New EU Directive on Money Laundering – a curate’s egg

The European Union, amid all the Brexit turmoil, has issued a proposal for a new Directive on money laundering and terrorist financing. Transparency, of course, is at the core of it. The Panama Papers scandal has given new urgency to the task of unmasking the corrupt, the crooks and other financial miscreants, and it’s clear that business supports us: in a survey of 2,800 senior executives in 62 countries, Ernst & Young found that 91% of respondents believe it is important to know the ultimate beneficial ownership of the entities with which they do business.

So how does the new Directive (an amendment to what is known as the Fourth Anti-Money Laundering Directive) look? In short, there are two main things.

First, there is welcome progress on companies: the proposal is to make beneficial ownership details public, through a register of beneficial ownership. This is an advance on earlier proposals, where only those with ‘legitimate interest’ would be able to access beneficial ownership data: that might have led to rather arbitrary refusals of information to journalists and others pursuing financial shenanigans. What is more, the threshold for beneficial ownership has been reduced, from a 25 percent ownership stake in the current Directive (which would be easily avoided by, say, splitting ownership between five owners, each with a 20 percent stake), down to a 10% stake. This is an improvement, and as we previously recommended, though even this is fragile: this threshhold is only for companies with passive income (like interest or dividends: these entities are known as “passive non-financial entities” in the jargon). You can circumvent this by having an “active” company — for example by pretending that it provides consulting services — as we explained earlier. This loophole should be closed: extend this to all companies, active and passive, and to all beneficial owners who beneficially own at least one share.

There are major loopholes with respect to companies, however. For example, the current Directive includes a clause which states that if the beneficial owner cannot be identified then a member of senior management can be named instead. As we noted in a recent paper, this could make shell company abuses easier in Europe, when compared to the current legal framework (2005/60). This clause has not been removed in the new set of proposals.

Second, there is less to welcome on the all-important issue of trusts. There are certainly plans for central registers of trusts, of which the key segment is:

“Each Member State shall require that trustees of any express trust administered in that Member State obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust.

That information shall include the identity of:

(a) the settlor;

(b) the trustee;

(c) the protector (if any);

(d) the beneficiaries or class of beneficiaries;

(e) any other natural person exercising effective control of the trust.”;

The trustees are key to this. As we have explained in great detail in our recent report, if the trustee is in a European Member State, then it’s in scope. However, there is lots of potential for mischief here.  First, the proposal says:

“a trust is considered to be administered in each Member State where the trustees are established.”

For one thing, the trustees need to be ‘resident’, not ‘established’ in a Member State: that is peculiar wording. Second, why “trustees”, in plural form? Why not ‘any trustee’ — which is a much stricter and more appropriate test?

With these narrow and badly defined connection points, it would be easy to escape trust registration, even for trusts set up under EU law. Not only that, but it would be easy to escape registration of any trust by having the trustees, and possibly any trustee (the wording isn’t clear,) in Panama or the United States (or, perhaps, the United Kingdom, in a Brexited world). It would be much better to expand beyond trustees and include all those elements of a trust that have connection points with the EU: any trustee, any settlor, any beneficiaries, any assets, and so on. Not only that, but a trust should only be enforceable in European courts if it is in a European registry. This gives incentives to trustees to declare the trust to the European registry.

Now, on the more positive side, the trust registers need to be accessible to the public, as long as the trust is managed by a professional trustee (they use the words ‘profit-making’ instead of ‘professional’.) For other trusts, such as certain private “wealth management” trusts, there is a ‘legitimate interest’ test before access can be given: this is likely to be a loophole that would surely be tested by the avoidance industry.

A press release providing further details and background is available here. A video of the proceedings is available here.

(In parallel to this proposed Directive, the EU also yesterday announced measures to address tax transparency issues.)

Endnote: Le Monde is running a story looking at how France has already introduced a register of an estimated 16,000 trusts with some connection to France (that is, a settlor, beneficiaries, assets, etc., so a broader definition than the EU’s) but is now being taken to court by a U.S. resident of France. For those of you who read French, it’s entitled Le registre public des trusts lancé par la France contesté devant le Conseil d’Etat. (Hat tip: Lucie Watrinet.)