Corporate ownership transparency in the EU

In the very first episode of Integrity Insights, I talk to Jennifer Hanley-Giersch, a managing partner at Berlin Risk. We discuss the topic of corporate ownership transparency in the EU. In our roles as investigators, we rely on publicly available company information. In recent months, access to information about actual owners of companies, the so-called "ultimate beneficial owners", has been invalidated by a ruling of the EU Court of Justice. Why did this happen? What does this mean for journalists, NGOs and due diligence investigators? Is the EU still committed to ensuring corporate transparency across the bloc? Find out the answers in this episode! 

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Transcript

Hi Jennifer. Thanks for being here today. Hello, Philip. Good morning. Great to be here. Thank you. Uh, so before we jump into today's topic of corporate. Ownership transparency. Could you maybe please tell us a little bit about your background, your, uh, career path and, uh, what you do at the moment? Yeah, I'm very happy to do, uh, that.

Yep. Uh, so I'm a managing partner at. Berlin risk. Uh, and I've been working in the investigations business for 22 years now. Uh, conducting mostly in-depth, uh, due diligence globally, um, into potential investment targets and business partners working both for corporations and public institutions. Uh, I'm also involved in providing training to anti financial crime professionals and supporting.

Various organizations in how to implement, um, regulatory requirements, uh, as well as, um, in building actual anti financial crime, uh, compliance programs. Um, maybe what's also interesting, in 2016, I co-founded the ACAMS Germany chapter, which is kind of part of the wider ACAMS network. Um. Acams is the largest association of anti financial crime professionals globally.

It's got some over a hundred thousand members, uh, now. Uh, and, but I'm also involved in working groups here in Germany, uh, with, for example, the leading compliance, uh, association called DO, uh, where we develop standards for industry around, uh, topics such as supply chain and human rights, uh, as well as business partner due diligence and, uh, money laundering, uh, topics.

So really everything that we're doing, uh, at Berlin Risk and, uh, everything that's kind of accompanied my journey has been kind of driven by the quest for transparency. So it's, uh, really great to be here talking about this topic. Thank you, Jennifer, for this introduction. So talking about the topic of corporate ownership information, um, I mean, I said in the beginning of this episode that the transparency is in the center of what we do and.

This is because we really rely on publicly available company ownership information. And we will discuss a little later on how the availability of this information has changed, uh, throughout the years in the European context. But, uh, the key word here really is. Beneficial ownership. Uh, so maybe before we start, can we just demystify this, this term, like who exactly is a beneficial owner?

How is it defined? Yeah, well actually the regulation, the anti, uh, financial crime, uh, regulation, uh, at the EU level, uh, defines it quite clearly, although there, uh, is an overhaul taking place, uh, at the moment. But as we stand today, uh, beneficial owner is a natural person who ultimately owns or controls, uh, a company, uh, through direct.

Or indirect ownership of more than 25% of the shares or the voting rights or ownership interest or, and this is important through control via other means. And this is a bit, uh, tricky and leaves a lot of, uh, room for. Uh, interpretation and, uh, if no one is identified. So basically, if you've exhausted all the possible means, uh, uh, provided, um, uh, and, um, uh, there's no grounds for suspicion, uh, uh, uh, or if there's any doubt that the person identified is the beneficial owner, then the natural person who holds the position of senior managing official, uh, uh, can be, uh, defined as the beneficial, uh, owner.

And why exactly is it so important to clearly identify the, the beneficial owner? Well, the beneficial owner is the individual who benefits from, uh, the uh, um, company, from the funds, the profits, uh, generated by, uh, the company in the first instance, and also in the second instance. Who controls, uh, uh, the uh, uh, company, uh, and, uh, its, uh, development and activities.

And, uh, information on beneficial owners of companies incorporated in the member states of the European Union has been available, which has tremendously improved the work of journalists, NGOs, or even companies like ours. But then in November, 2022, the European Court of Justice made access to this type of information really complicated.

So can you. Give us some background about, about this decision. Um, yeah. Um, before I move into that, maybe I'll just provide a little bit of context, um, also, you know, to kind of set the scene for the discussion, um, and. You know, also following up on your question, uh, as to why, um, beneficial owners are so important.

Um, well, it kind of boils down to, uh, the fact that shady actors have, uh, been able to circumvent, uh, anti-corruption efforts, uh, through the use of anonymous companies time and time again. So across every sector and sphere of. Public administration from public procurement to elections, uh, and integrity measures and out of reach of the authorities.

Criminal actors have been using anonymous companies to game the system basically and to launder a legal, uh, gain. So anybody who's the beneficial owner of a legal entity can very easily, uh, uh, launder, um, uh, illegal funds. Uh, now NGOs and investigators have been raising this issue for many years now, uh, but with limited legislative effect and many setbacks actually.

Um, and it was actually, uh, the Panama Paper is scandal, which you probably, uh, remember. I think that really kind of, uh, drew everybody's attention to the topic, uh, that. Broke in 2016. Uh, really shed light on the scale and the dimension of, uh, the, the problem of int transparency, uh, linked to legal entities, uh, as never before, really, and kind of catapulted this topic to the fore of the global agenda.

