One year after the Panama Papers, the EU’s drive for increased financial transparency risks falling short
On the morning of 4 April 2016, exactly one year ago, citizens around the world woke up to yet another shocking tax scandal. The leaking of 11.5 million confidential documents from Mossack Fonseca showed
how the Panamanian law firm helped its clients through the use of offshore anonymous company and trust structures to launder money, dodge sanctions and evade taxation.
In the weeks which followed, the Panama Papers put the issue of anonymous company ownership high on the international agenda. The European Commissioner responsible for taxation, Pierre Moscovici, said that the use of offshore companies in order to hide financial assets from tax authorities was “immoral, unethical and, in one word, unacceptable
”. He said that the EU had “a duty
” to act and put an end to the kind of tax dodging uncovered by the Panama Papers.
In April 2016, European governments recognised the need for action, and EU Finance Ministers invited
the European Commission to introduce changes to EU anti-money laundering legislation in order to enhance the accessibility of beneficial ownership registers for both companies and trusts. Soon thereafter, the European Commission responded with a proposal
in July, announcing revisions to EU legislation that would allow for full public access to the beneficial ownership registers of companies and business-related trusts operating in the European Union.
This was a welcome step towards greater transparency. The types of schemes uncovered by the Panama Papers involved anonymous companies, whose real owners hid behind hired ‘nominee directors’ that often had very little or nothing at all to do with the business in question. They often also involved the use of anonymous offshore trusts. Such anonymous vehicles are known as ‘getaway cars’ for tax evaders, money launderers and criminals, which allow them to obscure their identity and hide the proceeds of their crime.
Public registers would make anonymous trusts and companies a relic of the past. Through such registries, the real owners – also known as “beneficial owners” – would be required to disclose their true identity. With public access to such information, journalists, civil society and interested citizens would be able to peel back the layers of secrecy and uncover wrongdoing. This would not reveal any details about bank accounts, but simply allow us all to know who owns the companies and trusts operating in our societies. Already today, public registers exist, including in the UK where a public register for companies
is up and running. One of the world’s largest banks, HSBC, has meanwhile also indicated its support
for establishing public company and trust ownership registers.
However, one year on from the Panama Papers, we find that commitments by European governments to put an end to the loopholes revealed by the Panama Papers have waned. Meeting in December last year, negotiators from the EU countries dropped key provisions from the European Commission’s proposal, most notably the proposal to make the registers public. Instead, registers would only be made accessible to those individuals who can prove a ‘legitimate interest
’. This would mean that journalists, civil society organizations and the general public would have to demonstrate a ‘legitimate interest’ in order to get any information, unless member states voluntarily opt for public access.
In reality, this could mean that the public would often be left in the dark. How to define the concept of ‘legitimate interest’ would be left to the discretion of EU member states. Experience from the ongoing implementation of the current EU anti-money laundering directive shows that EU member states cannot agree on a common definition. In the Netherlands, following a lengthy consultation, the government came to the conclusion that registers should be made public because attempting to assess who would have a ‘legitimate interest’ in accessing this information would be too “hard to control, hard to enact, and costly
.” Meanwhile, in other countries, such as the Czech Republic and Italy, the interpretation of legitimate interest has been so restrictively defined that individuals have to go through a court procedure
in order to demonstrate their legitimate interest in accessing this information.
But while EU member states have sought to backtrack the European Commission’s proposals for further transparency, the European Parliament has long recognised the need for transparency. And in February of this year, MEPs voted in favour of an ambitious response
to the Panama Papers, backing rules that would introduce public beneficial ownership registers for all companies and trusts operating in the EU.
The European Parliament proposed to close several loopholes in the Commission’s proposal, including by strengthening the definition of when an individual is deemed to be the beneficial owner of a company and requiring banks to terminate business relationships with companies who are unable to identify their beneficial owner.
Meanwhile, the billion dollar scandals keep hitting the news. Less than a month ago, a new exposé
showed that dirty money from Russia worth US$ 20 billion had been laundered through anonymous shell-companies and hidden outside of Russia. One of the favourite hiding places was banks in the EU.
In order to become EU law, the European Parliament and EU member states need to negotiate a final agreement. Therefore, it is crucial that EU governments rethink their unambitious position and instead deliver on their commitment to enhance transparency following the Panama Papers. Only fully publicly accessible beneficial ownership registers of both companies and trusts will allow for the transparency needed in order to put an end to the shadowy business practices that were at the centre of the Panama Papers.