By Dr. Anabel Hyzler
The battle against money laundering and the funding of terrorism is far from over and regulators across the globe have expressed their concerns in the hope of creating unity in the fight against white collar crime. The key to doing so? Detection, prosecution and prevention. These three factors were at the forefront of the creation of European Directive 2015/849. By targeting the source of illicit profits, one will be in a position to shut down the generation of a criminal network. This is what the Directive seeks to implement.
The Fourth European Union Anti-Money Laundering Directive has taken the corporate sector by storm and has shed new light on AML regulation and the importance of transparency in the corporate sphere. Member States were given a two year window to transpose the new legislation into national law and must do so by 27th June 2017. With the deadline fast approaching it is interesting to see how each jurisdiction has chosen to interpret and apply the new changes proposed by the Directive and do their part in the battle against tax evasion, money laundering and terrorist financing.
This fight has been at the forefront of the Union’s agenda with the ultimate objective of harmonizing EU law with that of the United States to create an effective global compliance framework. The new Directive seeks to align the AML policies by implementing a risk-based approach, allowing decisions to be taken based on evidence to pre-empt the risks of money laundering and terrorist financing. Recent public scandal has only reiterated the need for increased corporate transparency in order to restore the people’s confidence in their governments. Citizens must be rest assured that a stricter approach is being taken to combating white collar crime and the only means of doing so is to give insight into the ultimate beneficial owners of large corporations. In light of this, the Union has made one of the most controversial and drastic decisions in favour of increased transparency; the implementation of a Register of Beneficial Ownership across the Member States.
An ultimate beneficial owner or beneficiary (UBO) for the purpose of this register is deemed to be a natural person holding an interest, be it directly or indirectly, of more than 25% in a legal person. This interest may be a financial or controlling interest over more than 25% of the assets held in such an entity.
Member States are now obliged to set up central registers that necessitate the disclosure of certain information on the beneficial ownership of corporations. Increasing the amount of data available that is used to identify beneficial owners will meet the requirements posed by the Financial Action Task Force to raise the level of transparency in the corporate sector. The idea is that national Financial Intelligence Units and other authorized entities will gain access to this register when carrying out their due diligence procedure.
However, the wording of the Directive raises some doubt as to who is entitled to gain access to such private and confidential information. Article 30(5) of the Directive states that;
Member States shall ensure that the information on the beneficial ownership is accessible in all cases to:
(a) competent authorities and FIUs, without any restriction;
(b) obliged entities, within the framework of customer due diligence in accordance with Chapter II;
(c) any person or organisation that can demonstrate a legitimate interest
Needless to say, dispute arises as to the interpretation of the term ‘legitimate interest’ as the Directive fails to shed light on its definition. It is clear that this was an attempt by the legislator to give Member States the freedom of interpretation to ensure that the term is understood within the context of that particular jurisdiction. Whether the term is construed in a narrow or wide manner will directly affect the extent of the Directive’s effectiveness in the realm of transparency. The subsequent sub-article gives Member States the option of making this register entirely public should they wish to do so. Seeing as Directives are only able to set minimum standards to allow room for interpretation, it is evident that the legislator has equipped Member States with the necessary legal tools to go one step further in the fight to create a more transparent world.
In light of the fact that privacy and confidentiality are at the heart of the Trust and Fiduciary sector it comes as no surprise that practitioners are particularly concerned about the implementation of these centralized registers. The disclosure of this information may have devastating effects for individuals who have legitimate and understandable reasons for keeping their personal details private. The nature of these relationships is precisely to act as an identity shield for those individuals who would rather not disclose who they are for various reasons. Unfortunately, this gives rise to a number of individuals abusing of these legal tools. The danger is that by disclosing information on not only the settlors, but also the beneficiaries to Trust setups, the need for transparency will have an adverse reaction on one of the most economically profitable areas of business.
There is a very delicate balance to be struck between the right to privacy on one hand, and the need for transparency on the other. Has the introduction of the centralized register crossed this fine line? Many argue that it has. However, the legislative leeway granted to each Member State is proof that the Union understands that this decision must be left to each government to take in line with their particular cultural contexts. It is yet to be seen how each Member State will interpret the contents of the Directive, however those that have already transposed this law, have varied in their approach.
In an attempt to combat the increase in fraudulent wire transfers, France has adopted a stricter approach in its regulatory framework. However, on October 21, 2016 the French Constitutional Court was faced with this first issue concerning the UBO Register. The Court came to the conclusion that the public registry, is in direct conflict with the French Constitution, and in particular, the right to privacy. As a result, the Court officially declared the register to be unconstitutional this removing its public accessibility. This is the first case of its kind and it will be interesting to see how this will play out going forward should more jurisdictions opt for a public register. The Courts may be facing a rapid increase in human rights disputes. The Court in this case made it a point that the only situation in which one may justify the invasion of an individual’s right to privacy is if it is effected within a lawful and proportionate ambit. In this case, the State failed to provide such justification.
The Maltese legislator is currently working on transposing the Directive into domestic law to meet the imminent deadline. Despite the aura of uncertainty that still surrounds the way this will be implemented, it goes without saying that it will have an effect on the Financial Services sector in Malta; it is simply unclear as to what extent this will happen. The main concern at this point is how much information will be disclosed with regard to all parties of the Malta Trust as a substantial amount of information on corporate entities is already held with the Registrar of Companies. When defining who the beneficial owner is in these entities, we see that it includes not only the settlor but also the beneficiaries. This can have detrimental effects not from a confidentiality perspective but also on a personal security level. These setups require a great deal of discretion for a reason; and sometimes that reason is the safety of those for whom it is set up. The directive also states that information on the trustee, protector (if any) and any person having effective control over the trust must also be divulged.
A cloud of uncertainty still surrounds the way in which the individual Member States will choose to interpret the wide provisions of the new Directive; particular when it comes to defining who may have a ‘legitimate interest’ and thus the key to unlocking a considerable amount of confidential information. The lack of consensus in this regard may lead to a fragmented legal framework being established across all Member States which may have an adverse effect on the objective of the Directive. The real question is how willing are we to sacrifice the individual right to privacy in order to achieve a fully transparent operational system? A public register will certainly cut administrative expenses but this may come at a very hefty cost; confidential information getting into the wrong hands. It is also advisable that legislators take a step back and truly consider the implications that may arise should the register be given public access. Will we simply be faced with an onslaught of constitutional proceedings in an attempt to safeguard one of the most fundamental human right as we saw this year in France? It will certainly be interesting to see which of these two highly protected objectives of the EU will win when directly weighed against each other.