Europe’s highest court upends anti-corruption efforts by finding the right to anonymously own a company

Oliver Bullough

 

WHAT ON EARTH JUST HAPPENED?

I have become accustomed to the U.S. Supreme Court putting its considerable weight on the scales to benefit the rich and powerful, but I admit I was blindsided by the European Court of Justice decision to do the same. Now admittedly Tuesday’s ruling is only available in French so far and, though I can order a croissant without too many problems, I can’t decipher legalese (and Google Translate gives us “large bedroom” for “grande chambre,” which can’t be right), so I am relying on the press release here, but I am still very alarmed.

  • “The Court, sitting as the Grand Chamber, holds that, in the light of the Charter, the provision of the anti-money-laundering directive whereby Member States must ensure that the information on the beneficial ownership of corporate and other legal entities incorporated within their territory is accessible in all cases to any member of the general public is invalid,” the court’s press release states.

For decades, efforts to expose and restrict kleptocracy, corruption and money laundering have focused on making sure everyone can easily discover who owns companies. Shell companies have been used in every major financial crime in recent times. And in March, members of the Financial Action Task Force — the intergovernmental body setting standards on money laundering regulations — agreed that every country needed to collect data on companies’ so-called “beneficial ownership.”

Admittedly, not every country is committed to publishing that information for all to see, but in 2018 the European Union insisted it would forge ahead and let everyone see what actual people stood behind corporate structures.

  • “Public access to beneficial ownership information allows greater scrutiny of information by civil society, including by the press or civil society organizations, and contributes to preserving trust in the integrity of business transactions and of the financial system. It can contribute to combating the misuse of corporate and other legal entities and legal arrangements for the purposes of money laundering or terrorist financing,” the European Commission’s resolution stated at the time.

This was welcomed by everyone with concerns about financial crime as a crucial step forward, and members of the EU have gradually started to comply with it. This has been one of the most unmitigatedly good developments for anti-money laundering of recent years, in my opinion.

But “WM” felt that information on his ownership of 35 Luxembourg companies should be restricted “because disclosure of that information would expose him and his family, in a way that is distinct, genuine and current, to ‘disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation,’” and took the European Commission to court. The EU’s highest court has now sided with him and against the Commission, which presumably means this key pillar of global anti-money laundering efforts is dead. That certainly would explain why his lawyers are taking a victory lap.

  • “Today’s judgment represents a victory for data protection and the Rule of Law in an extremely politicized context,” said Filippo Noseda, a partner at the (inevitably London-based) law firm Mishcon de Reya, who led the firm’s appeals on behalf of “WM.” “When it comes to beneficial ownership of companies and bank accounts, high-profile public campaigns run by highly organized and single-minded transparency campaigners has succeeded in stymying the debate about ends and means, and the principle of proportionality, which is at the core of the Rule of Law.”

There are two clever bits of sleight of hand in that comment if you look closely (plus one grammatical error). The first is to suggest that the big bullies here are the “highly organized and single-minded transparency campaigners,” rather than the kind of people who own dozens of companies registered in Luxembourg. The second is cleverer and requires a bit of unpicking. If you look at the second half of Mr. Noseda’s quote, you’ll see that he brackets together bank accounts and companies, as if anyone anywhere is demanding that the public has access to citizens’ bank account information.

So, for the benefit of Mr. Noseda and anyone else, I want to briefly explain the difference. A bank account is private, it’s your own business. It’s between you and the bank. No transparency campaigner has designs on your bank account.

A company, however, is not like that at all. It is a fictitious entity, a legal person whose debts are guaranteed by the public as a whole. If a company goes bankrupt, everyone else makes its debts good via a bankruptcy proceeding. This is a feature, not a bug: we want entrepreneurs to take risks, so we socialize their losses.

A company therefore is a kind of insurance policy, giving protection against business failure. And the policy is being underwritten by all of society. It therefore follows, and I feel like writing this bit in capitals because it’s so obvious yet keeps being missed, that AN ANOMYMOUS COMPANY IS AN INCREDIBLY STUPID IDEA, just like an anonymous insurance policy would be. Imagine being able to get insurance on a house, without having to say who you are: you would be able to claim the full value of the house, whether you owned it or not, even if you burned it down. Anonymous insurance of any kind is an invitation to commit fraud. Publishing beneficial ownership information is therefore a no-brainer. The weird thing is that we ever thought it wasn’t.

It is no more an invasion of someone’s privacy for society to publish company ownership information than it is for an insurance company to demand that customers identify themselves. If someone wants to keep their ownership of a business private, and thus avoid the responsibilities that go with using a limited company, they can just not use a limited company and continue as an individual. It’s really not a big deal.

But the good gentlefolk at Mishcon disagree with me, and are not stopping here, it would seem.

  • “Today’s judgment is likely to have practical implications beyond the EU, including the U.K. The U.K. was the first country to introduce public registers of beneficial ownership of U.K. companies and partnerships (known as ‘PSC registers’) in 2016, which was followed by public registers of overseas entities holding U.K. land (‘ROE register’) in March 2022. By the same token, the U.K. continues to adhere to the GDPR principles and therefore the EU judgment will be watched closely in the U.K.,” it noted.

Anti-corruption activists were not happy.