Uh, now some countries and international bodies, uh, began to adopt measures to increase, uh, transparency in corporate ownership, uh, by establishing what we call, uh, these beneficial ownership. Registries. Uh, and now coming back to your question, the EU was really something of a pioneer on this front. So already in 2015, the fourth EU anti-money laundering directive, um, actually required all member states to publish central beneficial ownership registers with accurate and, uh, UpToDate information on the real owners.

Of companies. Then in 2017, the fifth EU anti-money laundering directive really marked a turning point, uh, in, uh, the, uh, legislative, uh, process, uh, because it enabled full access of the registries to the wider public so that as of 2018 journal. NGOs, investigators and due diligence professionals, uh, like ourselves, um, uh, could also find out who the beneficial owner, for example, of an Austrian Trust or of a Luxembourg legal entity was.

Uh, uh, and this formerly had not been possible. Yeah. Um, uh, so this was, uh, really groundbreaking. And Jennifer, this was a decision on the EU level that all the member states had to implement, right. That's right. That's right. So, yeah. Uh, in fact, by 2019, uh, the transparency registers had be really been implemented effectively across the eu, enabling access to ownership information on companies, uh, in all EU member states.

Uh, the uk Liechtenstein and Switzerland, who are not members of the EU also implemented, uh, the registers. Uh, and, um, yeah, like I say, the implementation was really recognized as a giant step towards improving transparency across the eu. Of course, uh, it was very much still work in progress and, um, even, uh, uh, last year by the implementation deadline, uh, in Germany, for example, not all companies had been registered in the transparency register, but you know, at least 50% had.

So, um, uh, we had a lot more, uh, data to work with, uh, than, than we had before. Then, as I already mentioned earlier, the European Court of Justice effectively invalidated access to the beneficial ownership information in the European Union. Um, what I wonder is, did this. Come completely out of the blue or was it something that you expected based on, you know, previous development?

Or did it just surprise everyone, including yourself? Yeah. This is a really good, uh, uh, question, Philip and I must say, uh, it was, it did come as a, a. Uh, a surprise in the sense that, you know, we didn't see this coming. We weren't aware, uh, of, uh, uh, the, these cases, uh, being filed in the background. Uh, but you know, we've seen time and time again, uh, how, uh, access, uh, to registers helps to uncover shady dealings.

Uh, you know, if we look at the work of the O-C-C-R-P and other investigative journalists, so therefore access to beneficial ownership data is really. Vital, basically in identifying and stopping corruption or the flows of dirty, uh, uh, money. Uh, and the more people who are able to access such information, the more opportunity there is to connect those dots and, uh, to, uh, make.

Um, uh, illegal activity, uh, uh, public. Uh, so when the fifth EU A MLD, uh, came into force in 2018 and guaranteed this full public access to, uh, beneficial ownership information, uh, meaning that information on companies, real owners, uh, were, were, were, was available and enabling investigators to, uh, uh, better navigate.

These complex ownership structures. There were obviously, uh, groups of people who were, uh, very unhappy, uh, about this. Um, uh, I mean the corrupt and the criminals, uh, and, um, their gatekeepers. So lawyers and corporate service providers, um, uh, supporting. Uh, them in, um, uh, hiding behind, uh, anonymous, uh, structures.

Uh, um, uh, really, uh, uh, were unhappy with this, uh, development and they raised, um, um, issues such as increased security risk like kidnapping, for example. So what did the European Court of Justice actually decide in, uh, November, 2022? Well, in, uh, November, 2022, um, basically it all goes back to, uh, when, um, a kind of a case filed a.

Uh, by, uh, uh, a guy called Patrick, uh, Hansen. Uh, but you know, we can come to, uh, uh, the stories of that later. But basically he and some other individuals, uh, applied to have their names excluded from the Luxembourg Business Register citing these set, uh, security risks. Uh, and, uh, instead of assessing the materiality of the claim and how the law in the country defined, um, uh, exceptional circumstances or maybe the right to exception, uh, the courts in Luxembourg referred the case, um, uh, which disputed the compatibility, uh, of this provision for A-M-L-C-F-T with the right to privacy onto, uh, the EU Court of Justice.

Uh, and on the 22nd of November, a date that you mentioned already, the European Court of Justice ruled that article, one of the anti-money laundering counter-terrorist financing directive, according to which beneficial ownership data must be accepts accessible to all members of the public, uh, as invalid.

And it's stated that the provision violates Article seven and Article eight of the eu, uh, charter of fundamental, uh, rights. Okay. And so what. What kind of impact did this decision have on not just the individual European member states, but also uh, the, you know, ownership transparency landscape more, more broadly?

Yeah, I mean, this was, um, uh, had enormous, uh, implications, uh, uh, across the eu, uh, for the, uh, UBO registries, um, on the 23rd of N November. So already one day after the European Court of Justice decision, the Dutch Minister of Finance, uh, put. The disclosure of information from the UBO register on hold straight afterwards, uh, uh, and suspended the ability, uh, to access the Dutch UBO Register.

