Disclosure of Beneficial Ownership in EU
In a sweeping set of proposals, today the European Union Parliament voted to approve, at first reading, amendments to the proposed 4th Anti-Money Laundering DirectiveÂ to require the disclosure of beneficial ownership. Beneficial ownership refers to the owners or beneficiaries, or both, of private companies and/or trusts as the context requires. The proposals today are rather sweeping because they are not limited to disclosure of what we traditionally refer to as beneficial ownership – they go further and extend to the disclosure of natural persons associated with “any legal entity” including joint ventures, and any similar or future legal arrangement.
According to the European Commission, as much as 5% of world’s GDP is laundered, although that figure is likely significantly higher.
Online Database of Beneficial Owners
The proposals, if passed, would require the creation and maintenance of publicly accessible registers online that would list the shareholders of foundations and private companies. For trusts, it would list the settlor, trustee, beneficiary, protector and all natural persons exerting control over the trust. For other legal persons, such as joint ventures, it would list controlling or managing persons.Â The online corporate registries will be connected across the EU which raises concerns for hacking of private information.
The goal of the proposals is to shine the light on who owns or controls what legal entities to reduce tax evasion, money laundering, corruption and terrorist financing. Reporting entities (called obliged entities in EU money laundering law) – those required to disclose such information – include law firms, accountants, banks, notaries, tax advisors, asset managers, trusts, trust mangers, and real estate agents. The proposals would also require that legal persons be obliged to self-report information to the corporate registry.
Ironically, if reporting entities (obliged entities) complied with anti-money laundering rules applicable to politically exposed persons (PEP) there would be no need to require beneficial ownership disclosure. That’s because PEP rules require beneficial ownership disclosure and the reporting of suspicious transactions where source of funds is suspect.
Curing the Yanukovych Problem
Mr. Yanukovych allegedly went from earning $2,000 per month in 2009 to $200 million per month in 2013. Every bank, asset manager, broker and lawyer (except for lawyers in a few jurisdictions such as Canada where they are exempt from anti-money laundering reporting obligations) everywhere in the world who dealt with his funds subsequent to him becoming President was under a legal obligation to treat him as a PEP, ascertain the source and legitimacy of his funds and report every transaction he made subsequently as suspicious to the relevant FIU (financial intelligence unit). The reason every transaction was suspicious and was required to be immediately reported is because in 2009, there were reasonable grounds to suspect it was proceeds of crime. It had to be – it couldn’t be anything else since he allegedly had no other sources of income or thriving businesses in 2009. And even if he did, those businesses would have had to be worth more than Facebook or Microsoft. To keep his then new-found wealth in perspective – neither Bill Gates or Mark Zuckerberg earned $200 million per month in 2009.
Will it Have any Effect?
If the proposals are passed at the respective Member State level, the provisions on disclosure of beneficial ownership may be subject to legal challenges on the basis of privacy law.
If upheld, natural persons will create multiple beneficial ownership layers in two jurisdictions (which clever ones already d0) so that all the corporate registry would reveal is beneficial ownership of a legal person whose natural persons are protected in a jurisdiction where beneficial ownership is protected, such as Canada.
And if upheld, it may expose wealthy and prominent people worldwide to litigation risks because every prospective litigant will be able to ascertain who is connected with what legal entity and its registered jurisdiction to commence claims against them. And although the online registry will not reveal assets, logically if a target has a trust in, for example, the Cayman Islands, the trust funds associated with the trust will likewise be located, or controlled by the Trustee, there.
The proposal does not apply to public corporations such as Apple or Google, and while it may seem logical that it should not, public companies also have beneficial ownership as a function of securities law and share transfer agency requirements.
A new European Parliament will be elected in May 2014 and it will be tasked with negotiating with the EC for acceptance of the proposals.