Public Registers of Beneficial Ownership

By Paolo Panico Solicitor (Scotland), Avocat (Tableau IV), Luxembourg. (01/09/2017)

Forward looking policies, which may shape the fundamentals of a society over the long run, should not be dictated by short-term political tactics cavalcading a public outcry or a temporary infatuation alimented by the press. A critical example is the mounting political pressure in Europe for the creation of publicly accessible registers of beneficial ownership of companies and trusts.

Public Registers: Those Already in Force and Those to Come

Beneficial ownership registers were first introduced under the original version of the 4th EU Anti Money Laundering Directive (the 4th AML Directive), which was published in the Official Journal on 5 June 2015 and should therefore come into force in all member states by this summer. Articles 30 and 31 of the Directive contain detailed prescriptions for the creation of beneficial ownership registers of companies and trusts. The information contained in these registers is intended to be available to the competent authorities in charge of the fight to money laundering and terrorist financing as well as to financial intermediaries performing customer due diligence. As far as companies are concerned, the information has to be accessible also ‘to any person or organization that can demonstrate a legitimate interest’ but in relation to trusts, no public access is envisaged.

At the same time as the 4th AML Directive was completing its legislative process, the United Kingdom enacted a public register of the Persons with Significant Control (PSC) over locally incorporated entities. The ‘PSC Register’ was created under the Small Business Enterprise and Employment Act 2015 (SBEEA), which was granted royal assent shortly before the general election of 2015. As a result, a publicly accessible register of the ‘Persons with Significant Control’ over UK companies – which broadly correspond to beneficial owners holding at least 25 per cent of the shares or voting rights and persons otherwise exercising ‘significant influence and control’ - has been maintained by Companies House since June 2016. For the time being the UK appears to be the only jurisdiction in the world to maintain such a register, which embodies a clear political will to subordinate the fundamental right to privacy to a ‘total transparency’ objective. An initiative promoted by a few MPs to pass legislation imposing the same requirement on the UK Overseas Territories was dropped in anticipation of the snap general election of June 2017.

The massive publication of unlawfully leaked documents of a Panamanian law firm in April 2016, known as the ‘Panama Papers’, triggered a public outcry, mainly fostered by sensationalistic press coverage, which was followed by various political initiatives on a global scale. In particular, at the EU level, the European Commission on 5 July 2016 published some proposed amendments to the 4th AML Directive, about one year ahead of the due date for its implementation by the member states. The amendments, as regards public registers, would concern both the 4th AML Directive and Directive 2009/101/EC, which had originally to do with the safeguard of minority shareholders and company disclosure obligations. The result is a sprawling and convoluted text, the main effect of which would be to subject trusts to the same disclosure obligations as companies and to remove the ‘legitimate interest’ requirement for the public access to beneficial ownership information.

The proposed text of July 2016 is not the definitive version yet. In November 2016, the European Presidency drafted a compromise text, reinstating the ‘legitimate interest’ requirement. On 2 February 2017, the European Data Protection Supervisor (EDPS) issued an opinion raising serious concerns about the compatibility of the proposed public registers with the European Charter of Fundamental Rights and particularly the Proportionality Principle. Nonetheless, on 28 February 2017 the Economic and Monetary Affairs and the Civil Liberties Committees of the European Parliament voted overwhelmingly in favour of unrestricted public access to beneficial ownership registers under what is already referred to as a forthcoming ‘5th AML Directive’.

The political debate is heated, and for good reason. Apart from the technicalities of the proposed beneficial ownership registers, the issues at stake lie at the very roots of Western society and civilization. International financial centres (IFCs) outside the EU should look carefully at this debate, which is poised to set international standards that may have an unprecedented impact on their industries and their economies.

The issues at stake in the political debate around beneficial ownership registers are not tax avoidance, money laundering and the misuse of corporate vehicles to serve such criminal purposes. In fact, the registers themselves are a very poor remedial measure in this respect. The gist of the debate boils down to the core values of an open society, that is, the boundaries between the availability of information which is in the public interest (often captured under the all-encompassing heading of ‘transparency’) and the respect for privacy in everybody’s life.

This is why policy measures of such an importance cannot – and should not - be passed out of the excitement unleashed by the Panama Papers furore or as a result of some political tactics relying on easy slogans and catch phrases.

This article attempts to illustrate how public registers of beneficial ownership are not an effective solution to combat money laundering and tax evasion but at the same time involve an unwarranted and disproportionate breach of the fundamental right to privacy.

