Beneficial ownership is a phrase likely to leave the average person baffled and probably not very bothered. But it’s a concept that seems guaranteed to attract a great deal of international interest over the coming months and years, not least because of the European Union’s Fourth Anti-Money Laundering Directive (4th AMLD) 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, as the recent revelations by the International Consortium of Investigative Journalists in the Panama Papers have demonstrated.
In itself, there’s nothing wrong with beneficial ownership. Someone has to be the ultimate owner, and most will have valid reasons why a corporate structure has been set up in a certain way. But when identifying an ultimate beneficial owner (UBO) becomes a mammoth, multinational detective job, that secrecy becomes very attractive indeed to those involved in financial crime.
The Panama Papers have formed another landmark in a series of events intensifying the international focus on secrecy over corporate ownership and control, and the part it plays in financial crime, going back almost two decades.
As long ago 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 to disguise the source of their illicit gains, bribe-givers and recipients conduct their illicit transactions through bank accounts opened under the names of corporations and foundations, and individuals hide or shield their wealth from tax authorities and 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 4th AMLD, 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.
The directive is due to be transposed into national law by June 2017, although the European Commission has now urged member states to commit to doing so by the end of this year.
What is happening in the Netherlands?
Back in 2011, the Financial Action Task Force (FATF) published its Mutual Evaluation report on the Netherlands and recommended improvements around beneficial ownership information, calling for this to be ‘accessible and up-to-date in all cases’.
By 2014, when FATF carried out its second follow-up report, it highlighted government action taken to address the issue, including establishing a central register of shareholders. While not containing beneficial ownership details in every case, FATF reported that the Dutch authorities argued that it would make it easier to trace UBOs; while not public, the register can be accessed by supervisory and investigative authorities.
With the new EU directive adding to existing pressure from FATF to strengthen UBO transparency, earlier this year Minister of Finance Jeroen Dijsselbloem outlined plans for the Netherland’s new register of beneficial owners.
While the register will be public, there look set to be some caveats, such as registering each user of the register, charging a fee for each search, restricting the extent of the information made available to users, apart from the Financial Intelligence Unit-Netherlands and other authorities, and protecting the privacy of those who argue they run a significant risk of being kidnapped, blackmailed, threatened or intimidated, on a case-by-case basis. Such restrictions are allowed for in the 4th AMLD.
Mr Dijsselbloem made clear that the form of the register, which is set to be run by the Chamber of Commerce, had been arrived at by carefully balancing the privacy of UBOs against better preventing the misuse of corporate structures, the stance has attracted criticism. The Financial Transparency Coalition, a global network that works to stem illicit financial flows, expressed concern over the charging of fees, saying that this would prevent ‘any serious screening of the full data set’.
The Netherlands has a strong track record on transparency, achieving a top ten place in Transparency International’s Corruption Perceptions Index (CPI) every year since 2006. It's highest ranking, fifth place, came in the most recent CPI. However, Anne Scheltema Beduin and Arjan El Fassad, director of Transparency International Nederland, has also criticised the proposed structure in a recent joint article with and digital transparency campaign group Open State. They commented:
The data from a UBO registry are only properly useful if access is unlimited and equal for all. Obscuring information about companies, foundations, associations and organisations is part of the problem. The minister’s obstructions are also flying in the face of what the registry is meant to achieve; i.e. putting a stop to the creation of shadowy constructions used for illegal purposes.
With the EU pressing member states to move quickly on the implementation of the 4th AMLD, it will be interesting to see how the form of the Netherlands’ register evolves before it is implemented.
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.
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