Florencia Lorenzo ■ Split among EU countries over beneficial ownership ruling mirrors rankings on Financial Secrecy Index
Half a year later, EU member states are split in their response to the European Court of Justice’s decision to suspend the clause that guaranteed public access to beneficial ownership registers in the EU. Our new analysis shows that the split in responses mirror countries positions on our Financial Secrecy Index, which ranks countries on how complicit they are in helping individuals to hide their finances from the rule of law.
EU countries that shut down their registers in response to the Court’s ruling on average supplied three times more financial secrecy to the world than those who refused to shut down, according to our analysis of Financial Secrecy Index data that was collected prior to the ruling.
The worst secrecy jurisdictions took the ruling as an opportunity to become even more secretive, or to postpone transparency advancements (including British overseas territories which weren’t even bound by the ruling). However, several brave countries understood that they still had sufficient reasons to keep their registers open.
Currently, over a third of EU member states have kept their registers public.
A horrible setback
At the end of 2022, the Court of Justice of the European Union issued a ruling with significant implications for financial transparency and human rights. The ruling invalidated a crucial provision in the Anti-Money Laundering Directive which required member states to make information on the beneficial ownership of corporate and legal entities accessible to the general public. Activists, researchers, and journalists denounced this decision to throw the European Union back into the dark ages of financial secrecy.
The ruling is a major setback for financial transparency. Public beneficial ownership information is a keystone of financial transparency and plays a crucial role in combating illicit activities such as money laundering and tax evasion. By enabling anonymous oligarchs, tax abusers and criminals to hide their ill-gotten funds, financial secrecy undermines accountability and the rule of law. It allows these individuals to operate within societies without facing consequences for their actions. The idea that they could put their cloak of secrecy back on has shaken those concerned with financial transparency.
The importance of public access to beneficial ownership information to combat illicit financial flows is hardly a radical idea (even if it may have been when the Tax Justice Network first started advocating for it many years ago). Since then, and as the evidence of its positive impact piles up, several international organisations and standard setting bodies have highlighted the value of beneficial ownership transparency. The Financial Action Task Force, in its analysis of the best practices in the implementation of beneficial ownership frameworks, recognised the important role of public beneficial ownership information to speed up the identification of errors in registered data, thanks to the engagement of civil society actors.
A recent study published by the International Monetary Fund also highlights the importance of public beneficial ownership information, both for verification purposes but also for guaranteeing that all authorities (both domestic and international) have quick access to this vital information.
It’s worth noting here that beneficial ownership transparency is as robust and useful as the beneficial ownership laws countries put in place. That is, it depends on what information the laws mandate should be collected and made available to the public. We discuss this in more detail in our roadmap to effective beneficial ownership registration.
There is nothing controversial about publishing information on who the real owners of companies and other legal vehicles are. Most countries already make shareholder information publicly available in their commercial registers. For most companies, a business’s shareholder, ie legal owner, and beneficial owner (the person who owns, controls and/or benefits from the company) are the same person. Since commercial registers make information on legal owners public, the only beneficial owners that can remain anonymous are those that create indirect complex ownership structures, such as ones involving shell companies in secrecy jurisdictions, to conceal their legal ownership of businesses they own, control and benefit from. It is mostly these complex, indirect structures that cause concerns over the impact of the Court of Justice’s ruling.
To close or not to close: the immediate aftermath of the Court of Justice’s ruling
In the aftermath of the ruling, a curious spectacle unfolded. Some EU member states closed public access to their beneficial ownership registers almost immediately. Other countries took more time to reflect on the decision’s impact. Several countries eventually concluded that the appropriate way forward was to keep public access to their registers in place. Over half a year later since the ruling, more than a third of EU countries still provide public access to their beneficial owner registers.
Estonia, Slovakia, France, Denmark, Bulgaria, Czechia, Slovenia, Latvia, and Poland, have so far chosen to keep their public registers open, making beneficial ownership information freely available to the public. Estonia has gone a step further by removing the one-euro fee previously charged for accessing this information. This is a welcome improvement, since fees, no matter how low they are, can make some investigations prohibitively expensive when they involve multiple legal structures.
Latvia has been particularly outspoken about the rationale behind the decision to keep their register open. The government’s communiqué holds that public access to beneficial ownership data of legal entities is crucial for fair and transparent financial sector practices. In another communiqué, the Latvian Minister of Justice also stressed that “openness of information promotes a legal business and non-governmental sector environment, reduces the risks of corruption, ensures the implementation of sanctions, thereby strengthening the stability and security of our country.”
On the other hand, other countries may have found in the ruling an opportunity to quickly shut down their registers and keep beneficial ownership information opaque. Since the ruling, Austria, Belgium, Cyprus, Germany, Finland, Greece, Ireland, Luxembourg, Malta and the Netherlands have suspended public access to beneficial ownership information.
