Will the EU's new anti-money laundering rules have teeth?
By Koen Roovers
For months, Ukraine’s political situation has made headlines. Many Ukrainians believe the turmoil is a direct consequence of a shady concoction of political cronyism and financial secrecy that allegedly allowed those close to power to funnel billions out of the country.
Investigations by journalists and anti-corruption activists have documented, for example, how the presidential palace compound, presidential planes, hunting lodges and palaces in Crimea have been owned by European companies that are set up to obscure who really profits from these assets.
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Such corruption is widespread. Indeed, the Financial Action Task Force – an international standard setting body – estimates that as much as 2,7% percent of global GDP could be criminal money that is being laundered.
Financial investigations across the globe indicate that it’s common practice among tax evaders, corrupt politicians and other criminals to use companies to hide who really owns something. Research by the World Bank shows that anonymous companies were used in more than 70% of grand corruption cases in an effort to obscure ownership.
Since February of last year, the European Union has been updating its Anti-Money Laundering Directive, with the aim of making it more difficult for criminals to launder their money in Europe. The Financial Transparency Coalition, a group of NGOs, experts, and governments, has been following this process closely.
We would like to see the EU require all member states to put the names of the people who own and control companies in the public domain for all to see. Companies should be the engines of economic growth, not a means of hiding your identity.
But it looks likely that a clash between the European Parliament and member states on this issue is imminent. This past March, the parliament voted—with a whopping 643 out of 673 MEPs’ support—for the creation of registers of who really owns companies, trusts and other legal structures that are open to the public upon online registration.
This is an efficient way of making beneficial ownership transparent and would allow anyone, located anywhere, instantaneous access.
Two weeks ago, however, the council reached agreement on its own so-called ‘general approach’ after months of discussion.
It does not support creating public registries, or even non-public ones. Instead, the Council is calling for beneficial ownership information to be held in a ‘specified location’, which is pretty much what already happens in most EU countries.
Company service providers (companies that setup companies and deliver services such as nominee directorships) are often required to collect beneficial ownership data and make it available to law enforcement and tax authorities upon request. The council acknowledges that such requests for information should not tip off a company that’s under investigation, but guaranteeing this seems easier when a government has the information in-house.
Another fundamental difference between the European Parliament and member states seems to revolve around setting minimum standards for the data format.
The parliament wants to make sure that once data is collected, it’s actually usable. This is in line with research on open data, which indicates that registers are especially useful when information is searchable, sortable and downloadable in ‘machine readable format’.
What all of this means is that, ideally, one should be able to work with the data on a personal computer (an example of this is XML).
Trialogue talks ahead
The review of the law is to be finalised this autumn in trialogue negotiations that start under the auspices of the Italian Presidency.
While it won’t be easy, as the parliament and member states are clearly at odds over key issues, all the ingredients for a ground-breaking new anti-money laundering regime are on the table.
If the European Parliament sticks to its recipe, EU countries agree to a watertight approach to transparency, and the Italian Presidency shows the ambition that is needed for the EU to lead, we might see agreement to publicly disclose beneficial ownership of companies across the EU.
Money launderers don’t stop at borders. In fact, by incorporating companies overseas, they actively use borders to hide assets from public scrutiny. Therefore, financial transparency solutions should be international. And what better way than to make public who incorporates where and when?
The writer works in Brussels for the Financial Transparency Coalition, an international network of not-for-profit groups which advocates transparency and accountability in the global financial system.