A Guide to Anti-Money Laundering for Crypto Firms

Can We See Clearly Now? The EU, AMLDs, and the Implementation of Ultimate Beneficial Ownership Transparency

Regulation Knowledge & Training

With the release of the Panama Papers in 2016, the general public got an insight into how complex corporate and legal structures can be used to hide illicit funds and potentially unethical – if still legal – financial practices. Since then, the Financial Action Task Force (FATF), the international standard setter for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT), has encouraged its members to redouble their efforts to improve transparency.  The European Union (EU) has been one of the international leaders in these efforts, using both its Fourth and Fifth Anti-Money Laundering Directives (“4AMLD”, adopted May 2015, and “5AMLD”, adopted June 2018) to introduce and expand centralised Ultimate Beneficial Ownership (UBO) registries for corporate entities, trusts, and other legal arrangements. 

Nonetheless, while the establishment of UBO registers has increased transparency somewhat, critics note that substantial issues still remain with regard to the scope, reliability, and accessibility of the information that they contain. In this article, we will look at some of the main issues the implementation of UBO registers in the EU has encountered to date.

What do 4 and 5AMLDs Say About Ultimate Beneficial Ownership?

First of all, it’s important to note exactly how “Ultimate Beneficial Ownership” is defined within Article 3 (6) of the 4AMLD.

In the case of companies, a beneficial owner is a natural person (an individual as opposed to a company or other entity) who has a significant interest, be it in the form of shares or voting rights. It is generally accepted that a “significant interest” means 25 percent or more. The directives have also extended this definition further by including senior management, who may be considered beneficial owners when the controlling interest is not discernable. Beneficial owners of trusts and other similar legal arrangements can be the settlors, trustees, protectors, or beneficiaries.

4AMLD placed the onus on EU member states to set up central registers of corporate UBOs by 26 June 2017. Under 4AMLD, national UBO registries also had to be made available to national Financial Intelligence Units (FIUs) – public agencies responsible for receiving suspicious activity reporting from the private sector –  and members of the public with a “legitimate interest”.

5AMLD built upon the beneficial ownership rules in 4AMLD. In particular, the directive called for EU member states to ensure that their national UBO registries were fully publicly available and linked at an EU level to facilitate information sharing between member state authorities. 

In addition, 4AMLD required that beneficial ownership registers must be established for bank accounts, payment accounts, and safety deposit boxes. Unlike the company beneficial ownership register, which is available to the public, this information is partially private and can only be accessed by authorities.

Difficulties Associated with Beneficial Ownership Registries

5AMLD required member states to have their UBO registers publicly available by January 2020. However, 17 out of 27 jurisdictions had not yet fulfilled the requirement by the deadline, and even though the last year has seen better progress, patterns of adoption have not been uniform. Indeed, some member states have established UBO registers that arguably do not meet the standards set out in the AMLDs.

Difficulties Using National UBO Registries

UBO Information Behind Paywalls

A number of countries, including Austria, Sweden, Ireland, and Finland require members of the public to pay to access UBO information. While the fees are mostly nominal, there has been criticism that having this information behind a paywall may act as an impediment for businesses that require access to UBO information for multiple companies. In the interests of full transparency and the spirit of the AMLD UBO rules, information should not be locked behind a paywall.

ID Required to Access Information

In certain EU jurisdictions, such as Greece, Belgium, and Croatia, some form of national identification number for citizens or residents is required to access the UBO registers. This is problematic because not everyone will have ID numbers such as these – for example, non-EU citizens. In this sense, these registers cannot be considered “publicly available” as required under 5AMLD.

Knowledge of Tax Identification Number

In Poland and Portugal, access to UBO registers requires users to know the tax ID of the company they are searching for. This is clearly an impediment, as this information is not easily available to the public.

Inaccurate or Unverified information

In its 2019 Report “Best Practices on Beneficial Ownership for Legal Persons”, FATF highlighted some common issues that arise in respect of national UBO registers. The most concerning was that centralised registers detailing beneficial ownership often contained inaccurate or unverified information. According to the report, this is the case due to a number of factors:

  •     The information submitted to the registry is self-certified by the entities submitting it, and not independently verified or audited.
  •     Information systems are not interlinked, and do not “talk to one another.” For example, data on the UBO registry might not be cross-checked against other sources, such as tax and legal documents.
  •     UBO information may be out of date if there is no monitoring or updating mechanism in place.

Difficulties at Government Level

Member states have generally been slow to implement the requirements set out in 5AMLD, one of the main challenges encountered is a lack of resources. With such a large volume of information and the complex structures involved, many competent authorities simply lack the capacity to adequately verify the information that companies and other legal entities submit. As of this writing, the European Commission is pursuing enforcement action against 22 member states for failing to transpose and implement the directive in an effective and timely manner. 

What does this mean for AML/CFT obligated businesses in the EU? At present, it is near impossible for them to rely on UBO registries as the ‘single source of truth’ that corporate transparency campaigners have been calling for. A lot of work still needs to be done to ensure the registers are fit for purpose. The reality remains therefore that for the foreseeable future, AML/CFT obligated businesses in the EU will still need to look to other sources to gather the best available Customer Due Diligence and Know Your Customer (CDD/KYC) data. 

Regtech to Increase Transparency

Finding that data – necessary to inform effective client onboarding, verification, and ongoing monitoring – can be extremely resource-intensive for compliance teams. Many firms still use significant amounts of staff time to fulfill adequate due diligence – often through laborious and manual searching of the Internet, or multiple databases – with extremely costly and often mixed results.  

However, with the advance of Regulatory Technology (Regtech), businesses have opportunities to find the information they need in more efficient and consistently effective ways. The most sophisticated Regtech solutions, supported by carefully curated data, can assist businesses in deciphering complex shareholder structures within multi-layered, cross-border entities. Although the government-led movement towards corporate transparency is welcome, for the time being, they are not enough to support businesses in the due diligence they need to undertake. Businesses need to ensure they are taking proactive measures, and this is one of the areas in that technology can make the difference.  

Originally published February 15, 2021, updated November 17, 2021

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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