Sweden also suspended unrestricted access to information earlier this year. Sweden initially kept its register open after the Swedish Companies Registration Office said in a statement on the Court’s ruling that the “the negative consequences of closing the register completely for a period are judged to be far too great”.
For some countries, though, their positions are unclear. In the case of Portugal, Lithuania, Croatia and Romania, access to the beneficial ownership register is limited to those who possess an e-Identification or are nationals of those countries. We have therefore been unable to verify whether the information can still be publicly accessed. Other countries, such as Finland, Spain and Italy, never set up public registers in the first place (even when in some cases their legislation required them to do so), and as a result the court ruling has had little impact.
Figure 1. Status of beneficial ownership registers as of 28 June 2023
Countries’ decisions vs their Financial Secrecy Index rankings
Some commentators have tried to argue that the sole objective of shutting down public access to the registers was protecting the right to privacy. However, the Financial Secrecy Index, which identifies the world’s biggest suppliers of financial secrecy, provides some valuable context to countries’ responses to the ruling. The latest edition of the index was published in May 2022, months before the ruling.
The average ‘FSI Value’- a measure of how much financial secrecy a jurisdiction supplies – of countries that shut down public access to their registers- is more than three times higher the average value of countries that kept their registers publicly accessible.
When looking at ‘Secrecy Scores’ instead – a measure of how much scope for financial secrecy a jurisdiction’s laws theoretically allow – the average secrecy score of countries that closed their registers was 12 per cent higher than the average secrecy score of countries that kept the register open. More information on how these Financial Secrecy Index metrics work is available here.
Looking at countries’ rankings on the Financial Secrecy Index further confirms the pattern. All the EU countries that rank in the top 20 positions on the Financial Secrecy Index 2022 decided to revoke public access to their registers (Luxembourg, Germany, Netherlands, Cyprus). Of the five EU countries that rank closer to the bottom of the index, four have kept their register open (Slovakia, Bulgaria, Estonia, Slovenia), while Lithuania’s position is unclear.
Rankings on the Financial Secrecy Index 2022 were calculated before the Court’s ruling, but these subsequent events sustain its findings about which countries pose a serious risk to transparency and corroborate the pattern for financial secrecy the index demonstrates these countries to have.
There is also a geographical divide between the countries that decided to keep their registers open, and those that shut it down. Eastern European countries are among those that are making the biggest effort to keep their registers open, including Latvia.
The future of beneficial ownership transparency
Even though progress towards transparency of legal vehicles is a somewhat thorny issue, those who seek to present the ruling as a decisive turning point against beneficial ownership transparency are simply wrong. At the European Union level, strong, domestic mobilisation is required to keep public access to the registers open. Yet, throughout the world, most countries have adhered to at least some sectoral commitments to publish beneficial ownership information, be it for extractive industries, in the context of public procurements, or among the recipients of Covid-19 funds. When in November 2022 we published Beneficial ownership registration around the world, more than 100 countries were adhering to at least partial disclosures of beneficial ownership information.
The United Kingdom, no longer a part of the EU, kept its register open to the public. So have other eastern European countries, such as North Macedonia and Albania. After the ruling, the UK government even made a public statement saying that, while corporate ownership transparency could represent an intrusion on privacy rights, “the intrusions were limited and necessary in a democratic society for the prevention and detection of crime and in for the economic well-being of the country”. Limiting access to those with legitimate interest, the UK government argued, could undermine “transparency and thus the public interest benefits, in terms of crime prevention/detection and economic well-being of the country, that go with it.”
Regional examples, such as Nigeria and Ghana in Africa, Ecuador in Latin America, and Indonesia in Asia, show that progress is not limited to Europe. Canada is similarly debating a bill that would make beneficial ownership information available to the public, as is Australia.
Beneficial ownership transparency was recently recognised by UN Secretary General Antonio Guterres as a key policy area necessary to achieve the sustainable development goals. According to a Secretary General’s policy brief , which presents a roadmap to reforming the international financial architecture, “countries should strengthen beneficial ownership transparency systems with broad coverage, automated verification, and publication of information. Such registries would be game changers in efforts to properly tax high-net-worth individuals and multinational enterprises.”
In conclusion, beneficial ownership transparency remains a minimum standard for effective beneficial ownership registration frameworks. Examples from countries of the European Union show that even in the backdrop of the Court’s ruling, countries may find ways to keep registers publicly accessible, thus upholding transparency principles. Efforts towards beneficial ownership transparency are ongoing worldwide, and it is crucial for countries to fulfil their commitments, to combat financial crimes, and to achieve the sustainable development goals.