The EU has begun fast-tracking amendments to the Fourth Money-Laundering directive in the wake of the Panama Papers revelations and London’s Anti-Corruption summit. The recent atrocities in the intervening months between the amendment and the original drafting have also brought about some controversial proposals on high-risk countries and cryptocurrencies, but many of these had already been tabled in the Commission’s Terrorist Action plan in financing.
Insights from the Panama Papers appear to have had the greatest influence in the amendments proposed: there is a far greater focus on beneficial ownership and connected registries for AML in the amendment. Other key changes include new proposals around Financial Intelligence Units (FIUs) and high-risk countries, with an accompanying blacklist.
The revelations also seem to have had the desired effect in accelerating the implementation. Before the release of the leaks from Mossack Fonseca, member states were required to implement the laws by 26th June 2017 - the proposal brings forward this date by six months to 1st January 2017. This shorter deadline is accompanied by additional requirements which will likely be approved by the Commission and the Parliament, so companies in member states will have very little time to comply even if the directive passes through the first round. German regulator BaFin has already elected to impose AMLD4, tightening standards of CDD, by January 1st 2017.
UBO registers could be proposed EU-wide
Whilst some member states have already adopted measures such as a public registry for beneficial owners, such as in Denmark, Norway and the UK, the amendment to the directive requires open registries for all member states.
In the original drafting, legal entities were required to provide ownership information in a central register and provide it to regulatory authorities and any person who can prove a ‘legitimate interest’ in procuring the information. Under the tabled proposal, access will not be restricted to those that can demonstrate this ‘legitimate interest’. It will be provided to the public on demand, rather than only to the scrutiny of investigators (or an international consortium of well-connected journalists). This is justified in Article 54 TFEU on the basis that ‘it will provide additional guarantees to third parties wishing to do business with those companies.’ Moreover, ‘public access also allows greater scrutiny of information by civil society, including by the press or civil society organisations, and contributes to preserving trust [in the financial system].’
The more ambitious proposal tabled in the amendments is on the interconnection of national registers. This is an extraordinary proposal - a central EU register would be unprecedented in scale and scope, and demanding in terms of data protection and privacy. This section of the proposal is absented from the January 2017 deadline - instead the Commission is ‘tasked to draw up a report by June 2019 to assess the conditions and technical specifications and procedure for ensuring the interconnection.’
Are centralised registers on the horizon?
Many risk and compliance advisors severely doubt the likelihood of implementation, but there is some precedent: currently, the EU is implementing its own interconnected business registries system, BRIS. Whilst the live date for the Interconnection of Business Registries is not until 8th June 2017, it possibly indicates a framework by which company ownership data could be centralised across the EU using the European Central Platform (ECP): a new core services platform, accessible by citizens, businesses and authorities. Should the integration be successful, it will surely increase the chances of interconnected beneficial ownership registers being adopted, as parts of the technical infrastructure will be in place.
We reached out to a European Commission official responsible for BRIS. She clarified the Commission’s position by explaining that there are ‘currently’ no plans for a technical implementation of the European Central Platform beyond BRIS. Yet:
“its technical design is such as to allow further systems to connect to it in the future if necessary and also to allow further exchanges of information to be supported if a new business need is identified.”
She confirmed that staff responsible for the implementation of BRIS have a consultancy role on the revision of 4AMLD, amongst other ‘relevant Commission services’. She stated that it was important to clarify the distinction between a centralised register and interconnected services, emphasising that the interconnection will not in itself create a centralised register:
“The interconnection via the platform will simply be a tool for enabling the cross-border electronic communication between registers and for facilitating access at EU level to company data as provided by the national registers.”
It must be acknowledged that this is more of a demonstration of technical possibility rather than a requirement of the directive. BRIS was proposed under the 2012/17/EU directive, which specifically states:
“Since the objective of this Directive is not to harmonise national systems of central, commercial and companies registers, there is no obligation on the Member States to change their internal systems of registers, in particular as regards the management and storage of data, fees, and the use and disclosure of information for national purposes.”
