EU court returns EU to dark ages of dirty money


EU court returns EU to dark ages of dirty money

The European Court of Justice has barred EU governments from exercising one of the most powerful measures against financial secrecy of the past decade, immediately triggering a growing transparency blackout across the bloc. The decision comes in the middle of EU discussions on tightening measures to clamp down on dirty money entering the EU from Russia. Tax experts warn that the decision will throw the EU back into “the dark ages of dirty money”.

The court published its decision yesterday, ruling as invalid the legal requirements on corporations, trusts and other legal entities to publicly disclose the identities of their beneficial owners – that is, the true owners made of flesh and blood who control and benefit from the legal vehicles and who often conceal their identities by using shell companies and exploiting loopholes. EU countries passed the requirements into law in recent years as a direct response to the financial secrecy exposed by the Panama Papers, Pandora Papers and other similar leaks. By requiring corporations and offshore entities to publicly disclose who truly owns them, public beneficial ownership laws are designed to prevent their owners from escaping the rule of law, which can mean preventing billionaires from evading tax as well as preventing sanctioned oligarchs, organised crime and human traffickers from laundering money and financing illegal activity.

Although the patchwork of public beneficial ownership laws across the EU were still too early in their infancy to rigorously stamp out financial secrecy across the bloc, the EU court decision will again conceal swathes of transparency data only recently made available to the public following years of campaigning and policy negotiations.

Luxembourg and the Netherlands, which respectively ranked this year on the Financial Secrecy Index as the fifth and the twelfth most complicit countries in the world in helping individuals hide their money from the rule of law, have already taken offline their public beneficial ownership register. More beneficial ownership blackouts are expected to ensue imminently across the EU as EU countries bar public access to their beneficial ownership registers.

Public access to the registers in recent years made it possible to expose how often tax abusers, oligarchs and criminals were able to provide false beneficial ownership information to authorities in the absence of public accountability, often with help from EU lawyers, accountants and tax advisors. Analysis by investigative journalists revealed in 2020 that nearly a third of companies on Luxembourg’s beneficial ownership register listed fictitious beneficial owners, enabling the true undisclosed owners to evade the rule of law.1 With public access to registers across the EU now revoked, dirty money will likely surge back into the EU, the Tax Justice Network warns.

Reacting to the decision, Moran Harari, lead researcher on indices at the Tax Justice Network, said:

“The European Court of Justice’s decision ignores all the lessons learned over the past decade from leaks like the Pandora Papers and Panama Papers. Instead of continuing to lead the way on financial transparency, the EU now risks being left behind.

“The court’s decision implies that it is unjust to require offshore entities to publicly disclose information about their owners, but small domestic businesses in the EU and around the world have been already doing so for decades. For most companies, their legal and beneficial owners are the same individuals. It’s usually only those with the means and incentive to acquire offshore shell companies, accountants and lawyers to hide behind, that can be beneficial owners but not appear as legal owners on paper.2 This means the court’s decision doesn’t necessarily defend the principle of privacy, but defends the privacy of those owners who have specifically gone out of their way to evade legal accountability.

“This double standard of shielding the rich and powerful from public transparency and accountability is exactly what enables money laundering and tax abuse, and is exactly the type of dogma that governments across the EU have been fighting against by championing public beneficial ownership laws. We urge EU governments to not accept a return to the dark ages of dirty money and to open a full public hearing on the decision.

“The result of this double standard is arguably unequal treatment of investors who chose to invest domestically directly and whose details are already publicly available, and investors who chose to use offshore entities to disguise their identities. This at the very least raises doubts about the impact of the ruling on the principle of equality before the law. Public beneficial ownership laws are a step towards levelling the playing field between offshore and domestic investors. A step backwards on these laws will only tilt the field further.”

Andres Knobel, lead researcher on beneficial ownership at the Tax Justice Network, said:

“The Panama Papers and Pandora Papers made abundantly clear the power of public access to beneficial ownership information. Authorities have always had the means to privately collect beneficial ownership information one way or another. It wasn’t until that information became public, at first through leaks, and later through the law, that we finally started to see governments get serios about holding tax abusers and money launders accountable.”

The EU court decision comes the day before countries are expected to approve by majority vote a UN resolution mandating the UN to take on a global tax leadership role. With the EU’s hands now tied on public beneficial ownership transparency, countries will increasingly look to the UN to pick up the charge.


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Notes to editor

  1. Analysis by investigative journalists exposed that for almost a third of all Luxembourg companies publishing beneficial ownership in the register, fictitious beneficial owners (“company administrators”) were registered. Similarly, a recent study into Germany’s real estate sector showed that about 5 per cent of all real estate ownership chains end up in legal entities registered in secrecy jurisdictions without any public disclosure on their beneficial owners. This leaves a substantial share of investments into Germany’s real estate at high risk of being related to illicit activities. The money laundering watchdog Financial Action Task Force is now deliberating on urgent steps to improve data quality and data verification mainly because civil society organisations were able to demonstrate (see page 51 here) through public access to the UK’s beneficial ownership register how often registered beneficial ownership data was wrong and misleading.
  2. For most small domestic businesses, their legal owners and beneficial owners are usually the same people. Small businesses usually do not have the means to establish additional layers of offshore entities to hide behind or to hire accountants and lawyers to devise elaborate schemes to conceal their identities. As a result, the obligation on corporations and entities to disclose their legal owners in a public online registry is for small domestic businesses the same thing as disclosing their beneficial owner.The European Court of Justice has reasoned that the public disclosure of beneficial ownership data is an imbalanced and ultimately disproportional infringement into the fundamental rights of data protection. However, the only information beneficial owners needed to reveal about themselves under the EU directive is their name and the month and year of birth. This can hardly be considered to be compromising information that should be kept secret, especially for individuals who enjoy the privilege of limited liability granted to them by society at large.For companies that don’t use tax havens or have the means to hire service providers to hide their owners’ identities, which is to say the majority of companies, their legal owners and beneficial owners are one and the same. These companies are already required to disclose to public registries this kind of information on their shareholders and members in 18 EU member states and in 61 countries globally where legal ownership registers are made publicly available. The court’s ruling in effect creates a double standard granting anonymity exclusively to offshore money entering the EU.