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Money Laundering - Pounds. Photo by Flickr user Images Money (TaxRebate.org.uk). June 18, 2011. Used under CC BY 2.0 DEED, https://creativecommons.org/licenses/by/2.0/.

Beneficial Ownership Transparency’s Evolving Paradigms: An Overview of the Latest Reforms in the US, the EU, and the UK (Part 2)

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The following is a guest post by Sarah Bandini, a foreign law intern working with Foreign Law Specialist Jenny Gesley at the Global Legal Research Directorate of the Law Library of Congress. It continues part 1 of Beneficial Ownership Transparency’s Evolving Paradigms on the latest reforms in the U.S.

EU Law on Beneficial Ownership: The New Anti-Money Laundering and Countering the Financing of Terrorism Package

Common rules for beneficial ownership were introduced in the European Union (EU) in 2017 with Directive (EU) 2015/849, also known as the Fourth Anti-Money Laundering Directive (AMLD 4). The AMLD 4 laid the foundation for transparency in financial transactions by imposing stringent requirements for identifying and verifying beneficial owners. (AMLD 4, recitals 12, 13.)

Unlike regulations, which are generally binding and directly applicable in every EU member state, directives are only binding with regard to the result that must be achieved; the means are up to the member state. To become effective, directives must first be transposed into national law. (Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) art. 288, para. 3.)

Beneficial owner is defined in article 3, paragraph 6 of the AMLD 4. Like the U.S. Corporate Transparency Act and the Financial Action Task Force (FATF) Guidance, the AMLD 4 adopts a broad definition that includes direct and indirect ownership. It comprises natural persons who ultimately own or control an entity through “direct or indirect ownership” of a sufficient percentage of its shares, voting rights, or ownership interest. (Art. 3, para. 6(a)(i).) The AMLD 4 sets the rule that a shareholding of 25% plus one share or an ownership interest of more than 25% in the corporate entity is an indicator of indirect ownership. Member states may set a lower percentage. (Art. 3, para. 6(a)(i).)

Article 30 of the AMLD 4 requires member states to ensure that legal entities incorporated within their territory obtain and hold adequate, accurate, and current information on beneficial ownership. (Art. 30, para. 1.) The directive further specifies that each state has to create a central register of beneficial ownership for companies and imposes that such a register is made accessible to competent authorities, Financial Intelligence Units (FIUs), and obliged entities when taking customer due diligence measures. (Art. 30, paras. 5, 6.) The public can also access the registers provided they can show a legitimate interest. (Art. 30, para. 5(c).) However, information on beneficial ownership of trusts is available only to competent authorities, FIUs, and entities subject to the customer due diligence rules. (Art. 31, para. 4.)

In 2018, the AMLD 4 was amended by the Fifth Anti-Money Laundering Directive (AMLD 5), Directive (EU) 2018/843, to close loopholes detected following terrorist attacks and revelations, such as those exposed in the “Panama Papers,” that revealed widespread wealth concealment and tax avoidance. (EPRS Report, at 2.) Among the most relevant amendments was open access to beneficial ownership registries for the general public. AMLD 5 no longer required a legitimate interest to consult the registers but granted access without any further requirements. (AMLD 5, art. 1, para. 15(c).) In addition, information on beneficial owners of trusts, which had previously been limited to competent authorities, was made available to the public with a legitimate interest. (Art. 1, para. 16(d).)

However, in November 2022, the Court of Justice of the European Union (CJEU) invalidated the provision of the AMLD 5 on public access, holding that it conflicted with rights to privacy and personal data protection. The CJEU explicitly limited access to those that have “a legitimate interest” in beneficial ownership information but stated that it included the press or relevant civil society organizations. (Decision, paras. 72-74, 76.) The ruling shifted the EU’s approach toward beneficial ownership registries, prompting member states to modify their legislation.

The most recent development occurred on January 18, 2024. The European Parliament and the Council, the co-legislators of the EU, announced they had reached a provisional agreement on two components of the anti-money laundering package presented by the European Commission in July 2021, a directive and a regulation.

The proposal for a Sixth Anti-Money Laundering Directive (AMLD 6) would, among other things, clarify access to beneficial ownership information. As explicitly stated by the European Parliament in a press release, the co-legislators concurred that access should be limited to persons with a legitimate interest in line with the 2022 CJEU decision, including “journalists, reporters, any other media, civil society organizations, [and] higher education institutions.”

The proposal for a new regulation would harmonize the rules on beneficial ownership and clarify essential aspects. For example, it would explain that beneficial ownership is based on two components – ownership and control. (Regulation proposal, art. 2, para. 22.) Furthermore, it would clarify the beneficial ownership threshold previously regulated in the AMLD 4. (AMLD 4, art. 3, para. 6(a)(i).) It would set the beneficial ownership threshold at 25% plus one share or voting rights or other ownership interest in the corporate entity, including through bearer shareholdings, on every level of ownership. (Regulation proposal, art. 42.) The new rules would also close a longstanding loophole by requiring foreign companies with investments across member states, including in real estate, to declare their beneficial owners. (Id. art. 48.)

Washing machine full of money. Photo by Marco Verch. Nov. 22, 2017. Used under CC BY 2.0 DEED.

