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PEELING OFF THE LAYERS: A NEW ERA FOR TRANSPARENCY OF BENEFICIAL OWNERSHIP DISCLOSURES

peelingDiane Bugeja (KPMG Malta) discusses the significant changes likely to be made in the 4th EU Money Laundering Directive regarding the identification of the beneficial owners of companies and trusts.

Speed read

The 4th EU Anti Money Laundering Directive proposes a number of key changes concerning the responsibility of companies and trusts to identify and keep up-to-date identification records on their beneficial owners. The changes reflect an international preference for increased transparency, but how these provisions will work in practice remains unclear.

Commentary

The identification of the beneficial owner is regarded as key in the fight against money laundering, such that it has become one of the main pillars of anti-money laundering legislation. Although efforts have been made to encourage transparency, various international bodies have found that accessibility to information about beneficial ownership is limited and inconsistent across different member States. Further, the Impact Assessment carried out by the European Commission found that the way in which member States determine the beneficial threshold for beneficial ownership is different in each State.

The proposed 4th EU AML Directive defines a beneficial owner as “any natural person(s) who ultimately owns or controls the customer and/or natural person on whose behalf a transaction or activity is being conducted.” A person will ultimately own a corporation where he owns or controls over 25% of the voting rights. This was also the case under the 3rd EU AML Directive.

Article 29 of the 4th Directive obliges member States to ensure that subject persons “obtain and hold adequate, accurate and current information on their beneficial ownership”, with such information being made accessible in a “timely manner by competent authorities and by obliged entities.” The proposed Directive therefore introduces two new measures to provide enhanced transparency and accessibility to information about the beneficial ownership of particular entities: (1) companies must now keep accurate and up-to-date information about their beneficial owners; and (2) this information must be made available for the purposes of due diligence and must also be made available to law enforcement agencies. In introducing these new measures, the 4th Directive echoes the 2012 FATF Recommendations, which provide that:

countries should ensure that either: (a) information on the beneficial of a company is obtained by that company and available at a specified location in their country; or (b) there are mechanisms in place so that the beneficial owner of a company can be determined in a timely manner by the competent authority.” (page 85, paragraph7)

Pressure to clamp down on the use of corporate entities as a smokescreen for criminality has also come from the G8 Group. During June 2013, the G8 agreed on an Action Plan aimed at preventing the misuse of companies and legal arrangements. Most of the principles in the Action Plan re-enforce the provisions proposed in the forthcoming Directive. Indeed, the Action Plan stresses that all companies should hold “adequate, accurate and current” information on their ultimate owners and controllers, with onshore access granted to law enforcement and tax authorities.

There is currently no requirement for UK companies to hold information on their beneficial owners. The World Economic Forum 2012 Guidelines prioritise this issue, perhaps because anonymity is regarded as a catalyst for organised crime and corruption. To this end, the World Economic Forum recommends the creation of a “central registry of corporate entities” and “international sharing of beneficial ownership information”. International bodies have therefore come out in favour of the creation of ‘company registers’ and in July 2013, the UK Government announced that beneficial ownership information is to be held in a central registry maintained by Companies House and accessible to obliged entities.

The draft opinion of the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs has proposed a new paragraph which would require member States to “rapidly, constructively and effectively provide international cooperation in relation to company information, including beneficial ownership.” More importantly, the Committee proposes requiring member States disclose information about beneficial ownership to national authorities which “shall establish and maintain a central public registry that shall be updated periodically.”

Enhanced national and cross-border transparency is also at the heart of the proposed amendments put forward by the Committee on Economic and Monetary Affairs of the European Parliament. These amendments include the establishment of “business registers in each Member State”, which shall be “accessible by competent authorities and by obliged entities in a timely manner” and which “shall be interconnected and accessible by competent authorities and obliged entities from other Member States.”

A recent study carried out by BOWNET reveals that a number of beneficial ownership registers do exist across EU member States but there are problems with accessing these registers. But only a small number of registers provide information on beneficial ownership in comparison to information about shareholders and directors. There is also a lack of interconnection between different member States, which is hindering cross-border investigations.

In order to move forward, each member State needs to address the following issues: Should information about the beneficial ownership of all entities be held in a national registry? How would this detailed information be collected? What process should be adopted to ensure the information is frequently updated and accurate?

The UK Law Society has drawn attention to the administrative burden that is likely to be created if the 4th Directive is implemented in its current form. The administrative burden will be particularly heavy for companies in a group situation where constant changes in the ownership structure are the norm.

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Image credit: Flickr

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The views expressed in this article represent those of the author and not Bright Line Law.

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