Europe on the verge of major anti-money laundering reform

December 3rd, 2014

Trilogue or dialogue?

We’ve been following the review of the European Anti-Money Laundering rules (AMLD) closely and reported on this fascinating policy-making process before. One of our key campaigns, the need for more transparency around those that own and control companies—known as beneficial ownership disclosure—is among the most important changes that are up for consideration. With so-called trilogue negotiations (behind closed-door negotiations between European parliamentarians and diplomats), this reform is entering a crucial phase. Unfortunately, it doesn’t seem that the different sides of the negotiating table speak the same language when transparency is concerned.

A quick recap: in March, the European Parliament voted 643 to 30 in favor of registers that are publicly accessible. There’s a long list of reasons why making the registers public would be a wise course of action. It would allow citizens, journalists and civil society to hold businesses accountable, make it much easier and quicker for law enforcement—both within and outside the EU—to follow the criminal money trail, and allow businesses to understand who they are partnering with, supplying to, or buying from. Moreover, it would improve the quality of information by allowing as many eyes as possible to spot mistakes or discrepancies.

If all EU member states—united in the ‘Council’—agree to public registers, then this would make it impossible for unscrupulous people to simply relocate to the more opaque parts of Europe. However, after lengthy discussions in Council, a stance seems to be emerging that would seriously compromise the quality and accessibility of the proposed transparency measure. In short, this position would severely restrict what information is collected for the registers and who has access to it. In this blog, we’ll go into detail exploring these two flaws.

Which Agent Smith?

A crucial element of the negotiations is how much information will be publicly disclosed. The council seems to argue for very limited information to determine a beneficial owner: ‘name’ and ‘month and year of birth’ (as opposed to someone’s full date of birth). To illustrate why this would be wholly insufficient, it is interesting to look at research done on the existing UK directors register by FTC member Global Witness and the Open Knowledge Foundation.

They found that giving only the month and year of birth would mean that there are at least 57,000 people in the UK whom you could not identify to the level of an individual given that these individuals shared the same months and years of birth.

Looking at data of all the people who are officers of UK companies, there are 56,923 officers of UK companies who share the same name and month and year of birth as someone else. Of these people, there are 2,669 people who share the same name and month and year of birth with two or more other officers, 324 people who share it with three or more other officers, and 45 people who share it with four or more other officers.

You can only imagine how undoable this becomes when you are looking for a seemingly generic name like Mr. John Smith (remember when you had to look up a telephone number of someone in the telephone book and the family name was the only thing you could go by). It’s quite apparent that you need more information to identify someone. We have been advocating for the inclusion of someone’s place of birth, a contact address (for instance a business address) and details of how someone secures control and benefit of a company.

What did #LuxLeaks tell us?

The second flaw is the attempt by the Council of the EU to severely limit access to the data. All EU governments agree that their competent authorities should have access. Most agree that companies that are legally obliged to perform ‘Know Your Customer’ vetting on potential clients should also have access to the data in order to carry out their important work.

But some disagree that there is a need to extend access to other types of researchers. And quite frankly, that’s odd. Why? Well, one of the reasons why there’s so much high-level attention around issues of financial transparency and tax justice is because of the painstaking work of investigative journalists and campaigning organizations to put it on the agenda. Currently, these ‘investigators’ are often reliant on ‘leaks’ from whistleblowers—insiders who can no longer bear their bad conscience and pass on incriminating evidence—for their ‘breaking news’.

It is only weeks ago that the International Consortium of Investigative Journalists blew the lid off a scandal that has been brewing for years. The state of Luxembourg has been engaging with transnational enterprises from around the world in secretive tax rulings—often brokered by the world’s largest accountancy firms—that significantly limit their tax liability abroad. In other words, for a tiny advantage to Luxembourg, the countries where these companies made their money in the first place endured huge losses in corporate tax revenue.

For many, this kind of fiscal dark art was nothing new, but it had never been fleshed out in the open. And once it was, the final figures were simply astonishing. The result: a storm of protest around the world, from the G20 to the EU, not least by some prominent EU neighbors of Luxembourg, who would like to see this obvious fiscal loophole plugged.

So instead of mistrusting non-governmental investigators, the Council would be smart to embrace outsiders that can keep an eye out for irregularities in beneficial ownership information. This is why we think the ‘legitimate interest test’ the Council proposes should be substituted by full public access. Keeping it in could turn out to be highly restrictive for several reasons, as it would require evidence of wrongdoing in advance of checking the register (perpetuating the reliance on leaks), it can jeopardize the timely access to information for investigators (inside and outside the EU), and each country can set different standards for legitimate interests (as said before, incentivizing the dishonest to simply relocate).

Last but not least, setting up such a system of review of people’s request for information constitutes a huge cost burden. And at a time when governments are cash strapped precisely because of the erosion of their revenue bases due to fiscal loopholes and financial secrecy, such a costly and unneeded measure should be a no go.

Written by Koen Roovers

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