Christmas Comes Early in the EU for Kleptocrats, Terrorists and Money Launderers

Since 2017, all Member States of the EU and EEA have been required to keep central registers containing information on the ‘beneficial owners’ of legal entities established within their jurisdiction.

Background

It is down to Member States to decide what information needs to be provided but as a minimum, the information should include each beneficial owner’s:

• Name;
• Nationality;
• Country of residence;
• Month and year of birth; and
• The nature and extent of their beneficial interest.

Currently, Article 30(5) of the Fourth Money Laundering Directive (“4MLD”) states that the information must be freely available, without restrictions to official authorities and to any organisations that are required to carry out anti-money laundering checks. This is also extended to any person or organisation who can ‘demonstrate a legitimate interest’. However, ‘legitimate interest’ has not been defined, and is left to national governments and authorities to decide.

When the 4MLD was implemented, the UK was a member of the EU and had already introduced requirements to disclose the identity of beneficial owners in the form of the persons with significant control (“PSC”) regime. Therefore, the UK had effectively pre-empted Article 30 of 4MLD and only needed to make minor modifications to their regime. However, they did not incorporate a ‘legitimate interest test’.

The Fifth Money Laundering Directive (“5MLD”) imposed an obligation on Member States to ensure that information about the beneficial owners of corporate and other legal entities which are incorporated in their territory is held in a central register ‘accessible in all cases to any member of the general public’. The rationale for this was that the legitimate interest test was difficult to define in legal terms and so it risked creating disharmony in the approach taken by different EU and EEA Member States.

The Change

Last week, the Court of Justice of the European Union (“CJEU”) declared that the provision under Article 15(1)(c) conflicted with the Charter of Fundamental Rights of the EU (“the Charter”). They considered that making beneficial ownership information freely accessible to the general public is a serious interference with the rights protected by Articles 7 and 8 of the Charter, namely the right to respect for private life and the right to the protection of personal data.

The CJEU considered that whilst the provision of access to the general public may pursue an objective of general interest (the prevention of money laundering and terrorist financing), it is not limited to what is necessary nor what is proportionate. Therefore, they have viewed the additional actual benefits in terms of combating money laundering and terrorist financing as not justifying the increased interferences with rights under the Charter.

Since the decision was handed down, and at the time of writing, the Netherlands, Austria and Luxembourg have suspended their register. It is expected that others will follow shortly.

How does this affect the UK?

The Human Rights Act 1998 (“HRA”) made available a remedy for breach of the European Convention of Human Rights (“ECHR”) in the UK courts (including the Supreme Court). This means that in all appropriate cases, courts are tasked with deciding whether public bodies have acted compatibly with the ECHR. Further, the HRA imposed on all UK courts a duty to interpret legislation so that it is compatible with the ECHR, so far as possible. Where it is not possible, the courts can issue a ‘declaration of incompatibility’ which sends a clear steer to legislators that they should change the law.

The ECHR and European Court of Human Rights (“ECtHR”) exist separately from the EU and therefore the UK Supreme Court’s (“UKSC”) relationship with the Strasbourg Court is not changed by Brexit. However, the relationship between the UKSC and the CJEU has changed. The important takeaways in this sense are that UK courts are not bound by decisions of the CJEU after 11pm on 31 December 2020, and the UKSC is free to depart from decisions of the CJEU before this; applying the same test that they use when deciding whether to depart from their own case law. Further, the Charter ceased to apply from 11pm on 31 January 2020, when the UK exited the EU.

Although the UK is no longer a member of the EU, it was a Member State when 4MLD and 5MLD were required to be implemented in domestic law. As discussed, the UK effectively satisfied its obligations by creating the PSC regime. The UK also has a mechanism to allow a PSC to apply to suppress their details from public view if they can show they are at ‘serious risk of violence or intimidation’. However, there has never been a ‘legitimate interest’ test, meaning that if the UK were still a member of the EU, the PSC regime would infringe the Charter. 