  • “This is a potentially devastating blow to global efforts to tackle corruption, tax evasion and money laundering which will reverberate around the world,” Sue Hawley of Spotlight on Corruption told me. “Public beneficial ownership registers have been strongly supported across the business community, law enforcement as well as civil society, as a crucial measure to promote good corporate behavior, tackle organized crime and unearth wrongdoing. It is extremely disappointing that in pursuing this legal victory, law firms like Mishcon appear to have lost sight of their duties to protect the public interest as well as represent their clients.”
  • “Most likely we will be seeing all registers shutting down access in the near future. Member States resisting will likely face lawsuits calling on them to respect the judgment,” said Maira Martini of Transparency International. “We do see this decision having an impact globally, unfortunately.”

What an absolute bloody disaster.

BITCOIN/NEVIS

I am always glad to have an excuse to feature my favorite tax haven: the two-island Caribbean federation of Saint Kitts and Nevis, which is not just home to some of the world’s least penetrable shell companies, but also gave us the first mass-market “golden passport” scheme. That’s not bad for a country of just 50,000 people.

You may have noticed that times are tough for bitcoin right now. The price has dropped below $17,000, having been almost $70,000 this time last year, and the contagion from the collapse of FTX may be only just beginning. However, where others see trouble, Kittitian and Nevisian politicians see opportunities (or something like that).

  • “Our nation has always been forward thinking and a leader in exploring new industries,” said Prime Minister Terrance Drew. “I welcome the opportunity to dialogue further, with a view to exploring future opportunities to engage in bitcoin cash mining and making bitcoin cash legal tender here in St. Kitts and Nevis by March 2023.”

He was speaking at a crypto-themed conference at the Royal St. Kitts Hotel (true story: I once got stranded there when my flight was canceled and spent a couple of days on the beach in what was the least harrowing flight disruption of my life), and a later government statement said that officials would be checking the plan carefully before bringing it into effect.

  • “Due diligence checks were presently being prioritized by the Government ahead of any major decision concerning the cryptocurrency’s official use. The Prime Minister stated that the financial safety and security of citizens and residents is a matter of high priority,” the statement said.

This is not reassuring, considering the islands’ willingness in the past to sell passports to almost anyone, despite accusations of sanctions evasion, drugs smuggling and more, despite a supposedly rigorous due diligence proceeding. The prospect of the islands providing a safe haven to everything bitcoin-related is therefore a worrying one.

The role of cryptocurrencies in helping criminals launder their wealth is much discussed, and there have been some useful analyses of it, such as this one from Europol, which points to the increased number of bitcoin ATMs as a key statistic. And this recent study estimated that $4 billion worth of crypto had been laundered with digital currencies.

  • “The latest findings demonstrate that criminals are increasingly leveraging cross-asset and cross-chain transactions to evade legacy blockchain analytics solutions, not capable of tracing such activity,” noted Elliptic, a leading “regtech” company, in its analysis.

I certainly agree with suggestions that the crypto world should be regulated just like ordinary finance is, but that analysis suggests we need to keep the problem in perspective: $4 billion is pennies compared to how much is laundered through the traditional financial system. London alone moves hundreds of billions of dollars of illicit wealth every year, according to the U.K. government’s own figures; and reliable estimates of how much dirty money is hidden in trade shipments suggest the problem is many times larger again. So, why worry about bitcoin?

I’ve been speaking to a lot of law enforcement sources of late for a new book on money laundering I’m planning (on that note: please send me your money laundering ideas, stories, thoughts, insights, scoops, gossip and more), and they all say the standard assessment of crypto’s role in the criminal economy (“yes, it’s a big deal if people use bitcoin to buy weed on the dark web, but it’s only $4 billion, so whatever…”) is not only wrong but also risks leaving us worryingly complacent.

Most large criminal groups don’t move money between countries if they can help it, since that’s the easiest way to get caught. Instead, they move value in terms of stuff: they buy goods, obscure the goods’ ownership, send the goods somewhere and then sell them, thus moving their wealth around the world indirectly. This is trade-based money laundering. If you inflate — or, alternatively, deflate — something’s price, you can use this to dodge taxes, too.

The downside of this is that you actually have to ship stuff around the world, which is cumbersome, slow and annoying. So where does bitcoin come in? If you buy it in cash, then sell it at the other end, also for cash, it works in exactly the same way as trade-based money laundering but much more quickly. You can move it anonymously, with all the advantages of a container-load of machine parts, and you can do it instantly, giving you all the advantages of a bank account. It’s a digital commodity, putting trade-based money laundering on the blockchain.

Should I really really be worried, I asked a source recently? “Really really really,” he replied.

So, if Saint Kitts and Nevis provides a haven for this kind of business as impenetrable as the home it’s provided for kleptocrats, fraudsters and tax cheats over the years, we have a problem.

APOLOGIES

Thanks to a keen-eyed reader in Saint Petersburg who spotted that I’d misidentified the author of The Templars last week. It was of course Dan Jones, rather than Dan Snow (“at least it wasn’t Dan Brown,” he added). Sorry about getting that wrong.

Sorry also to the man who I met last week, who has now disproved the assertion at the beginning of Butler to the World that British law enforcement has no one trying to map the dimensions of the Chinese money laundering problem. In my defense, you weren’t in the job when I wrote the book.

WHAT I’M LISTENING TO

I’m sure many of you know More or Less, the BBC radio program in which Tim Harford gently but forcefully skewers anyone who tries to use statistics misleadingly. He has now made a new series called Understand: The Economy, which I’m really enjoying.