Money Laundering and Tax Evasion

An important point must be clarified before we get into the details of this analysis. An argument against public registers is not an argument indirectly condoning tax evasion or – God forbid – money laundering. Quite the contrary. A serious commitment against financial crime must be implemented by the appropriate instruments with a view to clamping down on mischievous conducts without causing unnecessary disturbance to the vast majority of honest people. To use a sadly crude reference, one would not bomb a city and kill all its inhabitants because a terrorist group was detected in it; beyond the obvious humanitarian disaster that such an action would cause, what if some of the targeted terrorists managed to sneak out to another town in the meantime?

The political creed in relation to public registers is embedded in the European Commission’s proposed amendments of 5 July 2016:

The personal data of beneficial owners … shall be disclosed for the purpose of enabling third parties and civil society at large to know who are the beneficial owners, thus contributing to prevent the misuse of legal entities and legal arrangements through enhanced public scrutiny.

This idea appears to stem from a misperception of the way the corporate sector works. If a company or a trust is formed with the involvement of a member of a regulated profession, the relevant information on beneficial ownership is collected and verified on a preliminary basis and is then regularly kept up to date. Professionals may be required to file such information in a publicly searchable register but this exercise does not contribute in any way to curb financial crime. In fact, the company or the trust are formed only on the grounds of a satisfactory result of the preliminary due diligence. Any suspected attempt to use lawful legal arrangements for improper purposes must be promptly reported to the competent authorities, who have the responsibility and the power to make appropriate use of such information.

However, the formation of a company or a trust does not necessarily require the intervention of a regulated professional in most European jurisdictions. Even if a public register was in place, criminals would stay away of the regulated sector and create their own corporate vehicles, filing intentionally inaccurate information in the register, or not filing anything at all. I can mention a personal experience of this. Towards the end of last year, I made some inquiries in relation to a UK company that had reportedly committed various irregularities to the detriment of one of my clients. The directors of that company, who were not easily identifiable in the first place, had apparently overlooked their obligation to file the required information in the PSC Register.

After all, can we reasonably believe that somebody engaging in conducts that may trigger serious criminal sanctions would be deterred by the fees and penalties for non-compliance with any public register requirements?

On the other hand, although public registers of beneficial ownerships are unlikely to effectively prevent the misuse of companies and trusts for criminal purposes, their very existence may unintentionally assist other criminal activities, such as blackmailing, intimidation, kidnapping, extortion, cyber-crime, and identity theft.

One of the reasons why the Panama Papers aroused such a keen interest by the press and general public, apart from the scale and the extent of the ‘leaked’ information, was the presence of many celebrities among the reported beneficial owners of offshore entities. In many cases the use of offshore asset holding vehicles had no tax consequences, let alone criminal motives, but was a legitimate way to ensure privacy for people potentially exposed to the unwanted and sometimes dangerous attention of fans or opponents. These issues should not be taken lightly. It may be remembered that last December the tennis champion Petra Kvitová was assaulted and stabbed in her apartment in the Czech Republic by an unidentified criminal who entered disguised as a gas man.

In the words of the Jersey financial industry’s promotion body:

It is evident that public registers risk overlapping between disclosing information that is in the public interest and information which interests people, potentially with grave consequences.

Public Registers are in Breach of the Right to Privacy

A common core of values which laid the foundation of modern Western societies can be traced to the US Declaration of Independence and the Déclaration des Droits de l’Homme et du Citoyen, which stemmed out of the French Revolution in 1789. This very text was expressly referred to by the French Constitutional Council in its decision of 21 October 2016, which struck down as unconstitutional a public register of trusts.

This French register was another hasty political reaction to the Panama Papers, which in fact had nothing to do – and could not have anything to do – with the prevention of tax evasion. Since 2011 French taxpayers who happen to be settlors or beneficiaries of a foreign trust have been required to disclose the relevant information in their tax returns. A similar obligation was also imposed on foreign trustees of trusts with some connection to France, such as settlors, beneficiaries, or France situs properties. In 2013, the information disclosed by law abiding French taxpayers or by their trustees was organized in a register maintained by the Ministry of Finance. On 1 July 2016, by a government decree, that register was published online and made searchable with unrestricted access to information. It must be emphasised that the French trust register, which was held to involve a serious breach to the fundamental right to privacy, could not conceivably have any effect in the fight to tax evasion – all the information made publicly available had been provided by French taxpayers in their tax returns!