Despite EU law ceasing to apply, there is a very narrow argument that the right of unfettered access to beneficial ownership information in the UK is invalid because it purportedly implements an EU law that never existed, and so is void from the outset. However, this argument is unlikely to succeed as the PSC regime stands as its own regime. There is also an argument that Article 7 of the Charter is nearly identical to Article 8 of the ECHR which was incorporated by the HRA. The UK’s commitment under the EU-UK Trade and Cooperation Agreement to adhere to ECHR principles following its departure from the EU would suggest that the UK should adhere to this ruling. However, there is the option to issue a declaration of incompatibility rather than nullifying the aspect of the regime if it was deemed appropriate.

Dominic Raab’s Bill of Rights Bill is currently in its 2^nd reading stage in the House of Commons and intends to repeal and replace the HRA. Under the Bill of Rights 2022, UK higher courts will still be able to issue a declaration of incompatibility if they find that a law contravenes a Convention right. This will not affect the validity or enforceability of the law but will trigger powers enabling ministers to take action to correct the legislation.

What happens now?

It is unclear what the UK will do next. The UK has recently pushed further forward with its drive towards transparency by creating the new Register of Overseas Entities. This requires non-UK legal entities that hold, or wish to acquire, registered land in the UK to disclose their beneficial owners on a public register. This was implemented by the Economic Crime (Transparency and Enforcement) Act which received royal assent on 15 March 2022.

Further, the UK has consistently insisted that the Crown Dependencies and the British Overseas Territories adopt similar regimes to the PSC regime, or it will legislate for them. Thom Townsend, Executive Director of Open Ownership stated “the UK’s corporate transparency regime, if new legislation passes to give Companies House the power to effectively verify the data it holds, could be well ahead of the EU”. Therefore, it seems unlikely that the UK will alter their position.

However, the UK does not want to be at a competitive disadvantage to the EU, especially with German, Austrian and Slovenian passports giving immunity against extradition outside the EU. Individuals wishing to establish a business or to hold assets through a new legal entity may find more comfort in a legal jurisdiction that more closely safeguards the right to privacy by imposing constraints to access and disclosure. This could play a factor in the UK’s next steps.

Clyde & Co Comment

The decision of the CJEU is contrary to the view in a democracy that laws should move in the direction of ever-increasing transparency, and it ultimately places the interests of a few over societal good. Exceptions in democracies, where institutions such as the UK monarchy are allowed to keep a lid on declaring wealth are also relatively rare.

Maira Martini, corrupt money flows expert at Transparency International, states that “access to beneficial ownership data is vital to identifying – and stopping – corruption and dirty money. The more people who are able to access such information, the more opportunity to connect the dots.”

Investigative journalists and non-governmental organisations do a huge job in building pictures. Martini talks of names such as Andrej Babiš, Aécio Neves and Riad Salameh who were initially not identified as likely involved in suspicious activities by authorities, but their roles and involvement only became clear once journalists and civil society gained access to registers. This is what triggered the 5MLD in the first place. Since, Russia’s invasion of Ukraine has demonstrated the dangers of the unmitigated flow of dirty money as never before, prompting governments around the world to tighten their anti-money laundering regimes. A powerful tool in this process is access to registers of beneficial ownership information across EU countries; the suspension of many to the public causing huge risks within the sphere. With the UK lagging behind in the fight against fraud, the investigative journalism sector is needed all the more.

As already stated in previous CJEU opinions, Article 7 of the Charter applies different standards to legal persons than to natural persons. For example, purely financial information warrants less protection than intimate data such as racial origin or religious beliefs. Also, legal persons were never supposed to be a vehicle to hide the identity of a natural person, and so if businesspeople want to avoid public reporting obligations that come with legal structures, they could trade in their own name.

We note that public access to company information is in line with countries’ obligations under the legally binding UN Convention against Corruption and therefore the decision of the CJEU seems to prioritise the interests of a few wealthy individuals over the widespread interest in tackling money laundering and terrorist financing. If a country such as the Netherlands is to lose its epitaph of a “narco-state” it does seem logical that individuals should be required publicly to state their ownership and business address.

Neither Sam Bankman-Fried, formerly of FTX Crypto Exchange, nor Jan Marsalek, formerly of Wirecard were available for comments.