The past few months have seen significant global developments around the key issue of corporate transparency. Earlier this month, the Financial Action Task Force (FATF) issued guidance on its revised Recommendation 24 on beneficial ownership, introduced in March 2022. The revised recommendation and the guidance make clear that states should adopt central, public beneficial ownership registries, although stop short of making this an explicit requirement. They also call for a “multi-pronged approach”, i.e. a combination of different mechanisms to collect ownership information, and state that the information should be verified.
The FATF changes were positively received by industry figures and transparency campaigners, who say they significantly strengthen the international standard for transparency. Beneficial ownership transparency is gaining momentum globally, with over 100 countries committed to implement reforms, and G20 and G7 leaders committing to implementing the FATF standards. Yet while anti-financial crime professionals are clear on the value of corporate registries (when done right), politicians and lawmakers are not always aligned on how best to implement them. A core divergence surrounds privacy and public access to information, coupled with longstanding issues on accuracy and reliability.
Against the backdrop of the new FATF guidelines, we explore the most recent developments in corporate transparency in key jurisdictions, and what they mean for the fight against money laundering and terrorism.
UK
In some respects, the UK has the potential to set the standard in corporate transparency. Its stipulated disclosure requirements and the accessibility of its records are amongst the most comprehensive of any major jurisdiction. However, even a cursory look under the bonnet quickly reveals some significant weaknesses.
Corporate records are held by Companies House, the government-run UK registrar. To strengthen its ownership information, Companies House introduced a register of People of Significant Control (PSC) in April 2016. Freely available to the public, who can search by looking up both legal entities and individuals, it became a key KYC tool for many UK financial institutions - one that does not exist in some other advanced countries (nod to the US here). That said, Companies House has repeatedly come under criticism for how its records are maintained. Companies House lacks the power to check and query data provided by reporting companies, providing ample opportunity for criminals to submit false data in order to create seemingly legitimate companies. The use of UK corporate structures in numerous money laundering scandals has been well-documented; most recently media outlets have reported how fake UK companies are increasingly used for fraud, including so-called ‘pig butchering’ cases.
“Analysis has identified 168 UK companies accused of running fraudulent cryptocurrency or foreign exchange trading schemes, with around half of these likely to be linked to pig-butchering scams.”
As a result, there have been vocal calls for reforms of UK corporate records across the public and private sectors. Following the Russian invasion of Ukraine in February 2022, HM Treasury took swift (but in the eyes of many, long overdue) action to tackle dirty money in the UK and the abuse of the financial system by criminals. Part One of the Economic Crime Act 2022, fast-tracked into law in March 2022, created a Register of Overseas Entities (ROE) designed to crack down on foreign criminals using UK property to launder money. This law requires any foreign business holding property in the UK to register with Companies House as an ‘overseas entity’ and disclose who controls them.
Reforms of Companies House featured heavily in Part Two of the Economic Crime Bill, heard in Parliament in October 2022. The Bill will equip the “data-house” registrar with new powers to act as an active gatekeeper upholding the accuracy and reliability of the data it collects. The identity of all directors and PSCs will be verified, meaning there will finally be some checks confirming that anyone who sets up, owns or runs a company is actually who they say they are. Companies House will also have enhanced powers to remove companies from the register and proactively share information with law enforcement if there is evidence of anomalous filings or suspicious behaviour.
However, questions remain about whether the reforms go far enough. As of 31 January 2023, when all initial ROE disclosures should have been filed, research by Transparency International UK showed that 56% of all assets held by offshore firms in the UK were still held anonymously, while 12% claimed to have no beneficial owners! Whilst it is still early into its existence, the true test for this and wider Companies House reform will be the effectiveness of enforcement activity, the provision of additional resources, and actions taken to pursue those who abuse the system. Watch this space!
US
Across the pond we have seen a lot of debate over the US’s move to create a database of beneficial ownership information. The Corporate Transparency Act (ACT) of January 2021 introduced the notion of a requirement to report beneficial ownership information, implemented by a Reporting Rule issued in September 2022 and due to come into effect on 1 January 2024. The reporting requirements will apply to both domestic and foreign entities operating in the US.
