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Millions of Euros Left Ukraine: Why Beneficial Ownership Transparency is Common Sense

March 7th, 2014

In the coming days, Members of the European Parliament (MEPs) will face a clear-cut choice: to move closer to ending financial secrecy, or to stagnate within the current system of opacity. The specific issue at hand is whether corporations should be required to disclose beneficial ownership information, which identifies who actually owns a company.

The vote on changes to the EU Anti-Money Laundering Directive (AMLD) will take place on Tuesday, March 11, at the Parliament’s headquarters in Brussels.

The current system has bred a vast network of shell companies that are often used to funnel money that’s been gained from illegal practices, or embezzled from a government’s coffers.

If regulators had accurate and detailed beneficial ownership information, tracing money that’s been flowing illicitly would become a much more realistic goal.

We’ve seen a lot in the news lately about illicit financial flows, especially those coming from former Ukrainian President Viktor Yanukovych. While his government saw the end coming, they apparently didn’t see it fast enough, as hundreds of documents were literally thrown into a lake next to Yanukovych’s residence, as he fled the country.

Photo courtesy of Flickr user Deepstereo

(Former President Yanukovych’s multi-million dollar residence)

The confusing web that he built around businesses, government corporations, and foreign banks is still being unraveled; but we do know that until September of 2013, his palace was oddly owned, in part, by an anonymous shell company based in the U.K.

In the wake of Yanukovych’s departure, members of the new government are looking into ways of repatriating money that the former president, and his inner circle, may have embezzled.

While it’s commendable that the EU, Switzerland, and others have frozen assets of Yanukovych, and 18 other high profile Ukrainians, one question remains.

Why must the fall of a government be the catalyst to uncovering corruption?

As the evidence pours out, it is clear that Yanukovych used shell companies, and tax havens that welcome secrecy, to create his financial spiderweb. But, if stronger oversight, like that in the new AMLD, were already in place, would it not have been easier to stem the tide and catch illicit financial flows as they are taking place?

We see cases like this on an almost-daily basis.

Just yesterday, the U.S. Department of Justice froze almost $500 million belonging to the descendants of former Nigerian leader Sani Abacha. The Justice Department alleges that Abacha, and his conspirators, obtained the money through corrupt contracts and the embezzlement of state funds from the oil-rich African country.

Much of this money was stored in places like Jersey, a well-known tax haven off the coast of Normandy, as well as banks in France and the U.K. They also seek the forfeiture of five corporate entities headquartered in the British Virgin Islands, which is known for attracting shadowy shell companies.

Although these two cases take place on different continents, they share one very strong common denominator – hiding the real owners of companies; the beneficial ownership.

Time and again, we see the practice of utilizing shell companies and bank secrecy to shield money launderers from the arm of the law. This is why it’s imperative that, on Tuesday, the European Parliament votes to move forward with the creation of public registers listing the true owners of corporations.

Past experience tells us that picking up the pieces after large-scale corruption and theft of state funds is difficult. According to a recent report in The Economist, the path to regaining stolen state funds won’t be easy for Ukraine, either:

Asset recovery is a slog, studded with obstacles that range from the deviousness of those hiding the money to the clunkiness of the international legal framework for identifying, freezing and repatriating looted wealth.

Even years into the asset recovery process in Egypt and Tunisia, there has been less than overwhelming success:

. . .the value of assets identified and frozen by foreign governments since the Arab Spring is disappointingly small: somewhere between $1 billion and $2 billion (with far less actually returned), when the amount nicked from Egypt alone was probably somewhere in the tens of billions (estimates run as high as $70 billion). Experts, alas, see no reason why Ukraine’s experience will be much different.

Instead of working on a puzzle after the pieces have already been shaken up, we must continue to push for common sense initiatives, like public registers, that will allow regulators to identify corruption as it’s happening, rather than trying to put things together from the past.

Written by Christian Freymeyer

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