Under updated draft anti-money laundering rules approved by the European Parliament earlier this year, the ultimate owners of companies and trusts would have to be listed in public registers in EU countries. This feature is a summary of these proposals, and other measures being considered around the world to increase the transparency of ownership of legal entities and arrangements.
The EU Proposals
Public central registries were not originally envisaged to be included in draft legislation for the Fourth Anti-Money Laundering Directive (AMLD). However, G20 governments have put the issue of tax avoidance firmly on the agenda over the past year and the amendment answers what Civil Liberties Committee rapporteur Judith Sargentini says is “a clear call for more transparency.”
“With this vote Parliament has shown, from left to right, that it is in favour of public beneficial ownership registers, and thus sends a strong signal to the Council for forthcoming negotiations on the file,” Sargentini said. “By approving the establishment of beneficial ownership registers, the committees have shown that they are serious in their demand to finally break with the tradition of hidden company ownership."
The proposal as amended by MEPs would list information on the ultimate beneficial owners of many types of legal arrangement, including companies, foundations and trusts.
EU member states would have to make registers "publicly available following prior identification of the person wishing to access the information through basic online registration," MEPs say. They nonetheless inserted several provisions in the amended AMLD to protect data privacy and to ensure that only the minimum information necessary is put in the register. For example, registers would show who is behind a given trust, but would not reveal details of what is in it or what it is for.
Under the draft directive, "beneficial owner" is defined as any natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted.
In the case of corporate entities the beneficial owner is: the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership or control over a sufficient percentage of the shares or voting rights in that legal entity, including through bearer share holdings, other than a company listed on a regulated market that is subject to disclosure requirements consistent with European Union legislation or subject to equivalent international standards. A percentage of 25% plus one share shall be evidence of ownership or control through shareholding and applies to every level of direct and indirect ownership.
In the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds the beneficial owner is: the natural person(s) who exercises control over 25 % or more of theproperty of a legal arrangement or entity; and where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property of a legal arrangement or entity; or where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates. For beneficiaries of trusts that are designated by characteristics or by class, an obliged entity must obtain sufficient information concerning the beneficiary to satisfy itself that it will be able to establish the identity of the beneficiary at the time of the payout or when the beneficiary intends to exercise vested rights.
Trust or company service providers are defined by the draft directive as any natural or legal person which by way of business provides any of the following services to third parties: (a) forming companies or other legal persons; (b) acting as or arranging for another person to act as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons; (c) providing a registered office, business address, correspondence or administrative address and other related services for a company, a partnership or any other legal person or arrangement; (d) acting as or arranging for another person to act as a trustee of an express trust or a similar legal arrangement; (e) acting as or arranging for another person to act as a nominee shareholder for another person other than a company listed on a regulated market that is subject to disclosure requirements in conformity with European Union legislation or subject to equivalent international standards.
Under Article 29, Member States must ensure that corporate or legal entities established within their territory obtain and hold adequate, accurate and current information on their beneficial ownership. Member States must ensure that this information can be accessed in a timely manner by competent authorities and by obliged entities.
Under Article 30, Member States must ensure that trustees of any express trust governed under their law obtain and hold adequate, accurate and current information on beneficial ownership regarding the trust. This information should include the identity of the settlor, of the trustee(s), of the protector (if relevant), of the beneficiaries or class of beneficiaries, and of any other natural person exercising effective control over the trust.
Member States must ensure that trustees disclose their status to obliged entities when, as a trustee, the trustee forms a business relationship or carries out an occasional transaction amounting to EUR15,000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked (EUR7,500 or more if the transaction is in cash).
As above, Member States must also ensure that this information can be accessed in a timely manner by competent authorities and by obliged entities.
Additionally, Member States must ensure that these measures apply to other types of legal entity and arrangement with a similar structure and function to trusts.
The draft AMLD rules would apply to banks and financial institutions, and also to auditors, lawyers, accountants, notaries, tax advisors, asset managers, trusts and real estate agents.
The European Parliament will begin negotiating the legislation with the European Commission and the Council of Ministers under the Italian Presidency before the end of this year.
Commenting on the proposals, Geoffrey Todd, a Partner in the Private Client and Tax team at law firm Boodle Hatfield, said that while the draft beneficial ownership requirements appear to have safeguards, they perhaps go beyond what is required to reduce tax evasion and increase transparency.