On 22 July 2016, a US citizen living in France successfully appealed and the decree was struck down as unconstitutional. The French Constitutional Court decision – which is quoted here in its official English version – relies on ‘The freedom proclaimed by Article 2 of the Déclaration des droits de l’homme et du citoyen of 1789 [which] implies the right to respect for private life; Owing to this, collecting, recording, keeping, consulting and communicating information of a personal nature shall be justified by general interest and implemented in an adequate and proportional manner’.

In particular, in the words of the French consititutional judges, even though the government’s initiative purported to further the repression of tax fraud and tax evasion, which is sanctioned under the French Constituton:

Listing, in a registry accessible to the public, the names of the settlor, the beneficiaries and the administrator of a trust provides information on the manner in which a person intends to manage his or her estate. The result is an infringement on the right of respect for private life. However, the legislature, which did not specify the quality nor the motives that justify consulting the registry, did not limit the people that have access to the information in this registry, placed under the responsibility of the tax administration. Therefore, these disputed provisions have a clearly disproportionate effect on the right of respect for private life in regard to the objectives sought.

The same fundamental right to the respect for private life and personal data is enshrined in the EU Charter of Fundamental Rights, Articles 7 and 8 of which deserve to be quoted in full:

Article 7 – Respect for private and family life

Everyone has the right to respect for his or her private and family life, home and communications.

Article 8 – Respect of personal data

Everyone has the right of protection of personal data concerning him or her.

Such data must be processed fairly for specified purposes and on the basis of the consent of the person concerned or some legitimate basis laid down by law. Everyone has the right of access to data which has been collected concerning him or her, and the right to have it rectified.

Compliance with these rules shall be subject to control by an independent authority.

Although on 28 February the politicians forming the two European Parliament Committees referred to above voted overwhelmingly in favour of unrestricted public access to beneficial ownership registers, it is hoped that the three-way negotiations between the Parliament, the Commission, and the European Council will be mindful of these founding values of the European project.

In the event that they were not, and that a 5th AML Directive were to be approved with a requirement for public registers, a judicial review by the European Court of Justice may still restore the respect for human rights. It has already happened in 2014 in the ‘Digital Rights Ireland’ case, which led to the repeal of a proposed ‘data retention directive’ that would have allowed the police to collect and maintain information on a person’s internet activity even in the absence of an investigation.

Public Registers are in Breach of the Proportionality Principle

The European Data Protection Supervisor’s Opinion of 2 February 2017 (the EDPS Opinion) highlights that the public registers provided under the European Commission’s proposed amendments to the 4th AML Directive of 5 July 2016 represent a serious breach of the Proportionality principle. The principle is embedded in Article 52 of the EU Charter of Fundamental Rights:

Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others.

The EDPS Opinion records the stated purpose of the proposed amendments to the 4th AML Directive, which is not limited to the fight against money laundering and the financing of terrorism but expressly extends to tax evasion. Accordingly, quoting the Executive Summary of the Opinion:

Processing personal data collected for one purpose for another, completely unrelated purpose infringes the data protection principle of purpose limitation and threatens the implementation of the principle of proportionality. The amendments, in particular, raise questions as to why certain forms of invasive personal data processing, acceptable in relation to anti-money laundering and fight against terrorism, are necessary out of those contexts and on whether they are proportionate.

In particular, as is stated in the proposed new Article 7b of Directive 2009/101/EC, quoted above, broadened pubic access to beneficial ownership information is believed to facilitate the enforcement of tax obligations. The effectiveness of this political initiative is highly doubtful but at the same time, in the words of the EDSP Opinion:

We see, in the way such solution is implemented, a lack of proportionality, with significant and unnecessary risk for the individual rights to privacy and data protection.

In particular, relying on a decision of the European Court of Justice in the Österreichsicher Rundfunk case, which had to do with the publication of certain persons’ income details, the EDPS Opinion suggests that it is necessary:

to examine whether the policy objective served by publicity “could not have been attained equally effectively by transmitting the information as to names to the monitoring bodies alone”. This question should be carefully considered when assessing the proportionality of measures consisting of public access to personal information.

For the purposes of the Proportionality principle, it is worth mentioning that the automatic exchange of financial information under the Common Reporting Standard (CRS) elaborated by the OECD is already in place in the European Union under Directive 2011/16 (the Directive on Administrative Cooperation in the Field of Taxation, DAC).

The CRS itself raises some concerns as to its compliance with the Proportionality principle. However, it is realistic to assume that the CRS is here to stay and as a result the tax authorities of all participating countries – which include all EU member states and all major international financial centres – are going to regularly receive updated information about the world-wide financial activities of their taxpayers, including those held through corporate vehicles and other legal arrangements.

