(Bru-nO, CC BY 2.0)
In May 2020, the European Commission (EC) adopted an Action Plan for comprehensive EU policy on preventing money laundering and terrorist financing. The plan calls for an integrated EU Anti-Money-Laundering (AML) system, interconnecting the individual national financial crime units.
Moreover, it puts emphasis on overseeing the setting up of the beneficial ownership registries by Member States in order to ensure they are populated with high-quality data. The ultimate plan in Brussels is to interconnect all registries into one single registry encompassing data on beneficial owners of companies around Europe.
This aspect of financial crime detection is often the key to prevent money laundering, which is frequently conducted through shell companies with unknown ultimate owners. Forcing companies registered in Europe to provide information on ultimate beneficial owners (people who actually own the company), and making the information available to the general public, would be a major step in the fight against financial crime on the continent.
The pressure on European authorities to act has been growing over the past couple of years as information about major bank frauds have been revealed to the public. For example, since 2017, information has begun to surface about Danske Bank’s local branch in Estonia being involved in a mass-scale money-laundering operation (read more and more). Over the next few months, the full extent of the problem was gradually revealed. According to Danske Bank own internal report, around EUR200bn of suspicious transactions flowed from Estonian, Russia, Latvian and other sources through the Estonian branch from 2007 to 2015.
As the full extent of the problem was revealed, the affair became known as “the Danske Bank money laundering scandal”, and has often been called the largest money laundering scandal in Europe, and possible the largest in the world history. The CEO of the bank, Thomas Borgen was forced to resign in 2018 following the scandal.
Danske Bank and its compliant team completely failed its due diligence responsibilities. The key for any AML operation to be successful is to know who banks are doing business with. In other words, the bank needs to be always able to identify the ultimate beneficial recipient of a transaction. Needless to say, in many cases, the clients themselves put a lot of effort in disguising their true identity. This was the case with the Danske Bank affair, as well when the ownership of the companies the bank was dealing with often passed through a series of shell companies before the eventual owner could be identified.
Battle for transparency in Europe
Cognizant of the scale of the issue, the EU financial authorities have been working on putting in place a regulatory system designed to make it harder for individuals to hide behind multiple layers of secret offshore companies. Registers of ultimate beneficial owners (UBOs) of companies were first required by the 4th AML Directive, but were only accessible to government agencies and those who could demonstrate a “legitimate interest” in the subject.
However, this was deemed by a number of key institutions to be insufficient. In the 5th AML Directive, the EU financial authorities decided to make the information contained in the registries public.
All member states had to have an open access to registers of ultimate beneficial owners from January 2020, providing information on names, month and year of birth, nationality, residence and ownership interest of any individual who owns more than 25 per cent of an EU-incorporated company.
But even this measure still has weaknesses. For example, there is nothing that prevents an ultimate owner to split his or her holdings between themselves and friends or family members to dilute the 25 per cent share and drop below the threshold. The whole system also relies on all member states playing according to the rules, otherwise ultimate owners could simply register their companies in a jurisdiction that doesn’t require the disclosure.
According to Risk Advisory, Switzerland is the country that poses a major risk to the whole system as it refuses to comply with the directive. “Unlike its neighbor Liechtenstein, Switzerland does not even have a closed central UBO register. Swiss firms have to know who their beneficiaries are, but are under no obligation to communicate this information to the authorities,” the report says.
Information still mostly unavailable
But even among the EU member states there are significant differences in their compliance with the directive. Global Witness, an international NGO, published a comprehensive study looking at the EU member states compliance with the 5th AML directive. Although the deadline was January 2020, the NGO found that 17 of 27 Member States do not yet have a centralized register of the beneficial owners of companies available to the public.
Only five EU Member States have implemented a public register which is free to access. Those countries are the following: Luxembourg, Slovenia, Bulgaria, Latvia and Denmark. The existence of publicly available registries in Latvia, Denmark and Luxembourg can likely be explained by those countries involvement in money laundering or tax evasion scandals in recent years.
The other five countries which have already implemented a central register of beneficial owners (Austria, Germany, Poland, Estonia and Ireland) have not given a free access to the public. The existing restrictions include setting up a paywall or only being able to search using a company’s tax identification number.
The rest of the EU countries have no centralized registered available to all. The Czech Republic, Finland, France, Portugal, Romania and Spain have a register but only available to people that can demonstrate legitimate interest of purpose of use.
Other four countries — Belgium, Croatia, Portugal and Sweden — make the register available only to citizens or residents of a few European countries. The rest — Cyprus, Greece, Hungary, Italy, Lithuania, Malta, Netherlands and Slovakia — either do not appear to have any beneficial ownership register or have one, but not available to members of the public with a legitimate interest.
Filip Brokeš is an analyst and a journalist specializing in international relations.