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#Anti Money Laundering

Beneficial ownership: A new era of openness? (Germany)

International Compliance Association

4MLD , beneficial ownership , EU , FATF , G20 , G8 , Germany , TI , Transparency International

Beneficial ownership is a phrase likely to leave the average person baffled and probably not very bothered. But it’s a concept set to attract much more interest over the coming months and years, thanks to the Fourth Anti-Money Laundering Directive, and the central registers of beneficial owners that it will introduce.

The word ‘beneficial’ usually has positive connotations. But put beneficial ownership in the context of corporate anonymity ­– hiding the identity of ultimate owners of companies and other legal entities within complex structures that are almost impossible to unravel ­­­– and it takes on a different complexion.

In itself, there’s absolutely nothing wrong with beneficial ownership. Someone has to be the ultimate owner, and most will have entirely valid reasons why a corporate structure has been set up in a certain way. But when identifying an ultimate beneficial owner (UBO), which can be a mammoth, multinational detective job, that secrecy is very attractive indeed to those involved in financial crime.

Central registers

The international focus on secrecy over corporate ownership and control, and the part it plays in financial crime, has been growing in intensity among politicians and anti-corruption campaigners for more than a decade.

As far back as 2001, the Organisation for Economic Co-operation and Development was calling for reform in its report Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes.

Almost every economic crime involves the misuse of corporate entities– money launderers exploit cash-based businesses and other legal vehicles todisguise the source of their illicit gains, bribe-givers and recipients conduct theirillicit transactions through bank accounts opened under the names of corporationsand foundations, and individuals hide or shield their wealth from tax authoritiesand other creditors through trusts and partnerships. To prevent and combat the misuse of corporate vehicles for illicit purposes, it is essential that the authorities in all jurisdictions have the means to obtain and share, on a timely basis, information on the beneficial ownership and control of corporate vehicles established in their jurisdictions.

The Financial Action Task Force (FATF) stepped up the pressure in 2003, including measures in its revised Recommendations to address the transparency and beneficial ownership of legal persons and arrangements and strengthening these in 2012.

By 2013, the G8 had published Action Plan Principles, in line with the FATF Recommendations, to prevent the misuse of companies and legal arrangements, with G8 members committing to publishing national Action Plans on the issue.

A year later, the G20’s High-Level Principles on Beneficial Ownership Transparency included the value of authorities having ‘timely access to adequate, accurate and current information regarding the beneficial ownership of legal persons…for example, through central registries’.

The Fourth Anti-Money Laundering Directive

During negotiations on the Fourth Anti-Money Laundering Directive (4MLD), members of the European Parliament strengthened its measures to include a requirement that member states keep central registers of information on the ultimate beneficial owners of corporate and other legal entities, such as trusts.

Entities must hold ‘adequate, accurate and current information on their beneficial ownership’. The information must be held on a central register in each member state, with features including:

  • unrestricted and timely access to national authorities and financial intelligence units (FIUs)
  • access to obliged entities – those responsible for applying anti money laundering/countering the financing of terrorism rules – for example, banks carrying out customer due diligence
  • access to any person/organisation able to show they have a legitimate interest, such as journalists – as a minimum they will be able to access the name, month and year of birth, nationality, country of residence and the nature and extent of the beneficial interest.

What is happening in Germany?

Germany is a member country of the Financial Action Task Force (FATF) and the European Union (EU) and has enacted laws and rules designed to implement the anti-money laundering policies of both FATF and the EU. The goal of these laws is to detect and prevent money laundering and potential terrorist financing.

Changes proposed by the German Government include draft legislation to be prepared amending current customer due diligence obligations on beneficial ownership under the German Money Laundering Act, by including a new chapter on “Beneficial Ownership Information and Transparency”.

The draft legislation will provide for an obligation of companies incorporated in Germany to collect and hold accurate and current information on their beneficial owners, including the details of the beneficial interests held.  In addition, it will ensure that those companies are required to provide information on the beneficial owner to obliged entities when the obliged entities are taking customer due diligence measures.

Germany already has a data retrieval system in place providing up-to-date basic information on bank accounts and deposits including information on the beneficial owner. A special data base that can be accessed by competent authorities is supplied by banks with account information collected in the course of their due diligence obligations when opening new accounts or updating customer information on existing accounts.

In line with Article 30 of 4MLD, the German Government will prepare legislation to create a beneficial owner register, again, under the German Money Laundering Act where beneficial ownership information of companies incorporated in Germany will be held.  The register will be accessible both for competent authorities, obliged entities when performing customer due diligence measures and for persons who are able to demonstrate a legitimate interest with respect to money laundering, terrorist financing, and the associated predicate offences such as corruption, tax crimes and fraud.  It will not be accessible to the public. 

In practice, these changes will mean that German financial institutions should refuse to open an account/enter into a relationship, or will have to close an existing account/terminate a relationship, if they cannot form a reasonable belief that it knows the true identity of the UBO; and/or the nature of business or that the formal requirements concerning the identification of the UBO are not met.  

In November 2015, Transparency International (TI) assessed G20 members for compliance with the High-Level Principles on Beneficial Ownership Transparency and found that Germany was fully compliant with only one of the ten principles listed – Principle 1: Beneficial Ownership Definition.

In contrast, the TI assessment found that Germany was only 13% compliant for Principle 3: Acquiring Accurate Beneficial Ownership Information, with TI reporting: ‘Current laws and regulations do not require legalentities, other than those with anti-money launderingobligations to maintain information on beneficialownership.  Consequently there is also no comprehensive requirement that the beneficial ownership information is maintained within Germany.’  Germany scored zero for Principle 2: Identifying and Mitigating Risk, due to the fact that they have not released an assessment of the money laundering risks related to legal entities and arrangements in the country in the past three years.

Compliance with Principle 4: Access to Beneficial Ownership Information resulted in a score of 29% for Germany, as there is no beneficial ownership registry and legal entities are not required to maintain beneficial ownership information.  This is, however, likely to improve when Germany implements 4MLD. 

What happens next?

The cultural shift involved in bringing certain corporate ownership structures out of the shadows will involve a perhaps lengthy period of adjustment, but with Europe setting the pace, commitments at a wider international level to ending corporate anonymity and the ongoing attention of anti-corruption campaigners, the pressure for reform looks set to continue and grow.

This update has touched on the campaigning of Transparency International and our next bulletin will focus on TI’s latest Corruption Perceptions Index.

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