The need for transparency around beneficial ownership information for the purposes of tackling and preventing financial crime has never been more evident. The last few years have seen a range of leaks and regulatory developments, including the Panama Papers in 2016 and the Paradise Papers in 2017, countless international money laundering and corruption scandals involving the world’s largest banks and multinationals, ever-changing international sanctions regimes and evolving EU Anti-Money Laundering Directives, and associated national financial crime regulations.
However, on 22 November 2022, EU member states encountered a significant setback in their efforts for increased transparency. The Court of Justice of the European Union (“CJEU”) ruled to limit general public access to beneficial ownership information on grounds that it conflicted with data protection and privacy rights outlined in the Charter of Fundamental Rights of the European Union (the “Charter”). This article explores this ruling, the impact on both enforcement and preventative due diligence and investigative efforts for obliged and regulated organisations – particularly investors, regulated corporates and financial institutions – and the necessary considerations in any future alternative legislation on the matter.
The CJEU’s ruling followed a request made by a Luxembourgish company and its beneficial owner to restrict public access to beneficial ownership information relating to them in the Luxembourg Business Registers. In weighing up the provisions in the EU’s 5th Anti-Money Laundering Directive (5AMLD) and the Charter, the Court ruled that the information contained in the register “is capable of entailing a disproportionate risk of interference with the fundamental rights [in relation to respect for private life and the protection of personal data] of the beneficial owners concerned”.
The Court highlighted the need to balance the objective of general interest in beneficial ownership information against the fundamental rights outlined in the Charter, acknowledging concerns surrounding the difficulties of defining when there is and is not a “legitimate interest” for accessing beneficial ownership information.
To comply with the fundamental rights outlined in the Charter, several EU countries followed the lead of the Benelux nations in taking their ultimate beneficial ownership registries offline following the ruling. This did not remove the requirement for entities to register their beneficial owners with the relevant authorities but ended general public access to these registries completely. The knock-on effect on organisations’ ability to tackle international financial crime, as well as their sanctions compliance efforts, is significant. Financial institutions, designated non-financial institutions and bodies, investors, corporates, journalists and civil society organisations all play important roles in tackling and exposing financial crime, and this ruling has abruptly prohibited the use of a significant tool in these efforts. Our discussions with stakeholders in anti-financial crime and anti-corruption forums indicate that financial crime specialists accept the reasoning behind the CJEU’s decision, but there is also a clear dissatisfaction with the lack of an adequate and efficient alternative enabling access to ultimate beneficial ownership (“UBO”) information for those involved in tackling and preventing financial crime.
Organisations are required by law to report to and work with relevant supervisory bodies and enforcement agencies to identify and prevent financial crime and sanctions violations. In addition, guided by a risk-based approach specific to the stakeholders and jurisdictions involved in each opportunity or transaction, these entities are required to conduct enhanced due diligence proportionate to the potential associated risk exposure. UBO registries were important tools for identifying key stakeholders in target entities and, in turn, informing the assessment of corruption, sanctions, political exposure and other financial crime risks. The days of such quick UBO checks are, at least for the time being, behind us.
Beyond this more straightforward use case, investigators also find registries of beneficial ownership a valuable tool for unravelling complex corporate ownership structures. Not only do beneficial ownership registries enable investigators to quickly identify the UBO(s) of an entity, but where investigators are required to identify all entities in a corporate group, knowing the identity of the group’s UBO(s) can provide investigators with further leads, including relevant locations and other known corporate interests, to assist in deciphering a group structure. This is especially relevant in cases where ownership structures flow through several jurisdictions and where parent or shell companies are incorporated in “high-risk” jurisdictions, usually acting as tax havens, with limited-to-no corporate reporting requirements.
In the absence of these registries, the process of unravelling such corporate structures becomes significantly more time-consuming and costly, often requiring local investigative expertise, including local language skills and knowledge of a particular jurisdiction’s corporate reporting and regulatory landscape. While online company information databases that aggregate data from national corporate registries across the globe exist and should be consulted, information contained in these databases is often incomplete, inaccurate or outdated. Accordingly, in the absence of beneficial ownership registries, it is vital that obliged entities, investors and corporates have access to specialists with the local expertise, language capabilities and contextual knowledge required to view and analyse national and local corporate and public records.
We experienced the importance of this first-hand during a recent multijurisdictional litigation support case in which an investor instructed us to investigate allegations of a fraudulent bond scheme and to conduct an asset trace of one of the key debtors. The target in question had corporate interests across Europe, with special purpose investment vehicles established in several different jurisdictions. Records consulted included company statements, shareholding and incorporation documents, financial statements, social media, and national and local media reporting. Public records pertaining to the same international group of companies can differ in content and detail depending on the jurisdiction they are filed in, and our ability to compare records on a multijurisdictional level enabled us to identify, map, and, more importantly, corroborate leads into addresses, high-value assets and corporate entities belonging to the subject while also providing useful context and intelligence for our investigation into the allegations of fraud.
The road ahead
There is unlikely to be a significant change or U-turn in this ruling over the coming months, despite efforts by transparency campaigners and a recognition at the policy level that transparency around beneficial ownership information is required for private sector stakeholders to effectively carry out their legal compliance obligations. While wording in the judgement implied that journalists, certain civil society organisations, and due diligence professionals would have a “legitimate interest” to access beneficial ownership information, lawmakers have not yet agreed on a viable alternative or a clarified definition of the term that could enable access for these stakeholders. As the Council of the European Union commences its discussions with the European Parliament on a single AML/CFT rulebook (in which rules relating to beneficial ownership information are a particular focus) after member states agreed a common negotiating position in December 2022, it is likely that the need for and definition of “legitimate interest” to access beneficial ownership information will be a key area of focus as a possible additional consideration to this rulebook.
While there is no clear timeline for a viable solution as yet, negotiations around the content of the rulebook will continue to progress over the remaining four months of the Swedish presidency of the Council of the European Union. During this time, it is pertinent for organisations to continuously monitor suggested amendments and additions relating to beneficial ownership information access to both the rulebook and the existing sixth EU anti-money laundering directive.
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