It was followed by Luxembourg, Austria, Belgium, Malta, Ireland, uh, and Germany, uh, which announced that it shut down, uh, public asset access to the transparency on the 30th of November. So a lot of states move quite quickly on this. Whereby the obliged entities, uh, those who were obliged to comply, uh, with the anti-money laundering, terrorist financing, uh, regulations, they still had to continue, uh, uh, fulfilling their legal, legal obligations to consult the UBO registry for, uh, before entering into a professional, uh, relationship.

Um, so basically we went back to the previous version, like you said, uh, of the fourth, uh, E-U-A-M-L-D that allowed access only in a, in the case of legitimate interest. So obliged entities had a legitimate interest and could therefore access the UBO registry, but it basically made it very difficult and bureaucratic for the public and journalists to access that beneficial ownership information.

Can you explain why certain countries, you know, you mentioned Germany or Malta, why they reacted so quickly to the, to the ruling and others have not reacted until. You know, does they? Yeah. Well I think, you know, countries like Germany, they, uh, uh, have, uh, very strong, uh, privacy, uh, laws. Uh, and, um, you know, privacy has always been, uh, uh, uh, really, uh, important, uh, in Germany.

So that's probably one of the reasons why they did that. So, uh, uh, quickly. Uh, but yeah, now we're waiting to see what's gonna happen, uh, within the context of the eu, uh, anti-money laundering regulation. Uh, uh, which, uh, is, uh, currently being negotiated, um, uh, at the council, uh, and is expected, uh, to, uh, come into force, um, at some point this year, maybe over the summer, maybe in the autumn.

Uh, and that will provide more, uh, clarity on the way forward. Okay. I'm, I'm getting a bit confused. You just mentioned anti-man laundering regulation. Before we spoke about a ML directive, what, what is the difference between those two? Well, um, previously, uh, with the anti-money laundering directives, um, they were implemented, uh, by each member state, uh, of their own accord.

Uh, and each member state had two years to transpose any, uh, anti-money laundering, terrorist financing directive. Uh, but now in the interest of harmonization and also in the interest of having common standards across the eu, uh, the next, uh, piece of uh, anti-money laundering, terrorist financing regulation will be, uh, a regulation, uh, which will.

Uh, be implemented, uh, across the EU in a harmonized fashion. So each country will have to implement, uh, e exactly, uh, the same, uh, requirements, um, uh, rather than each country, uh, interpreting the directive, uh, as they see fit. Okay. Yeah, that makes sense. Uh, let me just ask you this one last thing before I let you go, because I really wonder how do you view the.

Future. I mean, I don't, I understand that you, you, you cannot really break the future, but I mean, there has been such an incredible push towards transparency in, in Europe, in the, in the, these recent years and, and then this development has been really such a move against the grain. And I, and I wonder. If you see it as a, just a speed bump on the road or a, or a much more, you know, like a significant event with a long-lasting effect.

Yeah, I mean, I think, uh, the European, uh, commission is still very much committed, uh, to ensuring transparency and to improving, uh, transparency of, uh, legal entities across the eu. And, you know, maybe, uh, there will be. In the future room, uh, for certain, uh, legal entities to maybe require an exemption, uh, on uh, uh, certain, uh, grounds.

But I think at the same time, and this is something that's being, uh, discussed at the moment, uh, within the context of the new A-M-L-C-F-T regulation, uh, is that. Um, persons with a legitimate interest. So compliance professionals, uh, like ourselves, journalists, or other interested parties will be granted, uh, access to the register via license.

So they will be provided a license because they are identified as having a legitimate interest. And this, uh, right of access will be valid for at least, uh, two and a half years. Uh, and, uh, uh, the member states are to extend access, uh, automatically. However, according to the draft, uh, uh, regulation, uh, that we've seen, uh, the member states will reserve the right to revoke or suspend the license in the event of abuse.

So I think it will be, uh, maybe more, uh, controlled and provide, uh, security maybe for, uh, parties that are particularly concerned or that, you know, really, uh, have grounds to. Uh, uh, be worried about their security to be able to, uh, protect, uh, themselves. But I think there will still be a strong drive for, uh, greater, uh, transparency.

I mean, we'll have to see also when the, uh, uh, regulation comes, uh, how it's implemented and, uh, uh, what the accessibility will be like. But I'm sure, uh, um, uh, we will move away from the situation. Uh, we face at the moment. And how do you think this is gonna work with this license? Do you think you'll just, uh, get a license in, I don't know, let's say Germany and, and then they'll be able to apply it in Latvia or other member states?

That's a very good question, Philip. Uh, we'll, we'll have to, uh, uh, keep a watch out, uh, to see whether, uh, the license will be valid across the eu. Um, uh, I hope so. Um, but, um, uh, at the moment, uh, we'll, we'll just have to take a wait and see approach. Sounds good, Jennifer. I will definitely watch out for the license and also make sure to invite you again on the podcast as soon as we have some other developments on the, on the front, on the U level.

But for today. Uh, I thank you very much for joining me and providing us with your valuable insights, and yeah, I look forward to talking to you in the future. Thanks, Philip. It was great to be here.