Monday

27th Jun 2022

Letter

Ending shell companies does not threaten privacy

  • Smoking gun? The EU's anti money-laundering directive strikes the right balance between the public's desire for transparency and the data subject's desire for privacy (Photo: Pixabay)

In last week's op-ed Fundamental snag with new EU money-laundering rules, Martin Kenney, a lawyer based in the British Virgin Islands criticises one of the cornerstones of the new EU anti-money laundering rules: the granting of public access to a minimum set of information on the person who ultimately owns an EU-based company, commonly known as the beneficial owner.

This is not a new debate and the issue was widely discussed during the negotiations of the 5th Anti Money Laundering (AML) Directive.

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  • Recent scandals, spearheaded by the Panama Papers, have shown us that the current opaque financial system we have in place is vulnerable to systematic wrongdoing (Photo: European Parliament)

At the time, it was concluded that there was absolutely no contradiction with the newly-adopted EU framework on data protection, the General Data Protection Regulation (GDPR). Let us reiterate the arguments made at the time.

The stated objective of the directive is "the protection of the financial system by means of prevention, detection and investigation of money laundering and terrorist financing".

Recent scandals, spearheaded by the Panama Papers, have shown us that the current opaque financial system we have in place is vulnerable to systematic wrongdoing.

Without public access to beneficial ownership information, the laws of our societies are constantly undermined.

Kenney seems to equate the concept of legal persons with anonymity, something that has been a part European legal traditions for some time.

Legal persons are needed to operate complex businesses, collect capital and limit risks and the liability of individuals, they were never created as a tool to hide ownership in business or other enterprises.

Individuals who create legal structures are actively choosing to benefit from them and take advantage of things like limited liability. In return for this it is legitimate to expect transparency around beneficiaries.

Individuals could – if they wanted – trade in their own name and therefore avoid the public reporting obligations that come with legal structures.

Although we do not deny the responsibility of public authorities for investigating money laundering and terrorist financing cases, we believe public access is necessary for efficient prevention and detection of criminal acts.

Acting as strong deterrents, public registers will create an additional layer of protection for societies. Not only will they make it much harder for corrupt individuals to hide their criminal activities, but they will also prevent opportunistic behaviours that thrive on financial secrecy as the Panama and Paradise Papers revealed.

In addition, public access to beneficial ownership information can lead to more investigations by public authorities.

This was well-demonstrated by the Panama Papers: since beneficial ownership information about companies created by Mossack Fonseca became public in April 2016, more than $1.2bn [€1.11bn] has been recouped in 22 countries and investigations were sparked in more than 82 countries according to the ICIJ.

Public beneficial ownership registers can also serve other purposes.

For example, businesses themselves find it useful to know the beneficial owners of companies they are dealing with so as to better manage risks and potential liability. Our environment, human rights and social justice also benefit from greater transparency.

Kenney's claim that "only an effective and credible UBO due-diligence process on the beneficial owner [conducted by banks or lawyers like him] will frustrate illicit endeavours". This argument seems unconvincing in light of recent scandals, which have shown that intermediaries and professionals are not always on the right side of history.

More eyes needed

Although we do not question that they are an essential piece of the puzzle, we argue that the more eyes are able to scrutinise the data, the more chance we have of identifying anomalies, wrongdoing or misconduct.

Kenney also makes the point that crooks will lie and disclose incorrect information on the register. There is no doubt that this is a risk.

We have been consistently reiterating that information in beneficial ownership registers should be verified – regardless if the register is public or private. Public registers, however, will add an additional layer and offer opportunities to other users of the register (including the private sector) to spot and report inconsistencies and inaccuracies.

Proportionality

The amount of information required to be published had been deemed at the time proportionate to the objectives pursued. Only part of the information collected by authorities is put in the public domain.

Furthermore, robust safeguards have been built in to redact information from the public domain on a case-by-case basis when public access to beneficial ownership information could put individuals at risk.

This strikes the right balance between the public's desire for transparency and the data subject's desire for privacy.

It should also be noted that there is precedent paving the way, which should reassure data privacy defenders. It has been a long-standing practice that many European countries have publicly available, detailed information on the board members and managing officials.

Denmark has an online register for shareholders, where you can freely access shareholders full names and service addresses as well as full dates of birth for a small fee.

In another arena, the EU Transparency Register includes the names and contact details of individuals who seek to lobby EU policy makers. Data is freely accessible and can be downloaded.

This shows that it is possible to disclose carefully selected information on an individual for a well-defined and legitimate purpose.

What we read between the lines in Kenney's indictment against transparency is not as much a concern about individuals' privacy than the fear of losing a lucrative business that has been thriving on financial secrecy for too long.

Societies are in dire need of transparency and accountability. In the future, there will be more Panama Papers and more Paradise Papers if we do not adapt the way the financial system works.

Instead of pushing back, we invite Kenney and his profession to think about it as an opportunity and find ways to accompany this structural shift.

Author bio

Laure Brillaud is senior policy officer at Transparency International EU.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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