Europe slides toward US-style corporate ownership rules, enabling corruption and scams
The thunderous reverberations of last week’s lightning-bolt-from-the-blue European court decision to block public access to company ownership information are getting — if anything — louder. I’ve had a bit of pushback against my interpretation in last week’s newsletter of this momentous decision, so I’m going to lead with it again, because it’s that important.
Those EU countries that had already implemented the bloc’s fifth anti-money-laundering directive, or 5AMLD, and allowed anyone to look at their corporate registries have rapidly complied with the court’s ruling.
- “Following the judgment of the Court of Justice of the European Union of 22 November 2022, access to the RBE website via the internet is temporarily suspended. A solution allowing access to the RBE data by professionals as defined in Article 2 of the amended Law of 12 November 2004 on the fight against money laundering and terrorist financing will be communicated shortly,” says the Luxembourg registry.
- “The contents of the UBO register can currently only be consulted by competent authorities such as the Public Prosecution Service. For example to investigate money laundering or the financing of terrorism,” notes its Dutch equivalent.
According to the Financial Times, the Belgian and Austrian registries are also offline and — it goes without saying — any progress in other countries towards meeting the measures laid out in 5AMLD will now be halted. Why is this a big deal? Why do I not agree with the subscribers who wrote to me last week to point out that, among other things, the viewpoint I expressed in my newsletter was “not correct,” “legally dubious” and “not true”?
The entire basis of the court’s ruling is that people’s right to privacy is so important that access to company ownership information should be limited to competent authorities or to any “person or organization capable of demonstrating a legitimate interest.” That in turn is based on the assumption that the competent authorities are sufficiently resourced, motivated or empowered to care. Considering the decades-long history of those authorities being precisely the opposite of that, as demonstrated by decades of financial crimes being committed under the cover of under-investigated shell companies, this is a pretty heroic assumption to make.
The reason we have tax havens is because, for decades, competent authorities have realized they can make money by selling strings-free corporations to anyone rich enough to afford their services, then hiding those clients’ identities. If you’re prepared to trust competent authorities to police corporate registries, then I have a bridge to sell you.
How to solve this? Yes, we need to resource corporate registries’ investigative departments, and we need to pass laws to punish financial criminals. But also, we need to unleash citizen investigators, due diligence companies, journalists, tech startups and others to scrutinize the corporate registry data and to make sure corporate registries don’t slip back into their bad old ways.
If you want to see what such collaboration looks like, check out this superb collaboration between Graham Barrow and journalists from the Sunday Times, revealing how fraudsters are registering British “burner companies” in properties without the residents realizing, using them for scams and then discarding them and leaving the victims to pick up the pieces.
- “The genuine owners of the properties have been left terrified by demands for repayment of debts that the firms have run up, and sometimes letters from victims of scams asking for their money back,” the article states. “It is a crime spree that is making life a misery for anyone who has the misfortune to have a burner company set up in their family home.”
If we were relying on the “competent authorities” to do something about this (or even to have noticed it was happening), we’d be waiting forever, which is why we shouldn’t do so.
If the EU court’s latest ruling forms the basis of a new settlement, it’s perfectly possible that the EU could not just see rampant fraud of this nature, but could also slide towards the U.S. model, whereby different member states compete to offer the most “business-friendly” corporate structures, just like Delaware has done for so long. If one state declares, say, that Transparency International has a “legitimate interest” and can therefore have access to its registry, while another one does not, then that second state would be able to sell corporate structures that undercut the regulations of its neighbor, just like wealthy Californians have enjoyed “the Nevada advantage” for so long.
We are therefore in the perverse situation in which, if Ukraine gains its ambition and joins the European Union, it will have to roll back its pioneering anti-corruption measures because they would be deemed to unjustifiably infringe on the privacy of the country’s oligarchs. And that’s just the start of it.
- “Company ownership transparency is not only a tool for rooting out corruption. It is also fundamental for building confidence in our business environments and critical for establishing public trust and accountability in the rules that govern us – both essential ingredients for the functioning of democracy. Open registers also contribute to combating tax evasion efforts and improving integrity in public procurement. They are important also in tackling natural resource crimes and improving governance in extractive industries. It is precisely on these bases that civil society has successfully campaigned for public registers in Nigeria, Ghana, Zambia, Liberia and Kenya, among others,” said 33 African and European anti-corruption groups in an open letter to the European Commission.