Initial reaction to the implementing Notice of Proposed Rulemaking (the “Access NPRM”), issued by FinCEN in December 2022, was muted and has since become more critical. The proposed rule aims to balance a useful database for authorised recipients against protecting sensitive information from unauthorised access. In practice this means there will be only a limited information retrieval process to protect unauthorised or inappropriate use of the register. Instead of open-ended access like the UK, US financial institutions will have to submit identifying information for a company to receive an electronic transcript with the beneficial ownership information. Furthermore, only some financial institutions would have access (cryptocurrencies firms, for instance, would not) and the company in question would have to consent to this access. Once information has been received it can only be shared with personnel in the US, limiting access within multinational institutions. With implementation looming in less than nine months, it seems the practical considerations of this are yet to be worked through, in terms of how consent is achieved, what this looks like for existing vs new customers, and if the burden of access outweighs the use of the database.
Industry bodies have been highly critical of the proposals. The American Bankers Association’s (ABA) called the proposal “fatally flawed”, saying it will provide “limited, if any, value to banks” and asking FinCEN to withdraw it. Other industry bodies such as the Institute of International Bankers have urged FinCEN to consider real-time access and automated bulk request processing, and to lift the restriction on using the database only under the scope of the CDD Rule rather than “all customer due diligence requirements under applicable law”. They claim the operational burden to maintain the information and restrict its use may disincentive firms from using the system. The ABA argues the proposal will create “significant redundancies and inefficiencies within banks’ AML/CFT compliance programmes”.
“The proposal creates a framework in which banks’ access to the Registry will be so limited that it will effectively be useless, resulting in a dual reporting regime for both banks and small businesses.”
Adding fuel to the fire, the proposed beneficial ownership information form that companies must fill in, shared by FinCen on 17 January 2023, allows firms to report that their beneficial ownership is ‘unknown’, enabling them to opt out of sharing the very information the CTA requires. The Financial Accountability and Corporate Transparency Coalition’s response to the proposal aptly summarised this as “an absurd result that FinCEN must avoid in promulgating”.
With the proposed limited and inefficient access, narrow scope of application, restrictions on sharing information, and ability to opt out of reporting information, many are asking whether the initiative has failed before it has even started. It certainly does not seem to meet the new FATF standard, which states information should be “adequate for identifying the beneficial owner” and publicly available. With FinCEN erring on the side of caution in prioritising privacy concerns, it is devaluing the value of the new registry at the expense of other important principles.
EU
In a surprising move, in November 2022 the Court of Justice of the European Union in Luxembourg ruled that the EU law-mandated beneficial ownership register regime was in fact unlawful. Making beneficial ownership information accessible to the public as required by EU money laundering directives was declared 'invalid'. The court found that the Fifth Anti Money-Laundering Directive requirements to create a beneficial ownership register regime accessible to all did not comply with Articles 7 (right to respect private life) and Article 8 (data protection) of the EU Charter on Fundamental Rights. The court found that the amendment is a “serious interference with the fundamental rights to respect for private life and to the protection of personal data”. Any person wishing to view the beneficial ownership data did not have to demonstrate a “legitimate interest” in doing so, creating a regime which allows for privacy intrusions.
Initial reactions to this ruling were strong. Many have seen it as a step back in corporate transparency. As summarised by Transparency International, “At a time when the need to track down dirty money is so plainly apparent, the court’s decision takes us back years.” In addition to the general public, the ruling impacts a number of professional groups who access registers to support the valuable work they do in uncovering corruption and dirty money, including journalists, academics and foreign government bodies. Whilst the ruling did state that certain roles in the media and other sectors could have a ‘legitimate interest’ in accessing public registries, it is not yet clear how this could work in practice.
“At a time when the need to track down dirty money is so plainly apparent, the court’s decision takes us back years.”
Some countries including Luxembourg, Belgium, Austria and the Netherlands reacted swiftly to the ruling, closing public registries to those without a legitimate interest. Ireland’s online registry now displays the following message: “RBO [Register of Beneficial Ownership] has restricted access to search the register to Designated Persons and Competent Authorities only, with very limited information being available to other parties in accordance with the recent ruling of the Court of Justice of the European Union.”
As we look forward, many are anticipating how the sixth money laundering directive will address this issue. Understanding how those with a legitimate interest in this information will maintain access, allowing them to continue promoting corporate transparency and conducting investigations to uncover illicit flows, is key. Prior to the ruling, the European Union had demonstrated clear movement in the right direction in terms of corporate transparency. What the ruling means in the long term is yet to be determined, however it is to be hoped the previous momentum continues and the commitment to pushing for corporate transparency remains.
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