Beneficial Ownership Transparency in the UK. New Rules on Beneficial Ownership in the Economic Crime and Transparency Act 2023

The United Kingdom (UK) embraced a pioneering approach to beneficial ownership in 2016 when it introduced the People with Significant Control (PSC) register, the first of its kind in the world. It requires entities incorporated or registered in the UK to identify their respective PSCs. A PSC is defined as an individual who satisfies one of the following conditions: (i) has direct or indirect ownership of more than 25% of a company’s shares; (ii) has direct or indirect control of more than 25% of a company’s voting rights; (iii) has direct or indirect rights to appoint or remove a majority of the board of company directors or equivalent management body; (iv) exercises or has the right to exercise significant influence or control over a company; or (v) exercises or has the right to exercise significant influence or control over activities of a trust or firm which itself meets one or more of the first four conditions.

The registration requirements apply to a spectrum of individuals similar to the ones covered by the U.S. Corporate Transparency Act, 31 U.S.C. § 5336. As seen in part 1 of this blog post, U.S. law provides for the registration of beneficial owners, broadly defined as those who, directly or indirectly, either exercise substantial control over a reporting company or own or control at least 25% of the ownership interests of a reporting company. (31 U.S.C. § 5336(a)(3)(A).) However, the type of information required to be disclosed in the UK is wider than that referred to in the U.S. Corporate Transparency Act. PSC register guidance obligates companies to disclose the PSC’s name, birthdate, nationality, country, state, or part of the UK where the PSC usually lives, service address and residential address, the date they became a PSC, and the condition met for being a PSC.

In 2022, the UK expanded its reporting obligations to entities outside the UK. In August 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (ECTE Act) entered into force, introducing the Register of Overseas Entities (ROE). The ROE, held by the Companies House, aims to trace the ownership of UK properties by non-UK entities. To this end, overseas entities that own UK property are required to identify their beneficial owners and provide a series of details, including the entities’ names, legal forms, and governing laws, to the Companies House. The definition of beneficial owners is identical to the one adopted for the PSCs.

The framework underwent modifications under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). The final version of the ECCTA, which incorporated Lords amendments, received royal assent on October 26, 2023, but it has yet to come into force. The legislation intends to empower the UK to eradicate illicit financial flows that abuse the country’s open economy. It is expected to bring a significant shake-up of the current reporting system, notably concerning the disclosure requirements for the register of overseas entities. The ECCTA will amend the ECTE Act and, among other aspects, expand the definition of beneficial ownership, providing that individuals qualify as beneficial owners of an overseas entity if the entity holds a qualifying estate as a nominee for that individual. (ECCTA, part 3, section 158.) Under the ECTE Act, the criteria for determining beneficial ownership focused on an individual’s interest in the overseas entity rather than the underlying UK property. The emphasis was on identifying the entity’s owner legally owning the land rather than the beneficial owner. The ECCTA will change this and expand the reporting requirements accordingly. Other significant amendments to the registration obligations relate to trusts. The ECCTA will provide that all trustees in the ownership structure of an overseas entity, including private trust companies, qualify as beneficial owners. (Part 3, sections 159, 161.)

The ECCTA seeks to strengthen the Companies House’s role as a gatekeeper of beneficial ownership transparency. It will grant the Companies House proactive powers to improve the quality of the information in the companies’ register. The Companies House will have the capability to require identity verification and verify the accuracy of the information provided, moving beyond a mere passive acceptance of data. (ECCTA, section 65.) It will also be allowed to decline information considered false and remove fraudulent companies from the register. (Section 70.)

With particular regard to identity verification, the ECCTA will impose verification requirements for all existing and new PSCs, members of a limited liability partnership, and those delivering documents to the Registrar. Failure to maintain a verified status will be sanctioned as a criminal offense. These obligations are expected to improve the reliability of the information on the companies’ register, making it much harder to register fictitious beneficial owners.

This overview illustrates that beneficial ownership transparency is gathering momentum, with various jurisdictions worldwide developing different measures to guarantee the disclosure of such information. While the international community advocates for more robust approaches, particularly in ensuring open access to registers, recent reforms signal a promising step forward.

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Comments

  1. Reading this makes me think about a movie I saw: Lethal Weapon 2, an American buddy cop action comedy film directed by Richard Donner, and starring Mel Gibson, Danny Glover, Joe Pesci, Joss Ackland, Derrick O’Connor and Patsy Kensit. It is a sequel to the 1987 film Lethal Weapon and the second installment in the Lethal Weapon film series.
    Gibson and Glover respectively reprise their roles as LAPD officers Martin Riggs and Roger Murtaugh, who protect an irritating federal witness (Pesci), while taking on a gang of South African drug dealers hiding behind diplomatic immunity. It soon becomes clear that both cases are related; after an attempt on Leo’s life, Riggs and Murtaugh learn of the former’s murky past laundering funds for vengeful drug smugglers. Leo provides them with information about how laundering works and leads them to the gang, but upon dispatching his would-be assassin and returning with backup they are confronted by Rudd, who invokes diplomatic immunity on behalf of his unscrupulous “associates”, leaving the LAPD powerless to take action against them. https://en.wikipedia.org/wiki/Lethal_Weapon_2
    Below is an excerpt of the movie which Leo (Pesci) explains the money laundering process:
    https://youtu.be/f-J6EpRoZ6o?si=P-pVJZuidXEJe8yH

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