BRIS is nonetheless an excellent resource for compliance officers and risk analysts. For the first time it will be possible at EU level to search for and have access to information stored by the business registers. This resource will be available on the e-Justice portal in the same manner as the insolvency registers. Centralised registers are unlikely in the short term politically, but in the meantime greater technical infrastructure is clearly being built to facilitate EU-wide compliance and could, contrary to popular expectation, raise the prospect of interconnected registers after consultation in 2019.
Lower thresholds, with few exemption clauses
The ownership stakes of the holders as a starting provision for their registration have been lowered from 25% to 10%, in the case of ‘Passive Non-Financial Entities’ (more frequently called intermediaries). The entities do not create income on their own, and receive income elsewhere. This would drastically add to the beneficial ownership available already in the UK, for example.
Once implemented, the UK will therefore have to lower the 25% threshold for inclusion in the Companies House registry. Much doubt has been cast about the exclusion of trusts from the legislation - the new Proposal clarifies this by specifying that any trust which can be demonstrated to have commercial activities will require disclosure. It will still be possible to require beneficial ownership data on non-commercial trusts - but only on request according to ‘legitimate interest’.
There are some caveats to the UBO provisions available to member states. Where disclosure could put the holder at genuine risk (fraud, kidnapping, threats to life), there are grounds for exemption. There is also a clear time limit to the provision of data - ten years after the company has been struck off the register, the information should be removed. Those measures to give exemption on certain grounds are extremely hazy, and it is inevitable that they will need to be clarified before adoption.
Enhanced Powers for FIUs
Whilst several member states already have proposals in place for registries on payment accounts, the proposal would require member states to facilitate identification of natural or legal persons holding accounts held by credit institutions, specifically in the member state’s own territory. The states are given the freedom to choose between an open central registry for such data or a ‘data retrieval system’ in order to comply.
Greater enhanced due diligence requirements
Previously, one of the more controversial changes in 4AMLD (Article 18) was the perceived ‘blacklist’ of high-risk countries. The measures were enforced to ensure the application of EDD to legal or natural entities in these countries, on the list which is to be adopted this month. The Proposal better details what would be the minimum EDD checks required on these entities - which have been extended to the nature of the business relationship, the sources of wealth and the reasons for the transactions.
Trusts are given further attention in the new proposal, as the legislation is further clarified after 2015. Member states must now monitor trusts far more actively and systematically. Article 31 has been addressed for clarification - previously, 4AMLD could be interpreted by a member state to not be subject to any obligation for monitoring or registration purposes of trusts administered on its territory. This possibility has been identified to be ‘not in line with the transparency requirements of the Directive’ - the requirement to register only trusts which could be tax-sensitive is ‘not consistent with the encompassing obligation to monitor and register trusts administered on its territory.’
Consistent with approach taken with much of 4AMLD, it is still ultimately up to the trustees in a member state to ensure the information on ownership is kept accurate, and it is up to the member state to choose to invoke penalties on poor record-keeping - the UK, for example, imposes criminal penalties for non-compliance with these duties for the companies and their officers.
It will be tremendously interesting to see how national registries respond to the changes to the EU legislation. France has set a precedent - it made the public register of trusts accessible from 30 June 2016. However, this has been challenged by a US citizen who has brought an injunction against the publishing of their ownership information in the Conseil d’Etat. David Anderson, director and solicitor at Sykes Anderson Perry Ltd, described the action of France’s tax’s authorities as ‘binary’:
“You either keep people’s tax information confidential or you publish everyone’s tax details. It is deeply disturbing that a country like France, with its Republican values and record on human rights, has taken this ill-considered and almost certainly illegal action.”
Needless to say, David’s specialisms within the firm - listed variously as ‘offshore trusts investing into France’, ‘wealthy UK individuals leaving the UK tax net’ and ‘project management of very high value property purchases in French speaking countries usually involving several jurisdictions and complex finance and ownership structures’ - are undoubtedly threatened by the onset of these registers.
It is important to remember, that whilst the Proposal has to be submitted to the European Parliament for review and amendments (and, additionally to the Council), there is considerable scope for change. However, popular sentiment towards issues of transparency is currently febrile, and unlikely to be placated by 2017.