used more than 70 percent of the time, according to Eurodad, citing findings in recent reports by the Organisation for Economic Co-operation and Development and the World Bank. Overall, tax evasion in Europe is estimated at $1 trillion annually.

Some countries, such as those who lobbied against the registries being public, including Germany and Luxembourg, are likely to define that term as narrowly as possible, making it much more difficult or costly for civil society groups and members of the public to access to the beneficial ownership details, Gunzburg said.

The hope is that, to cut down on the bureaucracy surrounding the initiatives, many member states will “simply open up the registries and make them public, but if they don’t we will hold them to it,” she said. “This is a new chance for each member state to not just do the minimum, but go further and see how much they can open up this area to follow the money.”

The registries, as is currently required, don’t have to be interconnected with each other, though that is likely on the horizon as it would prevent one company that is insolvent in one region from opening operations and getting loans in another, along with sharing data on possible suspicious activity, Gunzburg said.

Lack of trust in trust area fosters secrecy for good or ill

As for trusts, their related databases will not capture most of the sector because only structures with “tax implications” must submit their data, according to the latest text, and while law enforcement and banks would be allowed to peruse the data, others, even with a “legitimate interest” would not.

That is chiefly a concession to the United Kingdom, which lobbied against trusts being captured at all or being widely open to the public.

The logic was that trusts in the UK are mainly used to move inheritances smoothly from one generation to another and that the information, particularly for children or vulnerable, older persons, could be exploited by criminals for fraud or kidnapping, according to public statements.

Conversely, under current exemptions in certain countries, that has led to mansions tied to powerful politically-exposed persons to, in one case, be in the name of an 11-year-old boy, Gunzburg said.

The lack of access to trusts, and that many will not be in any form of an accessible database because they produce no revenue, “presents a particular problem because in their very nature they are incredibly difficult to track and benefit from a lot of secrecy because families want to keep details on their assets and inheritances private. But that also makes them perfect for money launderers. They can set one up and have no real record of it,” Palstra said.

It’s no surprise the UK so vociferously lobbied against increased transparency because the common law trust industry there has seen “exponential growth” with many foreign and domestic individuals and firms choosing to enclose their assets in such structures, or in foundations, she said, adding that to get around this, some countries are changing the names of trusts to other terms so they are not technically snared by the new rules.

“In the EU negotiations for the AML directive, it became clear just how little we know about these structures and how they can be used for money laundering,” Palstra said. “Our fear is that even these new rules are not keeping pace with the trusts and other legal structures presenting a real danger” of being used for financial crime.

The directive, first proposed in February 2013, inculcates revised recommendations proffered by the Paris-based Financial Action Task Force (FATF), which administers non-binding global financial crime recommendations to more effectively fight money laundering and terrorist financing.

The directive covers a wide swath of financial and other sectors: credit and financial institutions, natural or legal persons who are auditors, external accountants and tax advisors, notaries and other independent legal professionals engaged in financial or real estate transactions, for themselves or others, managing client assets and securities.

The EU, UK and other members of the main organization, sister groups and regional-style bodies are trying to update laws, enforcement tactics and methods to illustrate concrete steps taken that have cracked criminal networks, indicted influential figures and forfeited assets before evaluators arrive in upcoming months.

More information could crack global investigations

The revisions of laws and practices are all moves to improve scores on new effectiveness ratings under new evaluation criteria that puts more weight on the implementation of laws than just their existence in harmony with international standards.

As well, in recent years, G20 countries have agreed that corporate secrecy, shell companies and murky ownership structures are at the root of an extensive array of crimes, including fraud, corruption, tax evasion and money laundering.

Under the latest FATF revisions and corresponding EU AML directive, certain entities, including domestic politically-exposed persons, or PEPs, examples would be local lawmakers, heads of state, judges and the like, would require enhanced scrutiny and carry a higher inherent risk for possibly being tied to certain crimes, like receiving and moving funds tied to corruption.

On the whole, though, the registries, when finalized, will “be a huge step forward compared to even a year or two ago” and be much further than even what is considered compliant compared with the recommendations set out by the FATF, Gunzburg said.

The power of these new rules, even though not airtight, is also expected to extend beyond the EU, and will likely prod classic secrecy jurisdictions, such as crown dependencies Jersey and Guernsey, to create similar databases, said Robert Palmer, a campaign leader with advocacy group Global Witness.

“This is really a big step and is a very powerful tool,” for banks to get a much greater level of detail on the risk of businesses and the individuals behind their creation, granting the ability for more detailed and precise risk assessments and monitoring for financial crime, he said.

Moreover, the US financial intelligence unit (FIU), the US Treasury’s Financial Crimes Enforcement Network (FinCEN), has the opportunity, through existing data sharing protocols with many EU member states, to access the information in international money laundering, fraud and corruption cases, Palmer said.

“The US has good exchange agreements with the EU through FIU to FIU channels,” he said, adding that the move also puts more pressure on the US and other countries to follow suit. “So it should be able to use those same tools to get access to the beneficial ownership data held in EU FIUs.”

But not everyone agrees that a wide-open database of corporate information is safe.

“It’s a corporate invasion of privacy and a personal one because it will allow the public to access personal information of shareholders,” said Christine Duhaime, a solicitor with Duhaime Law, with offices in Toronto and Vancouver.

“Unless there is suspected terrorism, there’s no justification not to protect that information.” she said. “And in the case of suspected terrorism, law enforcement would have access in any event. There’s no evidence that it would lead to reduced money laundering whatsoever but in the meantime, we are going down the path of the erosion of corporate privacy on the basis of no known benefit identified by anti-money laundering lawyers.”

Not so, said a former US federal investigator who still works with several agencies on a contract basis.

“There have been whole investigations stopped in their tracks because we couldn’t get beneficial ownership information to go after the suspect who was really pulling the strings. If we know the company, but can’t find a person to link the suspected illicit transactions with, it makes our job very difficult.”