“Early indications are that there will be provisions to protect data privacy and to ensure only the minimum information necessary is on the register. Details of what is in the trust and what it is for, for instance, will not be included. Individual Member States will also be able to exclude certain people and activities from its scope in cases where there is little risk of wrong-doing.”
“It has been known for some time that greater disclosure of beneficial owners of companies was going to be required, but until recently it had been assumed that trusts would not be included. David Cameron has previously indicated that trusts should be treated differently. Further, whilst it is appreciated that greater transparency may help prevent criminal activity and tax evasion, many might feel the proposals go beyond what is required to achieve this aim.”
“These proposals are, however, still at an early stage. Final negotiations within the EU on the Directive will not begin until the second half of this year and then each individual Member State has to incorporate it into domestic law before any of the provisions take effect. Therefore, although at present the proposals seem rather worrying, there is some way to go yet.”
The United States is one of the countries banging the drum for increased transparency of company and trust ownership arrangements the loudest, yet companies are formed under state rather than federal laws and several states provide company owners with plenty of anonymity.
In August 2013, the Incorporation Transparency and Law Enforcement Assistance Act was introduced in the Senate in an attempt to ensure that the identities of corporations’ beneficial owners are known. Carl Levin (D – Michigan), Chairman of the Permanent Subcommittee on Investigations, and Chuck Grassley (R – Iowa), Ranking Member of the Senate Judiciary Committee said that the bipartisan bill would end the practice of the US states forming corporations for unidentified persons, and instead require the states to obtain the identities of the persons behind the corporations formed under their laws.
"Today, it takes more information to obtain a driver’s license or open a US bank account than it does to form a US corporation," said Levin. "Our States don't require anyone to name the owners of the corporations being formed under their laws, practically inviting people to misuse our corporations."
"Prosecutors of financial crimes follow the money," Grassley continued. "It's hard for them to do that when the owners of shell corporations are able to hide their identities so easily. Setting consequences for submitting false ownership information would help law enforcement by imposing a hardship on the money launderers and tax cheats who use shell corporations to conceal their fraud."
The senators said that States form almost 2m corporations and limited liability companies within the US each year without asking for the identity of the owners. The proposed bill would require the States to add a single question to their existing incorporation forms requesting the names of the natural persons who are the beneficial owners behind the corporations being formed.
The United Kingdom
It is the United Kingdom Government however, that has taken on the status of standard bearer for transparency of beneficial ownership, having put this issue at the top of last year’s G20 Summit in Lough Erne, Northern Ireland, last year. At the end of this meeting, leaders adopted an Action Plan, which stated that companies should obtain and hold information on their beneficial ownership, and that central registries containing these details be set up at national or state levels.
In a speech at an Open Government Partnership event, on October 31, 2013, Cameron claimed that "for too long a small minority have hidden their business dealings behind a complicated web of shell companies and this cloak of secrecy has fuelled all manners of questionable practice."
Cameron was adamant that for the UK to maintain a low corporate tax rate, "you've got to keep corporate taxes coming in." This is why he is determined that beneficial ownership be subjected to greater scrutiny.
Cameron has now confirmed that not only will plans for a register go ahead, but the register will also be open to the public. The Government will use the data "to pursue those who break the rules," while businesses will "be able to better identify who really owns the companies they're trading with." Developing countries should benefit from having "easy access to all this data, without submitting endless requests for each line of enquiry."
Stephen Camm, a tax partner at PwC, said that a register would demonstrate that "the UK means business and a commitment to follow up on the G8 promises." He did however warn that this is a "brave call that could drive some investors who value confidentiality, sometimes for personal safety, away from Britain."
Camm's advice to the Government is that the register be "clear, robust and easily understood, and it will take time and considerable effort to meet these goals. Anything incomplete or inaccurate could do more harm than good."
The proposal to create a register of beneficial owners was included in the Queen’s Speech on June 5, 2014, which sets out the Government’s legislative programme for the year ahead.
Britain is in a unique position of influence over many offshore financial jurisdictions thanks to its colonial past and strong constitutional links to these territories. It has therefore been fairly successful in persuading these offshore territories to take up its transparency initiatives. Since the Lough Erne Summit, Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Jersey and the Turks and Caicos Islands have published plans to facilitate access to beneficial ownership information.