Against this background, what additional benefits can reasonably be expected of a public register of beneficial ownership to justify such a massive breach of the fundamental right to privacy and the exposure of innocent people to unjustified threats?

An Alternative: The ‘Jersey Model’

An alternative approach, that effectively prevents the misuse of companies and trusts without an unnecessary invasion of individual privacy, exists and has been practised at least since 1989 in the island of Jersey.

A Jersey company may be incorporated only with the prior approval of the Jersey Financial Services Commission (JFSC), the regulator in charge of the supervision of all financial intermediaries in the island. Such approval is forthcoming only if the incorporation is applied for by a regulated professional or an individual resident in the island. The relevant beneficial ownership information is collected during this process and is maintained in a central register under the responsibility of the JFSC. The regulated service providers involved in the incorporation and administration of a Jersey company are required to update the relevant information and to promptly record any changes into the central register.

On a passing note, the UK PSC Register requires an annual update of the information when companies file their ‘annual returns’. This is hardly consistent with the FATF Recommendation that corporate information should be ‘adequate, accurate, and timely’ and may lead to some unpleasant situations if changes occur between two reporting anniversaries and the information is not updated in the meantime.

The ‘Jersey model’ is far more effective in the prevention of corporate abuse than the alternative of a publicly accessible register, which had been proposed by some members of the former UK Parliament for all Overseas Territories in a purported amendment to the Criminal Finances Bill, which was eventually dropped in the parliamentary vote.

The robustness of the Jersey approach was recently upheld by the Jersey Royal Court in Al Tamini v Al Charmaa. In the divorce proceedings of a couple in the United Arab Emirates an issue arose as to the beneficial ownership of two Jersey companies for which the wife had been registered as beneficial owner. The Court rejected the husband’s arguments to the effect that he had in fact contributed the relevant funds and the companies were thus beneficially owned by him:

There is a public interest – a very strong public interest – in the Island being able to demonstrate that it has the ability to identify the beneficial owners of companies, or the beneficiaries under trusts. In our judgment the Court should not recognise any arrangement which detracts from the ability of regulators or law enforcement authorities to do so.

A Safe-Guard: Judicial Review

If the ‘Jersey model’ cannot be easily replicated on a much larger scale in all EU member states, in most of which the corporate sector is largely unregulated, a suitable balance between the requirements of transparency in business matters and the fundamental right to privacy may be achieved in the form of judicial review.

A mechanism to this effect has been in place for a long time in the UK. All UK companies are required to keep a register of shareholders, which may be available for inspection by any interested party. A company receiving a request to inspect its shareholders’ register may either grant access to the applicant or seek a court order if it is under the impression that the information is being sought for improper purposes. 

The two reported cases in relation to searches of a company’s shareholders’ register appear to indicate that requests for improper purposes are far from being unlikely. In Burry v Knight, the Court of Appeal emphasized that there is a general presumption in favour of a shareholder’s right to inspect the register but access was denied in that particular case based on evidence that the information was being sought with a view to harassing the other shareholders in a private vendetta. In Burberry Group plc v Richard Charles Fox-Davies the court ordered not to comply with the request made by a tracing agency purporting to search lost shareholders in a publicly listed company because the details of the persons with whom the information would be shared were not disclosed (i.e. entities helping in the search) and the request was made for an improper purpose (i.e. extracting a fee from traced shareholders) and not in the shareholders’ best interests.

The same procedure was introduced in relation to the register of ‘Persons with Significant Control’, which has been mandatory on all UK companies since the enactment of the SBEEA. Nevertheless, the requirement for all UK companies to file their ‘PSC information’ with Companies House, where it is publicly accessible to everyone, defeats the very purpose of this judicial review: why would anybody bother asking a company for details of its PSCs when the information can be promptly accessed on-line?

The problem is that in this way there is no gate keeper against any improper use of such information.

Where Next?

The economies of Europe are slowly recovering from the largest financial crisis since World War II, a worrying effect of which is an increasing political fascination for populist, xenophobic and undemocratic positions.

In this troubled political context it is ever more important to uphold some of the fundamental values of Western civilization, such as the respect for private life and personal data.

Money laundering and terrorism are tremendous evils, while tax evasion undermines the functioning of civil societies by depriving them of rightful resources. To effectively combat them, it is important to put in place the appropriate measures and not to implement easy slogans which may put unnecessary and unjust burdens on millions of honest citizens without making the lives of criminals any harder, if not even easier.