Wednesday

1st Dec 2021

EU parliament cracks down on shell firms

  • 'Illicit financial flows are the single biggest economic problem plaguing the developing world' (Photo: Arsenie Coseac)

People trying to hide their money in shell companies will face greater scrutiny following a new law adopted Wednesday (20 May) by the European Parliament.

Initially proposed at the start of 2013, the bill - also known as the fourth anti-money laundering directive - proposed to crack down on money laundering, terrorist financing, and to improve ways of tracing illicit transfers.

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A political agreement with member states was reached last December.

MEPs expanded on it, making it more difficult for fraudsters and other criminals to hide behind shell companies to avoid paying taxes or to launder income from criminal activities. Member states have two years to transpose the rules into their national laws.

Carl Dolan at Transparency International (TI) estimates the tax income lost through the schemes amounted to around €63 billion in the EU in 2011.

“The EU, and European Parliament in particular, should be congratulated on passing new legislation that is a welcome first step in unmasking the corrupt in Europe,” he said in a statement.

Illicit flows used by the schemes are said to remove some 5.5 percent of GDP from Sub-Saharan Africa - more than any other region in the world.

A central feature is that national governments are now required to set up searchable registers. The registers will list the “ultimate owners” of companies.

Latvian centre-right MEP Karins Krisjanis, who helped steer the legislation through parliament along with Dutch Green MEP Judith Sargentini, said, at a debate on Monday, that the registers will now be mandatory in all 28 member states.

“It means that in this offshore chain, which now makes the work of law enforcement bodies so difficult, we will be able to reveal who stands behind a particular company and a particular money transfer,” he said.

The national registers will eventually be interconnected but are not entirely open to the public.

Only those who can demonstrate a “legitimate interest” can search the registers. This includes national authorities, NGOs, and investigative journalists.

The EU’s justice commissioner Vera Jourova said the rules adopted Wednesday would “help us follow the money and crack down on money laundering and terrorist financing.”

Trust loophole

But there is a loophole.

A trust typically involves someone handing over control of an asset to a trusted second party.

The trusted second party, which is often a lawyer, is the legal owner of the asset but not the beneficial owner.

“It’s no question that it is a loophole,” Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity in Washington, told this website.

“They are also used to hold tangible assets in a way bank accounts aren’t. Trusts can be used to hold real property, a house, a boat. So in a way they can be a lot more dangerous in way that they can hold those tangible assets that are often part of the process of laundering money,” she said.

One notable example was when a former governor of Bayelsa State in Nigeria set up a trust in the Bahamas to enrich himself and his family. He was later arrested in 2005.

While Britain pushed for the public disclosure of beneficial ownership of anonymous shell companies, they opposed any moves to do the same for trusts.

As a result, the new EU law will only collect partial information on trusts deemed to have tax relevance.

“That is problematic for several reasons because there is not a clear definition of being tax relevance,” said TI’s senior policy officer Nienke Palstra.

Palstra noted that the limitation means people in developing countries won’t be able to see if their leaders and others are using the trusts.

“Money launderers will seek to exploit the next loophole and if trusts haven’t been made more transparent, it just opens up a whole new business,” she said.

What about the US?

Despite the loophole, the EU’s new law is ahead of anything in the United States.

The US, for its part, has no equivalent rules in place. According to Lowe, the US chamber of commerce as well as the secretaries of state opposes any rule.

In the US, companies are incorporated at the state level. The secretaries of the state are elected officials that control the process.

“The National Association of Secretaries of State is strongly opposed to any requirement that would have the states need to collect beneficial ownership when they incorporate companies” she said.

They argue that looking at taxpayer identification is good enough.

This information is difficult to obtain. It also doesn’t necessarily disclose the real identity of the owner, says Lowe.

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