Money laundering and sausages: the making of EU laws

March 20th, 2014

This article, written by the FTC’s EU campaigner, Koen Roovers, originally appeared on

There’s an old saying that the legislative process is a lot like making sausages – it’s confusing, messy, and you don’t really want to know how it’s done.

The European institutions in Brussels, the butcher shop in this case, decide how laws are drafted, changed, and combined to reach a final outcome. My colleagues and I followed this process, as European and national legislators debated revisions to European anti-money laundering rules.

These revisions couldn’t come at a better time. For us, this legislative overhaul is a chance to implement necessary financial transparency reform, most notably the requirement that governments make public who actually owns companies, trusts, and other similar legal structures. These public registers would help clamp down on anonymous ‘shell companies’ that criminals, tax evaders, corrupt politicians and other money launderers use to hide where the money is actually going.

As the world looks toward Ukraine to see how the military stand off will conclude, we’ve been following the region for a different reason. As the previous government was ousted, European countries began freezing assets belonging to former President Viktor Yanukovych and other members of the Ukrainian government.  Work by the Ukrainian Anti-corruption Action Centre and Global Witness has revealed how President Yanukovych used anonymous European companies to hide ownership of huge assets. The stronger oversight and enhanced scrutiny that would come with public disclosure of the real owners of companies and trusts would make this type of corruption much more difficult.

For the Financial Transparency Coalition, an international network of civil society organisations promoting improved transparency and accountability in the global financial system, this is vitally important due to the global implications of continued illicit financial flows. Research has estimated that illicit capital leaving developing countries is more than eight times the amount of official development assistance received. If developing countries could reduce the amount of money flowing out of their economies – and collect tax revenue that is rightfully theirs – aid dependency would wane with newfound resources to tackle poverty.

In light of this, it’s vital that we understand how financial regulation in places like the European Union can affect economies on the other side of the world.

After months of public debate and backroom negotiations, last week’s vote has produced an overwhelming mandate in favour of the European Parliament’s plans to combat money laundering.  Members of the European Parliament (MEPs) from all across the political spectrum voted in favour of registers for beneficial owners of companies, trusts, foundations, and other legal entities. More importantly, the legislation calls for these registers to be open to the public. In the end, the vote wasn’t even close, as 643 MEPs voted in favour, and only 30 MEPs voted against the measure.

In our view, making the registers pubic is the only way to truly break through the noise and give citizens, journalists, and civil society a way to hold businesses accountable. It also takes a strain off of law enforcement – both within and outside the EU – by allowing them to follow the criminal money trail quicker and easier.

But the reason for reform goes beyond scrutinising those who participate in illicit financial flows. Public registers would also improve the quality of information by allowing a wider range of stakeholders to spot any mistakes, and improve corporate transparency in giving businesses the tools to understand who really controls their partners and suppliers.

This political majority didn’t appear out of nowhere.

To really understand how the sausage was made, we have to look back to February 2013. The European Commission had just published its proposed update to the EU’s anti-money laundering directive (AMLD). The Commission suggested that companies be required to hold information on their beneficial owners (the person or people who ultimately control or benefit from a company). Because we apparently live in a society where companies don’t even have to know who ultimately owns them.

In June of last year, the G8 put the issue of anonymous companies on the global political agenda by adopting an Action Plan that pledged to tackle misuse of companies and legal arrangements. It was a relatively weak agreement, but it was a start. In October, the UK government announced that it would create a publicly accessible register of the beneficial ownerships of British companies.

Meanwhile, in the EU, the European Parliament began the process of updating Europe’s AMLD. In an unusual move, two MEPs were jointly put in charge of shepherding the EU legislation through Parliament. They came from strikingly different viewpoints. Judith Sargentini, a Dutch member of the Green group, and Krišjānis Kariņš, a Latvian member of the Conservative Group, were chosen as the ‘co-rapporteurs’ tasked with coming up with a framework.

Their draft report, published in mid-November, outlined a compromise view of the beneficial ownership registers. The report laid out a plan in which the registers would only be available to governments, and those professions and industries that would fall under the scope of the legislation. The report sidestepped the issue of public access, by leaving that question up to Member States.

In the vein of true sausage making, over 500 proposals to alter the text were offered.  A sizable amount of these amendments aimed at opening up the registers to public view.

Soon, a comfortable majority in favour of public access began to emerge from the Parliamentary committees. This new majority spurred the co-rapporteurs to develop a compromise proposal that would satisfy those pushing for public access, and those who wanted to safeguard against ‘abuse’ of the proposed system. The compromise resulted in a register that would grant the public access, but only once an individual had gone through a basic online identification system.

While this created a small gap between the public and the information at hand, it was far better than an earlier compromise that would have restricted access only to those with a ‘legitimate interest’, a hard-to-define concept that could be used to restrict access.

While the MEPs were hashing out their differences – and ultimately deciding in favour of public registers – a spokesperson of EU Commissioner Barnier announced on 9 January 2014 that the Commission was willing to bring public registers into their discussions, as long as data protection concerns were addressed.

But the Maltese EU Health Commissioner, Tonio Borg, used last Tuesday’s plenary meeting of MEPs as an opportunity to convey a message of skepticism over public registers. He claimed that access should be restricted to a ‘need-to-know-basis’. It seems that politicians from Malta aren’t keen on addressing illicit financial flows, as 5 of the 30 MEPs who voted against Tuesday’s AMLD proposal are from Malta.

While we saw some dissent, the incredibly lopsided vote in favour of public registers sends a forceful message to EU governments that it is time to truly address problems of financial secrecy and money laundering. Once a deal is reached between governments, they will begin negotiations with the Parliament and the European Commission to work towards a final, binding agreement.

In order for those negotiations to be successful, a majority of European governments need to be supportive of public registers for beneficial ownership. The UK and France have openly petitioned for public registers in the past, but other influential member states, like Germany, the Netherlands, and Sweden, have argued for more ‘flexible’ approaches for member states to achieve beneficial ownership transparency. Given Germany’s voting cloud in Council, an agreement on the basis of the European Parliament’s proposal without a change in its government’s position seems difficult to achieve.

The big question that therefore remains is whether the sausage that the European Parliament has prepared will turn out to be a Berliner Currywurst too.

Written by Financial Transparency Coalition

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