Failure to Register

KleptoCast 15: Casey Michel talks to Laure Brillaud of Transparency International about a new report on European anti-money laundering efforts. Listen to previous episodes on iTunes.


By Casey Michel

Last year’s Panama Papers release not only revealed the sheer scale of the global offshoring regime, but also reminded constituents and researchers alike just how little Western governments have done to actually follow through on pledges to bring more transparency to their financial and company formation sectors. Indeed, European officials have long promised greater oversight for domestic shell companies and trusts – and, when faced with criticism about their slow pace, could always point to their American counterparts’ shortcomings to show just how much more oversight governments from Lisbon to London to Ljubljana offer than officials in Washington.

To be sure, American jurisdictions – most especially Wyoming, Nevada, Delaware, and South Dakota – present some of the most egregious failures when it comes to the basics of shell company and trust oversight. But a new report from Transparency International illustrates that the distance between American and European oversight is perhaps not quite the chasm European authorities have claimed.

Overseeing benefits

Diving into policies in Italy, Luxembourg, the Netherlands, the Czech Republic, Portugal, and Slovenia, Transparency International’s “Under the Shell” report brings a granular look at how these respective governments are, by and large, failing both their own constituents and international bodies when it comes to anti-money laundering efforts. Pivoting off of both G20 and Financial Action Task Force (FATF) benchmarks, especially as it pertains to identifying the attendant beneficial owners, Transparency International discovered that there “are still major problems when it comes to both anti-money laundering rules and their enforcement by European countries.” Unlike “national champions” like Ukraine, the U.K., and Denmark, the countries surveyed carry “areas of serious concern, as well as a number of significant weaknesses both in law and practice.”

It’s not hard to discover the holes still remaining in, say, these countries’ efforts to shine light on the shell companies. As the report lays out, only two countries, Slovenia and the Netherlands, offer public registers of beneficial owners – although it will cost upwards of €75,000 to access the entire Dutch database. (It’s worth reminding that Washington, despite its FATF commitments, still lacks a beneficial ownership registry altogether.) The Czech Republic and Italy, meanwhile, continue to restrict access to beneficial ownership information to people with “legitimate interest” – an amorphous, confusing definition that makes it “impossible to ensure consistent and harmonized practices across the EU.” And Luxembourg and Portugal, remarkably, still haven’t announced any plans for a beneficial ownership registry.

Even those states that have, or have planned, a beneficial ownership registry face significant shortcomings moving forward. For instance, the Czech Republic still hasn’t planned any sanctions for companies or beneficial owners who fail to register. Likewise, Italy and the Netherlands are the only countries surveyed that have planned mechanisms to confirm the accuracy of the beneficial ownership information submitted – and not a single one of the nations in question have plans to display the attendant data in any type of open data format.

That is to say, even those countries that are closest to following the letter of their commitments – Slovenia and Italy, in this survey – are falling woefully short of the over-arching purpose of the registries. (Per the report, the worst G20 countries for beneficial ownership information were South Korea, the Czech Republic, and Canada; the best were Slovenia, the U.K., and Argentina.)

In the Netherlands, for instance, constituents can only search the database by company name, and the Dutch government doesn’t permit searches by individuals’ names. As the report noted, “[All] countries in the sample fail to reach the golden standard of displaying the data in open data format, i.e. using an open data license so that the information in the register is free, downloadable in bulk, machine-readable and reusable.”

Shortening shortcomings

But the issues don’t end with the inaccessibility of the beneficial ownership registries. To wit, not a single one of the states surveyed have outlawed bearer shares, one of the most popular means of maintaining anonymity. (For comparison, even states like Wyoming and Nevada have barred bearer shares.) The Netherlands’ beneficial ownership registry, meanwhile, won’t cover foreign companies operating in the country, while the Czech Republic – which, along with Portugal and Luxembourg, is notably “dragging [its] feet” – scored a remarkable zero percent in Transparency International’s scoring for risk assessment, beneficial ownership information, and access to beneficial ownership information for legal arrangements, among other metrics.

Even the overall definition of “beneficial owner” is, according to the report, problematic. While the current interpretation of “beneficial owner” includes an ownership threshold of 25 percent, this is still too high a bar to combat all forms of money laundering. As Transparency International points out, a gold mine awarded to a British company allegedly involved family members of Azerbaijan’s president – but they only owned 11 percent of the company, a rate that would have allowed them to escape scrutiny. As such, the current threshold “is too high and easy to circumvent for people seeking to stay under the radar.”

Likewise, many of the issues plaguing European beneficial ownership registries – where they exist, at least – can be extended to current and proposed trust registries. Indeed, progress in registering and monitoring trusts is significantly lagging compared to beneficial ownership registries. For instance, Slovenia is the only country surveyed that is planning on setting up a public central registry for beneficial ownership for all trusts doing business in the country. Italy, meanwhile, won’t even allow the public to access its planned trust registry – while Luxembourg and Portugal, as with their company ownership registries, haven’t even announced plans for trust transparency requirements.

The policy prescriptions are all, to a certain extent, self-evident. As with their American counterparts, European officials should not only make their beneficial ownership registries, for companies and trusts alike, accessible to the public – and free of charge! – but they should also make it easily navigable. Likewise, such registries are worthless if the information contained is incomplete or inaccurate; as such, these governments, the report adds, should put in place “robust data verification and sanction mechanisms in order to detect and prevent non-reporting or false reporting to beneficial ownership registers by companies and trusts.” And in order to search out foreign kleptocrats working around the current restrictions, the beneficial ownership threshold should be lowered to ten percent.

Without these changes, such registries – like the commitments from which they arose – will be worth little. Slovenia may “clearly stand out as the best performer” at present, but given the shortcomings, both current and future, that may not necessarily be saying that much.

Casey Michel has worked as a researcher and journalist in the United States and former Soviet Union.