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ILZE INSIGHT: Why ECJ ruling on UBOs needs more nuanced reading; and why Commission must now use case as opportunity to make Europe’s fincrime fight smarter, more effective

ILZE ZNOTINA COLUMN: The Commission's attempt to evaluate the implementation of the 4th AML Directive is just one - but a very prominent example - of slowness, secrecy, some bizarre arrogance and definitely “tick-the-box” thinking.

By Ilze Znotina

AML Intelligence Expert Columnist
Former Head of Latvia Government FIU

The European Court of Justice (ECJ) judgment on registers of beneficial owners invalidating the provision where UBO information incorporated within Member States (MSs) is accessible to general public has attracted a lot of headlines.

The first reaction, undoubtedly, was a huge surprise and disbelief. That right now – in the tenth month of the bloodiest war since World War II in Europe – when finally, Europe’s response to the security threats posed by suspicious financial flows of unknown origin and shady corporate structures is rigorous, visible, and unified, the ECJ would take such a significant step in the opposite direction.

However, after reading the judgment, I concluded that it deserves a more nuanced assessment.

First, the judgment is definitely not a step back.

On the contrary, the ECJ quite rightly requires the European Commission (EC) and Member States (MSs) to meaningfully introduce new mechanisms – including a publicly available UBO registers, to facilitate improvements to the AML/CFT/CPF system.

The Court insists we think about the legitimate purpose and technical implementation of these measures.

The ruling also reminds us not to forget that the scope of FATF Recommendations 24 and 25 – just like Immediate Outcome 5 – has never been so broad as to disclose all the information contained in commercial and UBO registers to absolutely everyone.

The Commission’s attempt to evaluate the implementation of the 4th AML Directive is just one – but a very prominent example – of slowness, secrecy, some bizarre arrogance and definitely “tick-the-box” thinking

FATF calls on governments to ensure the availability of information to competent authorities (i.e. law enforcement (LEAs), FIUs, supervisors, but not to SRBs per se) and, if possible, also to obliged entities.

The 4th AML Directive followed this trace but broadened it stating that “Member States should also ensure that other persons who are able to demonstrate a legitimate interest with respect to money laundering, terrorist financing, and the associated predicate offences, such as corruption, tax crimes and fraud, are granted access to beneficial ownership information, in accordance with data protection rules.”[1]

The 5th AML Directive[2] that extended the scope of transparency requirements also very clearly indicated the necessity of finding a fair balance between the general public interest and the data subjects’ fundamental rights.

It also stated that MS should provide a sufficiently coherent and coordinated way of public access to the information on UBOs that is limited, clearly and exhaustively defined, and should be of a general nature, to minimise the potential prejudice to the beneficial owners.

Although the Directive permits MS, under national law, to allow for access that is wider, in my opinion it is necessary not to forget the following:

1) The state must be able to achieve the goals defined of the AML/CFT/CPF system by FATF even if UBO information is available only to obliged entities, so that they can fulfil their duties of conducting customer due diligence, transaction monitoring and reporting of SARs/STRs;

2) Disclosure of personal data to a broader public definitely can and should be justified by other legitimate purposes, like:

  • reduction of opportunities to use legal structures for illegitimate purposes, especially corruption and tax avoidance.
  • promotion of trust to the business environment and financial markets.
  • mitigation of bureaucratic barriers in accessing the information on business partners.
    -compliance with national or international sanctions.

3) The UBO register must contain true and verified information, that can be withheld in case a grounded request by private individual if certain criteria are met. That means that MS has an obligation to create a “smart and accountable” registry. The one in which the available information is up to date, verified, processable and well organized.

Judgment as a warning

This war against money laundering, terrorism and proliferation financing cannot be fought if Europe doesn’t not act smarter, more collaboratively, innovatively, and with proper resources.

It is also important to remind ourselves that AML/CFT rules are not a panacea that can justify all the efforts of the MS legislators to create a more effective framework for the fight against serious crimes.

Even in case FATF’s assessment is approaching and the long-term vacuum of political will must be urgently filled with trendy, but sometimes poorly conceived initiatives.

Of course, Member States would benefit from more coordinated, collaborative, and technically supportive environment where the obstacles and challenges in implementation of harmonized EU AML/CFT/CFP rules could be discussed.

Until now we have rarely seen attempts to reach beyond traditional bureaucratic and disconnected attitude of Brussels to assist those “on ground”.

The Commission’s attempt to evaluate the implementation of the 4th AML Directive is just one – but a very prominent example – of slowness, secrecy, some bizarre arrogance and definitely “tick-the-box” thinking.

If the Commission does not speed up and create an environment of vibrant collaboration and trust, we can expect other unwanted surprises.

Judgement as an opportunity

The European Commission and the Member States should use this warning as an opportunity.

The time has come to seriously reconsider and clearly define a broader basis for the transparency of UBO information.

In 2022, such a basis is provided by the broad sanctions regime.

Today every entrepreneur in Europe, not just the obliged entities must comply with the Commission’s sanctions on Russia, certain Russian individuals, businesses, and products.

Compliance means requirements to carry out due diligence of their counterparties and to ascertain that the individual or legal persons concerned are not subject to sanctions.

And all of this in light of publicly available information on hundreds and thousands of corporate structures that were masterly used by Russian oligarchs and “smaller fish” to hide their ownership of yachts, luxury real estate, football clubs, charities, big businesses and political parties in Europe.

Concealment of beneficial ownership certainly is not just a Russian typology but when it comes to limiting the availability of UBOs information to the very closed group at this time of war and sanctions, means sending a very strong signal that Europe is not able to respond properly to Russia’s war against Ukraine, Europe, and the world.

The Commission and Member States should act immediately.

When sanctions are mandatory to everyone, when their effect is so painful to businesses and all of us, it is only fair and proportionate to expect the availability of information on UBOs for general public.

Finally, the Commission should use this judgment as a basis for strict scrutiny on those European countries which have still not introduced UBO registers or have applied a fee or any other restrictive means that impede fight with money laundering, terrorism financing and sanction evasion.

A gap in a single jurisdiction opens up all of Europe not just to crime, but to money that is increasingly used to support warfare operations by Russia.

Let us all remember that sitting in warm offices and theorizing about interference with the fundamental rights requires noticeably less willpower than fighting in the warzone or trying to understand how to protect your children and parents from cold, dark and missiles.

Europe must use this judgment as an opportunity to make its fight against money criminals smarter, more nuanced and certainly more effective.

[1] Art.14, Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ 2015 L 141, p. 73), as amended by Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (OJ 2018 L 156, p. 43).
[2] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU

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