‘Under the shell: Ending money laundering in Europe’ – a critical summary of Transparency International’s latest report
30 May 2017

As the 26 June deadline for implementing the Fourth Anti-Money Laundering Directive (AMLD IV) approaches, Transparency International (TI) have released a report titled ‘Under the shell: Ending money laundering in Europe’. Focusing on six European countries—the Czech Republic, Italy, Luxembourg, the Netherlands, Portugal and Slovenia—it makes for worrying reading on the inadequacies of European anti-money laundering regimes. It also highlights best practice and recommends reforms for the future.

Its primary focus is beneficial ownership transparency, a topic on which it is critical of all countries surveyed. First in for criticism, however, is the European Union’s very definition of ‘beneficial owner’ in AMLD IV, which includes anyone who owns 25% or more of a company’s shares or voting rights. This threshold, says TI, is much too high. The report points to the example of a gold mine in Azerbaijan, which was awarded to a UK company allegedly involving the wife and daughters of the Azerbaijani president—who only owned 11% of it, but effectively controlled a total of 56% through a shell company (a fact only revealed later, in the Panama Papers leak). Moreover, the EU’s legal definition offers an alternative if no beneficial owner can be identified at the 25% threshold: a senior manager of the company can be named as the beneficial owner, leaving the true beneficial owner anonymous. “This is misleading,” TI concludes, adding that it “will prevent public authorities and others from detecting anomalies and raising red flags.”

TI proposes a comprehensive definition of beneficial ownership. In its estimation, the beneficial owner is always a natural person, never a legal person or entity, who has a direct or indirect right to appoint or remove at least one senior director or manager; furthermore, TI recommends that any individual holding at least one share and having the right to at least one vote—or, alternatively, above a certain threshold significantly lower than 25%, such as 1%, 5% or 10%—be counted as a beneficial owner. These thresholds, it concedes, may vary from country to country depending on ownership structures between states. TI also notes that governments may adopt a granular approach, such as through sector-specific thresholds or different rules for politically exposed persons. After this, any individual with direct or indirect control over the entity in question is also to be counted as a beneficial owner of it. If nobody passes the above tests, TI argues that “at least the top five or ten owners” be identified as beneficial owners by default.

For TI, the central importance of transparency is underlined by the often restrictive rules on who can access whatever data states do hold on beneficial owners. Often the data is limited in scope (e.g., omitting trusts established by European citizens in other jurisdictions), but even when it is complete it is often not available for easy public access. Current European standards limit access to beneficial ownership data to authorities, entities obliged to be on the register and those who can demonstrate a ‘legitimate interest’ in the information—with the definition of ‘legitimate interest’ left at the discretion of member states.

Meanwhile, TI notes that comprehensive AML enforcement statistics are generally not regularly published in the first place, and when they are, tend to suffer from dispersion and heterogeneous standards, making international comparisons “very difficult, if not impossible”. TI cites the Madeira free trade zone as a striking example of both these problems: foreign trusts set up by or managed by Portuguese citizens are not included in its register, and the register itself is only accessible by competent authorities bearing a court order.

The report concludes from this that the public should be able to access a minimum set of information on beneficial ownership, consisting of basic information such as name, nationality and country of residence of the beneficial owner, and the extent of their ownership. Likewise, national registers, it says, ought to be “freely accessible to competent authorities, obliged entities and the public”—and that the registers should be designed in open data format so as to allow bulk downloads and cross-referencing with other databases. “Getting the technical details and settings of the national registers right from the beginning can help save a wealth of time and make the database really relevant and useful,” TI argues, noting that good practices include systems as simple as scroll-down menus and taxonomies for types of ownership and control.

However, combined with lax enforcement of controls and sanctions by public authorities”. Particular problems are evident in enforcement of customer due diligence, partly because, as TI admits, the very nature of a trust conceived to offer guarantees of privacy frustrates that need for due diligence.

At the same time, oversight is generally weak, with “inadequate financial, human and technical resources of regulatory bodies, insufficient guidance and training provided to professionals on diverse AML compliance issues” holding back enforcement on those practice areas which are regulated or self-regulated. Indeed, TI singles out self-regulated professions such as lawyers, notaries and accountants for criticism, citing a Dutch notary office which failed to identify a conspiracy involving over $100bn in bribes paid to an Uzbek government official.

TI recommends in particular that these professions be required to safeguard against conflicts of interest and train members in AML obligations, while applying “regular ‘fit and proper’ tests” across all regulated sectors”. It notes the new UK Office for Professional Body AML Supervision (under the aegis of the FCA) as an example of the kind of action that ought to be taken. Pointedly, it adds that these supervising bodies must be adequately resourced to enable them to carry out their duties effectively.

Throughout, TI highlights areas at particular risk of money laundering: real estate, the gambling sector, trust and company service providers, and crypto or ‘virtual’ currencies like Bitcoin. Some of these “hot spots” are inadvertently abetted by European governments. For example, TI is highly critical of the Portuguese Golden Residence Permit Programme: aimed at attracting foreign investors, TI says that the Golden Residence Permit Programme has granted thousands of Schengen-compliant visas to countries with poor AML co-operation records, with 3,207 being granted in four and a half years to China alone. Similarly, the Non-Habitual Tax Regime, which is intended to buttress Portuguese coffers by incentivising individuals to become tax resident, has, argues TI, “contributed to the flourishing of a new business ecosystem of real estate agencies and lawyers facilitating investments in high value property”. This provides “a legitimate cover for money launderers wishing to introduce vast amounts of illicit money in the market.”

Many of TI’s general recommendations, as set out above, are expected to mitigate some of the problems in the real estate and gambling sectors, particularly in terms of beneficial ownership registration and better-financed oversight systems. Its proposals for dealing with virtual currencies are much more vague, urging only the “recognition” of illegal virtual currency trading as money laundering operations and the development of “working relationships” between law enforcement and the financial sector. The field is still very much in its infancy, with Russia belatedly opening to the use of cryptocurrencies in an attempt to regulate them and guard against money laundering; India, conversely, strongly deprecates their use at all. The Financial Action Task Force prepared its own report on the matter in June 2014, but likewise offered little in the way of strategies for dealing with virtual currencies as a systemic AML vulnerability. Nonetheless, as the prominence of virtual currencies increases in the wake of major cybersecurity incidents, such as the WannaCry cyberattacks which demanded payment in Bitcoin as ransom, regulators and pressure groups like TI will be forced to make more radical proposals for the control of cryptocurrencies.

This point aside, TI’s recommendations for more robust regulation across Europe stand as guidelines for good practice, and might if implemented bring about a system which is more ordered, organised and resilient, making responses to the challenges of the future faster and more effective.





Richard Nicholl (@rtrnicholl) is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.

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