Beneficial Owner Registries (BOR) have become a rule due to demands from international bodies that aim to promote tax transparency. The forefront of organisations such as the Financial Action Task Force on Money Laundering (FATF) - Groupe d'action financière (GAFI) in French - and the Global Forum on Transparency and Exchange of Information for Tax Purposes of the Organisation for Economic Co-operation and Development (OECD) is first, to tackle global money laundering and terrorist financing through the broadcasting of norms whose goal is to prevent these illegal activities;[1] and, second, to achieve global tax co-operation through the implementation of international tax standards and other instruments to put an end to bank secrecy.[2]
Although these two bodies have different goals, there is a special synergy between them. GAFI’s Secretariat is housed at the OECD headquarters, and the OECD itself has adopted several concepts promoted by GAFI. Indeed, the OECD has adopted the definition provided by GAFI in respect of the concept of the beneficial owner.
Setting the historical context of the concept of ‘beneficial ownership’ may be arduous, although many seem to agree that it was born from English Trust law; notably, since the Crusades.[3] Trusts are widely regarded as one of the hallmarks of the legal systems of the common law family;[4] that does not mean, however, that countries under civil law traditions do not have trust arrangements, as their beginnings are, simply, different.[5]
GAFI defines the term beneficial owner as: the natural person who ultimately owns or controls a customer and / or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate control over a legal person or arrangement[6]. As far as FATF and OECD are concerned, ‘beneficial owner’ refers to control, and control often translates to money ownership.
For transparency and tax implementation purposes, the Global Forum of Exchange of Information has launched two standards, namely: the Automatic Exchange of Information (AEOI) through the Common Reporting Standard (CRS),[7] and the Exchange of Information on Request (EOIR), demanding the identification of the person behind assets; both, in different manners. The Standard for Automatic Exchange of Financial Account Information in Tax Matters, deals with the systematic transmission of financial accounts to countries of which they have agreed to exchange information.
It seems important to highlight that, in respect of AEOI, there is no such term as ‘beneficial owner,’ but the existence of controlling person(s) of financial accounts. Nonetheless, in essence, both concepts are the same. The provisions set out in the AEOI Standard,[8] require financial institutions (i.e., banks) in participating countries to identify all clients (including the controlling persons of certain entity clients) that are residents of another participating jurisdiction. Once such a reportable person is identified, the financial institution will report the relevant information annually to its domestic tax authorities, which will forward the data to the tax authority of the jurisdiction in which the reportable person is resident for tax purposes.
Concerning the EOIR, jurisdictions have been asked to implement effective measures that allow appropriate access, amongst other things, to beneficial ownership records.[9] Countries are free to design the practice(s) that best fit their domestic situation; however, the third G20 principle requires countries to ensure that information on beneficial ownership is maintained by legal persons and made available in their jurisdiction.[10] The information should be sufficient to identify the beneficial owner.
Although nor the Global Forum or the G20 mandatorily expects jurisdictions to create a register, it seems to have become a trend to be complying with this international commitment. In that sense, beneficial ownership registries are seen as methods to enable access. The best way countries can ensure that competent authorities have access to beneficial ownership information is by creating a (central) beneficial ownership registry. In that pursuit of transparency, many countries have adopted a ‘universal’ approach of managing beneficial ownership information. Such way, is the beneficial ownership registry.[11]
The Luxembourg case
One of the first countries that implemented a BOR, was the UK, in 2016, with the UK Government commenting it was the first among the G20.[12] Other European countries later began adopting BOR, among which, Luxemburg.
