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Andres Knobel, Markus Meinzer ■ Drilling down to the real owners (Part 1 of 2)

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Tax justice reports
Tax justice reports

Drilling down to the real owners (Part 1 of 2)

This report analyses the legal language in the fourth European Anti-Money Laundering Directive (2015/849), a common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime. The reports finds two loopholes and proposes solutions (1) The 25% of ownership interests threshold should be abolished to reduce complexity of the rules and to make it harder to simply appoint a few trusted people as shareholders as a strategy to avoid identifying the (real) beneficial owners. (2) The provision for “unidentified” owners, which – if unaltered – would allow senior managers to be erroneously recorded as the beneficial owners of companies.

This report analyses the legal language in the fourth European Anti-Money Laundering Directive (2015/849), a common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime.

This first report focuses on just two aspects of the European anti-money laundering framework, all concerning the rules around the determining of the real owner(s) of companies – the so-called “beneficial” owner(s). Here are some loopholes that could be used and abused to get around the rules:
The first aspect relates to the 25% of ownership interests threshold. Under the current and proposed (2015/849) EU rules, only natural persons who ultimately own or control more than 25% of the shares of a company are to be considered beneficial owners. That means to get around this a typical family of four persons (two parents and two children or four friends) could appoint every member as a shareholder. In such a case, each of them would have only 25% ownership, so no one would trigger the threshold of more than 25% of ownership. For this reason, and because multiple layers of ownership may render it difficult in practice to prove joint (indirect) control of any natural person of more than 25%, the report concludes that the threshold should be abolished to reduce complexity of the rules and to make it harder to simply appoint a few trusted people as shareholders as a strategy to avoid identifying the (real) beneficial owners.

The second analysed aspect of our report is the provision for “unidentified” owners, which – if unaltered – would allow senior managers to be erroneously recorded as the beneficial owners of companies. Unless the proposed rules (2015/849) are tightened, shell company abuses will become easier in Europe compared to the current legal framework (2005/60).

But the flaws in those two aspects do not stop at the European Union level, but also relate to the global level. We trace the origin of the problematic provisions back to the 40 recommendations issued by the Financial Action Task Force (FATF) in 2012, the anti-money laundering organisation at the OECD in Paris. Therefore, these FATF recommendations also need to be reviewed in order to stop money laundering worldwide.

Key findings

  • The report find weaknesses in the fourth European Anti-Money Laundering Directive (2015/849), a common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime.
  • The 25% of ownership interests threshold is too high.
  • The provision for “unidentified” owners will make shell company abuses will become easier in Europe compared to the current legal framework.
  • We trace the origin of the problematic provisions back to the 40 recommendations issued by the Financial Action Task Force (FATF) in 2012, the anti-money laundering organisation at the Organisation for Economic Co-operation and Development (OECD) in Paris.

Key recommendations

  • The 25% threshold should be abolished to reduce complexity of the rules and to make it harder to simply appoint a few trusted people as shareholders as a strategy to avoid identifying the (real) beneficial owners.
  • The provision for “unidentified” owners (2015/849) should be tightened
  • The Financial Action Task Force (FATF) recommendations from 2012 need to be reviewed in order to stop money laundering worldwide.

Additional resources

Drilling down to the real owners – Part 2: https://www.taxjustice.net/wp-content/uploads/2016/06/TJN2016_BO-EUAMLD-FATF-Part2-Trusts.pdf

EU directive; http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015L0849&rid=1