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The EU needs better anti-money laundering rules

Added 03 Jul 2014
This article originally appeared on OpenDemocracy.net

The EU seeks to become the standard-bearer on financial transparency. But right now, it’s still too easy to get away with shady dealings in Europe.


Since February of last year, the European Union has made money laundering and terrorist financing a central focus. In reviewing and updating the third Anti-Money Laundering Directive (AMLD), the European Union has tried to target the process by which criminal proceeds and illicit funds are moved throughout the continent and beyond. We’ve been following their progress closely, and have advocated for sensible reform to allow the EU to set the standard on anti-money laundering. But to be the standard-bearer on financial transparency, EU decision-makers must regulate the anonymous legal entities that help hide the identity of criminal and corrupt individuals. Right now, it’s still too easy to get away with shady deals.

Ever heard of the phrase ‘follow the money’? It’s sound advice, but only when the trail doesn’t lead to a closed door. That’s often what happens to investigators thanks to anonymous companies and secretive trusts. Hiding the identity of those truly in control of a legal entity (company, trust, etc.) has become a favourite pastime of criminals, corrupt politicians and corporate tax evaders looking to move money without attracting attention.

Numerous financial investigations have revealed that it’s common practice to use anonymous legal entities to launder illicit proceeds. The Financial Action Task Force–an international standard setting body–estimates that as much as 2.7 percent of global GDP is laundered worldwide in connection with criminal activities. And a study by the World Bank estimates that over 70 percent of large-scale corruption cases involved anonymous companies.

When the European Commission launched its initial proposal for the review, we realised it was going to be an uphill battle: the text suffered from loopholes in transparency of company ownership and tax evasion. Soon after the review was launched, input was sought from the European Parliament (directly-elected parliamentarians from all EU member states) and the EU Council (in this case, Ministers of Finance) to amend the text. We’ve previously dubbed this decision-making process as something akin to sausage making: confusing and sometimes messy.

To clear up this murky process, let’s take it step by step to see what is at stake.

In March, the European Parliament adopted its resolution to revise the AMLD. The crux of the European Parliament’s resolution–approved with a whopping 643 out of 673 votes–revolves around the creation of registers of who really owns companies, trusts and other legal structures. The vote was heralded by civil society as ‘ground-breaking changes to fight money laundering’. A coalition of civil society, supportive governments, and experts welcomed making beneficial ownership transparent through public registers, so that anyone, located anywhere, would have instantaneous access.

In brief, the European Parliament called for EU countries to ensure that companies and other legal entities (including trusts, foundations and holdings) hold adequate and accurate information on their owner-beneficiaries. This information then must be transmitted to a public central register, commercial register or companies register (see amendment 93). By making these registers public, and in an open and secure data format, members of the European Parliament want beneficial ownership data to be scrutinized effectively.

The Council, too, has been busy at work, tasking financial attachés and national experts to review the file. In June, the Council reached a so-called ‘general approach’, a placeholder for trialogue negotiations where the EU institutions—the Commission, Council and Parliament—sit around the table to produce a finalized revision.

Unfortunately, the text adopted by the Council seems to have chosen the lowest common denominator as far as beneficial ownership transparency is concerned.

Rather than the public registers called for by the European Parliament, the Council text allows beneficial ownership information to be held in a ‘specified location,’ which would allow the status quo of many countries’ systems to continue unaltered. Company service providers (companies that help setup companies and deliver services such as nominee directorships) could still be used to collect beneficial ownership data in a “specified location” and make it available. While the Council acknowledges that under no circumstance should a request for information allow a company or entity under investigation to be tipped off, guaranteeing this seems far easier if governments have the information in-house (see article 29).

In listing examples of what a ‘specific location for company owners information’ could be, the Council mentions ‘a public and central company registry, or in data retrieval systems’. While this text offers public registers as a viable option, providing it as an example in the legislative text, placing it among other options like ‘data retrieval systems’ is nowhere near as strong as the plain requirement by the European Parliament for public registers.

Instead of citing public registers as a springboard towards future transparency, the Council text simply mirrors the difference in approach currently used by European countries. For example, the UK recently announced a public register of company ownership, but Germany still operates a data retrieval system. The German system works on the basis of bank accounts, and is decentralised at state-level, only providing competent authorities with access to databases run by financial institutions.

An obvious drawback of this method is that the only legal entities covered are ones that have bank accounts in Germany. For example, beneficial owners of a German company with an account in Switzerland, but not in Germany, would not be included, creating a loophole. And non-public registers, which only law enforcement agencies can access, are subject to resource limitations, language barriers, or even politics, which can diminish a country’s will to help another government.

The Council seems to advocate for a system where private and public registers exist side-by-side, which would simply continue the current, far-from-perfect, patchwork of public and private approaches. Another fundamental difference between the European Parliament and the Council revolves around setting minimum standards for the data format. The Parliament wants to avoid a situation in which there are public registers with useless data, by making sure that the registrants’ information “shall be available online to all persons in an open and secure data format.”

But the Council makes no mention of minimum data format standards. Italy, which has a well-established register for companies that is public and has some ownership information, currently has PDFs of scanned documents for many companies. This approach is a virtual nightmare for anyone trying to research illicit activity. Imagine trying to browse hundreds of thousands of entries, each with information stored in separate PDF documents. Italy is by no means an exception, however, according to the Open Company Registers Index, which ranks countries on how open their company information is to outside parties.

To make registers really useful, information should be searchable, sortable and downloadable in what is called ‘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).

Now the scene seems set for the final stage of negotiations, which will, in all likelihood, take place under the auspices of the Italian Presidency of the EU later this year. But chairing these negotiations won’t be an easy task, as the European Parliament and the Council are at odds over fundamental issues. It will take both tact and courage to navigate this process.

And it’s important to bear in mind that both the Parliament’s resolution and the Council’s general approach are more ambitious than the Commission’s initial proposal (generally Commission proposals get “watered down”). In the Commission’s defence, the worldwide debate on financial transparency has advanced considerably since the G8 Lough Erne declaration saw governments of major economies committing to ‘breaking down the walls of corporate secrecy’ (some of those promises do still await action, as we’ve set out in our Lough Erne anniversary scorecard). The Commission was quick to respond to the Council’s publication and called it “an important step towards the adoption of stronger rules to combat money laundering and terrorist financing.” We hope it is indeed that—an important step—and not the Council’s final offer.

All the ingredients for a truly ground breaking anti-money laundering regime are on the table. If the European Parliament sticks to the recipe, EU countries agree to a watertight approach to transparency, and the Italian Presidency shows the ambition that is needed, we might see an agreement to publicly disclose beneficial ownership of companies across the EU.

The stakes are high: if Europe cannot reach an effective agreement, money-launderers will continue to exploit the patchwork of different national laws to hide their ill-gotten gains.