The Luxemburg BOR had been partially public, meaning that the public, through the internet, had access to some of the information contained therein. The Luxembourg Law of 13 January 2019 established how to store and make available information on the beneficial owners of the registered entities.[13] Because registered entities or beneficial owners could request, on a case-by-case basis, to limit the access to the information relating to them, a company, registered under the laws of Luxembourg and its beneficial owner, seized an action requesting to restrict its information from the general public.[14]
The action was then brought to the Luxembourg District Court, which, ultimately, decided to submit a request for a preliminary ruling to the European Court of Justice (the ECJ). On 22 November 2022, the ECJ disseminated that such access constituted an interference with the rights guaranteed by the Charter of Fundamental Rights of the European Union and was not limited to what is strictly necessary and proportionate to the objective pursued.[15] Notably, it was held that the information concerning the beneficial ownership of companies incorporated within the territory of the member states and had been accessible to the public was invalid. Consequently, on 22 November 2022, the Luxembourg Ministry of Justice, in consultation with the Luxembourg Business Registers responsible for managing the RBO, decided to temporarily suspend public access to the RBO; however, the registration of companies continues to be mandatory.
The European Court of Justice ruling has certainly set a milestone not only because it deemed invalid a European law, but also because it solved to restrict public access to the BOR of a country with vast experience in the topic. The decision of the ECJ, paradoxically based in Luxembourg, is extremely relevant as it affects all member countries of the European Union and might suggest that the Fifth Directive (EU) 2018/843, may require further amendments pursuant the ECJ ruling. This decision sets a precedent giving the nature of the role of the Court, which is to ensure that EU law is interpreted accordingly. BOR schemes are a valuable mechanism to fight against money laundering and terrorist financing as it promotes transparency; however, the information contained therein must always be treated as confidential and be under the competence and sovereignty of the state that administers or promulgated the registry initiative.
Thoughts
Jurisdictions should clearly deliberate their laws specially, when deciding on fundamental rights, such as confidentiality. If such rights will be interfered, the reasons should be appropriate, necessary and proportionate. Modalities of exchange of information evolve and likewise, the laws of each country should be lined up with such changes. In this particular case, the ECJ ruled that article 30 paragraph 5 c) of the Fifth AML Directive granting the general public access to information on beneficial ownership is invalid, however, this legislation has not been yet amended followed to the court’s decision.
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Endnotes
[1] The Financial Action Task Force, ‘What we do’ (FATF) accessed 23 January 2023. [2] OECD, ‘Exchange of Information’ accessed 23 January 2023. [3] Pablo Porporatto, ‘Who is behind all this? – The beneficial owner’ (Inter-American Center of Tax Administrators) accessed 4 February 2023. [4] Ramandeep Kaur China, ‘An introduction to trusts’ (Open ownership, 1 July 2021) accessed 23 January 2023. [5] Ibid. [6] FATF, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation’ (FATF, October 2020) FATF Recommendations 2012.pdf (fatfgaf.org) accessed 27 April 2023. [7] Note that FATCA law precedes CRS; See, Institute on Taxation and Economic Policy, ‘Foreign Account Tax Compliance Act (FATCA): A Critical Anti-Tax Evasion Tool’ (ITEP, 2 May 2017) accessed 27 April 2023. [8] OECD, ‘Standard for Automatic Exchange of Financial Account Information in Tax Matters’ (OECD, 2017) accessed 17 April 2023. [9] Global Forum on Transparency and Exchange of Information for Tax Purposes, ‘Exchange of Information on Request, Handbook for Peer Reviews 2016-2020 Terms of Reference’ (OECD, 2020) accessed 27 April 2023. [10] Maíra Martini, ‘Implementing the G20 Beneficial Ownership Principles’ (International Transparency, July 2-015) accessed 4 February 2023. [11] Transparency International, ‘Reforming Global Standards on Beneficial Ownership Transparency’ accessed 17 April 2023. [12] Alan Duncan (FCO), 'Sanctions and Anti-Money Laundering Bill [Lords] debate', (UK Parliament, 20 February 2018) accessed 4 February 2023.; Alanna Markle, ‘Early impacts of public beneficial ownership registers: Ukraine’ (Open Ownership, 1 February 2022) accessed 4 February 2023. [13] Commission de Surveillance du Secteur Financier, ‘Law of 13 January 2019 establishing the Beneficial Owner Register’ (Commission de Surveillance du Secteur Financier) accessed 27 April 2023. [14] Joined cases C-37/20 and C-601/20 Sovim SA v Luxembourg Business Registers [2022] ECJ, para 19. [15] Ibid, para 34.
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