In a letter to the governments of the Crown Dependencies (Guernsey, Isle of Man and Jersey) in April 2014, Cameron expressed rare support for offshore financial centres, stating: "I want to see the Overseas Territories and Crown Dependencies flourish, and I respect your right to be lower tax jurisdictions. I believe passionately in lower taxes as a vital driver of growth and prosperity for all."
However, Cameron's letter stressed the importance of creating an accurate central registry on the beneficial ownership of companies, as well as a system to automatically exchange tax information.To which the offshore territories have responded that they are already more transparent than the UK, the US and other “onshore” countries in terms of making available information on beneficial ownership.
The Isle of Man's Chief Minister, Allan Bell, said: "The Isle of Man has a robust regime in place to ensure the identification of the beneficial ownership of companies and the availability of this information to the authorities. We have already made an international commitment to review the regime, and now that the UK Government has clarified its proposed way forward on beneficial ownership, it is logical to include that model as one of the options in our review. The outcome of the exercise has to be appropriate for the Isle of Man, of course, which is why we will be engaging in full consultation with the business community before reaching any conclusions."
The Channel Islands already record information on the beneficial ownership of companies. Jersey's Chief Minister, Ian Gorst, said: "Once we know the outcome of our consultation, we will be in a position to respond to the Prime Minister's letter. In doing so, we will be considering how the approaches adopted by the UK Government and other G8/G20 members to enhancing transparency on beneficial ownership compare with what is able to be achieved with our own approach."
Responding to the Queen’s Speech, Chief Executive of Guernsey Finance, the promotional agency for the jurisdiction’s financial services industry, Fiona Le Poidevin, said Guernsey continues to seek a level playing field on the publication of beneficial ownership information, pointing out that Guernsey already requires corporate service providers to keep records on beneficial ownership.
"Guernsey already regulates its corporate service providers who are required to keep records on beneficial ownership, and so we believe that we are in many ways ahead of the curve. We welcome the moves of other jurisdictions to enhance their regimes, but we and other like-minded territories believe that the most effective route forward is for the development of a truly global level playing field on beneficial ownership."
Le Poidevin said Guernsey will continue to monitor the precise details of the situation and assess how it develops in light of the fact that both the EU and the US are proposing their own versions, with variation on the types of entities covered and who has access to the information. “For example, the UK and EU are proposing public registers whereas the US is considering a register which can only be accessed by certain relevant authorities,” she observed.
"The European model has already raised concerns among potential clients around the world who – quite legitimately – want their affairs to remain confidential,” she added.“Interest groups in the UK have also expressed their fears that a public register might damage business prospects, pose a security issue, raise questions about data privacy, and have human rights implications."
"We will watch with interest the progress of all international proposals and continue to review our action plan on beneficial ownership, which was published in June last year, in this context,” Le Poidevin concluded.
The Isle of Man has similar concerns about the lack of a level playing field, and said upon launching a public consultation on the possible creation of a central register of beneficial owners that while it is keen to follow international standards, making this information public may be ill-advised.
The consultation documents notes that no comparable public register yet exists anywhere and there are inherent dangers associated with being a first-mover jurisdiction. It noted that some competing territories are not considering following suit.
The document also points out that the UK Law Society maintains that it is a fundamental principle of English law and natural justice (which would also apply in the Isle of Man) that people should be entitled to privacy, unless there is an overriding public interest issue that requires otherwise.
The consultation invites industry input on a number of technical points including: agreeing a strict definition of beneficial ownership; identifying what safeguards are necessary to protect user's data; and, considering what exemptions should exist (for example in the case of vulnerable individuals).
The consultation also acknowledges that there are many legitimate reasons for persons to be opposed to the data being made public. It notes that some law-abiding investors and companies may prefer to operate in jurisdictions which do not make this information public.
Likewise, the Cayman Government said upon launching a public consultation on its beneficial ownership action plan that it “will continue to evaluate further proposed changes in light of the intended benefits to law enforcement and tax authorities, the costs of implementation, and the potential impact on our competitive position.”
While world leaders are paying lip service to the need for more transparency of beneficial ownership, it is clear that without a level playing field, governments, fearing a loss of business competitiveness, are going to be very reluctant to be the first to take the plunge and make beneficial ownership information publicly available. If the EU and the UK do forge ahead with their own plans in this area, it will be interesting to see if other jurisdictions follow.
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