The European Union, along with the United Kingdom when it was a member, was central to global efforts to open up corporate registries and allow citizens to check how companies are being abused to hide fraud, tax evasion and corruption. Without the EU, those efforts are dramatically weakened, and the first signs of that are already visible, including in Britain’s tax havens.
- “This decision will no doubt have implications for the commitments made by British Overseas Territories and Crown Dependencies to establish publicly available registers of beneficial ownership, in respect of which a number of those jurisdictions have, or currently are, undertaking consultations, and which most have committed to put in place by 2023,” noted a statement from Bermuda-based “offshore magic circle” law firm Carey Olsen. “The pendulum finally appears to be swinging back towards privacy and security, and public beneficial ownership registers may not in fact be a foregone conclusion. We will continue to watch this space and share developments.”
This statement from Mishcon de Reya, the law firm that brought the case that resulted in the European Court of Justice’s momentous ruling, shows it is also taking aim at FATCA — the crucial piece of U.S. legislation that obliges foreign banks to inform the U.S. Treasury if U.S. citizens have undeclared assets, and are therefore dodging tax. Analysis from KPMG suggests the decision could even undermine EU efforts to stop corporations from shifting profits into low-tax jurisdictions.
- “The case could impact other legislation in the field of transparency, including the recently adopted EU Public Country-by-Country Directive. In particular it would be interesting to see how the CJEU would interpret the compatibility of the Charter with opt-in provisions such as the ‘safeguard clause’ under which Member States can allow in-scope groups to defer the disclosure of commercially sensitive information for up to 5 years, and where no clear definition was provided,” the accountancy firm noted.
So, at the risk of repeating myself, I’m going to remake the point I made last week. If you wish to keep your business affairs private, there is nothing to stop you doing so: just act in your own name, or in a partnership. If you wish to use a corporation, however, then privacy is not (and should not be) available to you.
- “While legal persons are needed to operate complex businesses, collect capital, and limit risks and the liability of individuals, they have not been created as a tool to hide ownership. On the contrary, it is legitimate to expect transparency around ultimate beneficiaries. Individuals, if they want, could trade in their own name and therefore avoid the public reporting obligations that come with legal structures,” as Transparency International put it in an amicus brief to one of the cases around corporate transparency.
I look forward to the day when European courts recognize the self-evident truth of that paragraph, and we all start moving forward again, and I only hope there isn’t too much collateral damage in the meantime. As it stands, however, I am in the unusual position of being glad about Brexit, since it means this dreadful decision is not enforceable in the U.K.
Bidzina Ivanishvili, Georgia’s richest man, has a bit of a thing about trees, in that he’s been collecting them from all over the country in order to ship them to the Shekvetili Dendrological Park on the Black Sea coast. It is of course possible to grow trees from seeds, but who’s got time for that? Which explains the bizarre selection of images you can find if you google “Ivanishvili” and “trees”: mighty trees on barges, on trucks, all kinds of weirdness, being gathered together. There’s even a documentary about it.
- “He collects century old trees along Georgia’s coastline. He commissions his men to uproot them and bring them to his private garden. Some of these trees are as tall as 15-floor-buildings. And in order to transplant a tree of such dimensions some other trees are chopped down, electric cables are shifted and new roads are paved through mandarin plantations,” says the summary for “Taming the Garden,” which was screened at the Sundance film festival to enthusiastic reviews. “The film moves the concept of uprooting from its metaphorical meaning into an oppressive, tangible and yet surreal reality.”
Now Ivanishvili’s tree collectors are looking further afield, which has caused drama in Kenya, where an attempt to collect some baobabs has fallen foul of local regulations.
- “In a statement on Monday, Kenya’s Minister of Environment and Forestry, Roselinda Soipan Tuya, said she had revoked a license to transport the trees that had already been uprooted, while a license to uproot the trees had also been revoked,” it says here.
It was a decision that attracted attention around the world, of which my favorite example was in New Zealand’s Dominion Post, which referred to the former Georgian prime minister as a “baobab-mad billionaire.” If I were a billionaire, I’d aspire to be described like that.
WHAT I’M READING
So many books, so little time. It’s been the Winter Weekend here in Hay-on-Wye, which is the smaller counterpart to the giant summer book festival held in my hometown, and I enjoyed chatting to Luke Harding about his new book on the Russian assault on Ukraine. I’ve also been reading Lulu Chen’s Influence Empire, the story of Tencent and China’s tech ambition, which is fascinating. This is clearly a period of massive turbulence in China, and I’m finding this book a really useful source of context about how the online space works, what forces shape it and why we should care.