With the EU’s 4th Money Laundering Directive about to step up the fight against terrorism financing and tax avoidance, how ready are member states for its demands on beneficial ownership?
The 4th Money Laundering Directive (4MLD), which EU countries must implement by 26 June 2017, is a significant challenge for organizations as they assess business risk and complex issues around ultimate beneficial ownership (UBO).
As well as transparency around beneficial ownership and enhanced customer due diligence, 4MLD modifies the regulations on politically exposed persons.
However, with just a few days until the implementation deadline it seems that too many member states are still not ready to create open and transparent registers of beneficial owners in order to clamp down on business secrecy.
The European Union’s 4th Money Laundering Directive was enacted in 2015, giving all EU member states until 26 June 2017 to comply with the new mandates.
The main modification points to note are:
- Emphasis on ultimate beneficial ownership and enhanced customer due diligence
- Expanded definition of a politically exposed person to domestic PEPs
- Cash payment threshold lowered to €10,000 (US$11,250)
- Expanded to include the entire gambling sector beyond just casinos
- Enhanced risk-based approach, requiring evidence-based measures
There are severe financial penalties for organizations who fail to comply, including a maximum fine of at least €5 million (US$5.2 million) or up to 10 percent of a company’s annual turnover.
However, the ongoing fight against terrorism financing, corruption, tax avoidance and other financial crimes means that the anti-money laundering regulations are constantly evolving.
As a result of the Panama Papers revelations of April 2016 and the increased number of terrorist attacks in Europe, the Economic and Financial Affairs Ministers Council (EcoFin) proposed further amendments to the 4MLD.
In particular, the group called for more accessible national beneficial ownership registries, with greater harmonization across Europe and the automatic exchange of information.
Attention was also focused on the registration requirements for trusts and the further strengthening of customer due diligence rules.
So how far along are EU member states with their local regulatory changes?
Progress on translating the requirements into local bills has been mixed, with significant discrepancies across countries due to differences in the legal interpretation and enforcement of European rules.
The UK and Slovenia have already implemented open registers of beneficial owners. The Netherlands has published the draft bill establishing the registry, but this will be behind a paywall and excludes trusts.
Some countries like Austria and Belgium don’t seem to have drafts of the updates ready yet. Many others, like the Czech Republic, Italy, Poland or France, are in the final stages of regulatory updates, but with a very different approach to UBO registers.
Transparency International’s recent report “Under the Shell – Ending Money Laundering in Europe” analyzed progress in six countries. They were the Czech Republic, Italy, Luxembourg, the Netherlands, Portugal and Slovenia.
The report identified areas of serious concern, as well as a number of significant weaknesses both in law and practice in the countries reviewed.
Certain sectors were found to be particularly vulnerable to money laundering risks, such as the real estate and gambling sectors.
And while no country fully met the highest standard of transparency, Slovenia stood out as the best performer having recently agreed to implement a full public beneficial ownership register with extensive scope covering any company or trust doing business or tax liable in the country.
Legislation in the UK requires transparency on the beneficial ownership of UK companies, Limited Liability Partnerships and Societas Europaea.
The obligation on these entities to maintain a register of people with significant control (PSC register) and provide this to the UK registrar of companies (Companies House) was put in place through the Small Business, Enterprise and Employment Act 2015, and a subsequent suite of regulations in March 2016.
The UK Government will also introduce a new Trust Register, but this will not be open to the public and is only available to law enforcement bodies and the UK Financial Intelligence Unit.
The UK has also softened the ownership rules for its overseas territories, instead using its special powers known as “Orders in Council”.
Taking a softer line
At the Anti-Corruption Summit in London in May 2016, France and the Netherlands committed to making their registers of beneficial owners open to the public.
The Dutch registry of beneficial owners is set up for companies, but trusts are excluded from the obligation behind a paywall and the data is accessible only to authorities and those with legitimate interest.
In France, anti-bribery policies under Sapin II came into force in December 2016.
The legislation introduced a new anti-corruption agency and forced companies to have policies in place to discourage bribery, as well as procedures to prevent bribes from being paid.
It also created a new legal requirement for compliance programs, but the country seems to be still behind with the beneficial owners’ register.
Meanwhile, Germany recently rejected amendments that would have allowed the public to access beneficial ownership information on German legal entities.
Just a few days before the 4MLD deadline, it appears that too many states are still not ready to create open registries of beneficial owners and clamp down on business secrecy.
Most European countries are blocking free access to the information by citing privacy protection, and allowing access only to those with “legitimate interest” — the interpretation of which remains at a specific country discretion.
The cost and the burden of identifying the beneficial ownership of companies, as required by customer and third party due diligence regulation, still remains with the compliance departments at financial institutions and corporates.