New report exposes flaws in global and EU anti-money laundering rules

20May 2016
The Guardian Reporter
The Guardian
New report exposes flaws in global and EU anti-money laundering rules

As the political dust settles on the Panama papers and the anti-corruption summit, the focus is now moving to concrete solutions.

The EU has already announced plans to revisit the beneficial ownership disclosure rules of the European anti-money laundering Directive in June.

In June 2016 the European Union is expected to review its anti-money laundering directive, including controversial rules on the beneficial ownership of companies.

The Tax Justice Network has identified significant loopholes that jeopardise the effectiveness of these efforts to curtail money laundering.

Yesterday, the Tax Justice Network publishes its new report “Drilling down to the real owners – Part 1” (the first of a series of upcoming documents) which analyses the legal language in the fourth European Anti-Money Laundering Directive (2015/849), a common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime.

The Directive is scheduled to come into force by mid-2017 across the European Union, but is now expected to be amended in June 2016 after the Panama Papers exposed the mayhem that can be caused by secret shell companies.

This first report focuses on just two aspects of the European anti-money laundering framework, all concerning the rules around the determining of the real owner(s) of companies - the so-called “beneficial” owner(s). Here are some loopholes that could be used and abused to get around the rules:

The first aspect relates to the 25 percent of ownership interests threshold. Under the current and proposed (2015/849) EU rules, only natural persons who ultimately own or control more than 25 percent of the shares of a company are to be considered beneficial owners.

That means to get around this a typical family of four persons (two parents and two children or four friends) could appoint every member as a shareholder. In such a case, each of them would have only 25 percent ownership, so no one would trigger the threshold of more than 25 percent of ownership.

For this reason, and because multiple layers of ownership may render it difficult in practice to prove joint (indirect) control of any natural person of more than 25 percent, the report concludes that the threshold should be abolished to reduce complexity of the rules and to make it harder to simply appoint a few trusted people as shareholders as a strategy to avoid identifying the (real) beneficial owners.

The second analysed aspect of our report is the provision for “unidentified” owners, which – if unaltered – would allow senior managers to be erroneously recorded as the beneficial owners of companies.

Unless the proposed rules (2015/849) are tightened, shell company abuses will become easier in Europe compared to the current legal framework (2005/60).But the flaws in those two aspects do not stop at the European Union level, but also relate to the global level.

We trace the origin of the problematic provisions back to the 40 recommendations issued by the Financial Action Task Force (FATF) in 2012, the anti-money laundering organisation at the OECD in Paris. Therefore, these FATF recommendations also need to be reviewed in order to stop money laundering worldwide.

The report dissects the FATFs and the EU AMLDs language in both aspects and proposes alternative language to replace the existing flawed formulations and close those loopholes, making another Panama Papers less likely in the future.

However, this is only the first part of a series of Tax Justice Network reports that will address additional weaknesses and propose amendments regarding public access to beneficial ownership information and the need to expand the disclosure rules to include trusts.

Andres Knobel said:

“All the Leaks drive home one key message to the FATF, the body which is crafting the global standards to prevent money laundering: their 40 recommendations have to be beefed up urgently in order to stem the tide of global dirty money - this is not rocket science, but requires bold political leadership.”

Markus Meinzer said:

“The EU has already announced plans to revisit the beneficial ownership disclosure rules of the European anti-money laundering Directive in June. This is the perfect opportunity to remedy the flawed provisions around company ownership rules in the Directive which the EU cannot afford to miss.”

John Christensen said:

“We have always said that any registry of beneficial ownership must include offshore companies, trusts and foundations. To fail to do that would simply result in a stampede towards any vehicles not included in public registry. It’s not rocket science.”

Alex Cobham said:

“Politicians across the world who are welcoming the Panama Papers have to realise that they don’t need to rely on lucky leaks. They can simply close their markets – where all the real economic activity takes place – to any entity from a jurisdiction that does not freely publish registers of beneficial ownership. Pretty soon, you’d find those jurisdictions turn themselves around.”

Liz Nelson said:

“After Panama Papers, we have to let go the naïve notion that anonymous private companies serve any legitimate purposes. These shell companies are like weapons, and if we cannot control their producers, we must ensure tight regulation of their owners.”

The Tax Justice Network
We are an independent international network focused on tax justice: the role of tax in society, and the role of tax havens in undermining democracy, boosting inequality and corrupting the global economy. We seek to create understanding and debate, and to promote reform, especially in poorer countries. We are not aligned to any political party. AGENCIES