Revue Européenne du Droit
Fighting money laundering must go hand in hand with transparency of beneficial ownership
Issue #4
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Issue

Issue #4

Authors

Andrej Leontiev , Radovan Pala

Revue européenne du droit, Summer 2022, n°4

Darkness cannot drive out darkness; only light can do that.

Martin Luther King, Jr.

Introduction

Money laundering is one of the most pervasive economic crimes in the world today. It has been estimated that some USD 0,8 to 2 trillion, or 2 – 5% of global GDP, goes through a laundering cycle each year 1 . The enormous volume of “dark” money creates severe threats to democracy and erodes the rule of law worldwide. This would not be possible without the involvement of offshore jurisdictions, shell companies, and professional intermediaries 2 .

But where does this money come from? Technically, the term “illicit financial flows” is used to describe the movement of illegal funds in their source, transfer, or intended use. Such are the proceeds of tax evasion, corruption, or capital for terrorist financing 3 . Essentially, “corruption is just a form of financial alchemy” 4 – transforming power into illicit money or illicit money into power. As noted by US Secretary of the Treasure Janet Y. Yellen, bad actors often require the use of intermediaries to execute such transformations 5 .      

In Eastern Europe, a pervasive and often latent conflict of personal interests and “entrusted” public goods remain the primary source of dirty money. Competing private and public interests naturally lead to misuse and abuse of power and are reflected in politics, legislation, judiciary system, business relations, and education or healthcare. In sociological terms, the abuse of power for personal financial gain is corruption in its purest form 6 . However, the abuse of power often also takes other forms like lobbying, clientelism, nepotism, or the concept of “revolving door” 7 . The existence of these phenomena and their (often accidental) detection fundamentally weakens public confidence in state institutions and democratic decision-making processes. It is, therefore, necessary to look for ways to prevent the existence of an environment that tolerates or justifies any form of conflict of interest.

In the former Eastern bloc countries, business interests “growing” into politics also materialized the conflict of interest. At first glance, there is nothing wrong with a successful entrepreneur offering money or skills for the benefit of society 8 . As the recent examples of Czech Prime Minister Mr. Babiš 9 or Mr. Putin’s close friends show 10 , it turns out to be very difficult or awkward to defend the public benefit of sitting on two chairs at once. However, a simple solution to hide business interests in politics is offered mainly by offshore jurisdictions. This is where anonymous shell companies enter the stage.

People artificially created corporations about two hundred years ago. They were initially intended to enable several entrepreneurs to invest together as shareholders. Their private property is protected against business risk since the property of a corporation is separate from the property of its shareholders and vice versa 11 . Only later did entrepreneurs find out how to hide their true identities behind companies they own or control. The anonymity of shell companies provides a cheap and highly efficient tool to hide assets from family members, creditors, police, or tax authorities 12 . A wholly new industry was formed 13 .

Global investigations – including the so‑called “Pandora,” “Panama,” and “Paradise” papers and “FinCen Files” have drawn attention to the essential role of certain professional intermediaries – so-called “gatekeepers.” 14 To successfully “steal, hide and spend” the proceeds of illegal activities, assistance from gatekeepers like banks, lawyers, accountants, corporate service providers, and others, mainly in the “layering stage,” is required 15 .

To identify conflict of interest and thus the potential source of illegal money and “financial alchemy,” we must have legal instruments to determine which natural person (materially) stands behind companies and benefit from their business. In other words, transparency, not as the ultimate goal but as a tool, is essential for fighting money laundering. In this process, we must focus on persons in conflict of interest and gatekeepers who can either enable or stop the undetected flow of illegal money. 

Legislative Background

In 2003, the FATF became the first international body to set global standards on beneficial ownership. In 2012, the FATF strengthened its standards on beneficial ownership to clarify how countries should ensure that relevant information is available. FATF suggested in its 2012 Recommendations 16 that countries should identify, assess, and understand the money laundering risks and apply a risk-based approach in choosing the measures. 

In 2013 the European Commission released its proposal for the 4 AML Directive 17 , with intended transposition in June 2017, intending to strengthen screening processes to disable dirty money from being laundered. The proposal was based on the FATF 2012 Recommendations. Specifically, more due diligence around ultimate beneficial ownership has been cited consistently as a way to fight corruption. Greater emphasis was put on a risk-based approach to addressing money laundering. 

In 2016, the European Commission published a proposal for the 5 AML Directive 18 , intended to be transposed until January 2020. While the 4 AML Directive specifies that companies must obtain and hold “adequate, accurate, and current information” about their beneficial owners, the 5 AML Directive emphasizes transparency around ultimate beneficial ownership. Member states must maintain inter-connected, publicly available national beneficial ownership registries. It also extends the requirements relating to central registries, requiring them to contain information on beneficial ownership, adequate, accurate, and current. In many circumstances, members of the general public shall be able to access this information.

In Slovakia, corruption in public procurement was always perceived as a severe issue. Over the past decade, there have been several cases, often in the procurement of large government construction contracts. The media or non-profit organizations have pointed out the lack of transparency or possible undisclosed connection between political leaders and successful bidders. Shell companies registered in offshore jurisdictions were often used as successful bidders or their shareholders. These cases have increased public pressure to demand transparency in state-private business relations 19 .  

In November 2015, Slovakia became the first EU Member state to introduce a register of beneficial owners of companies that participated in public procurement. The Act on Public Procurement 20 established public procurement register where companies registered their beneficial owners. It also provided a unique definition of a beneficial owner, defined as an individual, but not a company, with at least a 25% share in the enterprise, with the power to appoint or revoke a statutory body, or with another means of controlling the company. This register was published online in an open data format, available for the public. Nonetheless, it contained several shortcomings:      

(i.) First, its scope covered only companies bidding in public procurement procedures. 

(ii.) Secondly, there were severe doubts about the accuracy of the data entered into the register as there were no means of verification. 

(iii.) Finally, the sanctions were insignificant and often unenforceable. 

Basic principles and effects

Five years ago, on February 1, 2017, the so-called Anti-Shell Companies Law 21 (Act) replaced the original public procurement register. Although based on the same risk-based principle, the Act focuses on public-private commercial relations in the broadest sense; it does not constitute the Slovak transposition of the 4 AML or 5 AML Directive. The transposition was completed later 22 , and their regime runs parallel to the Act. 

The Anti-Shell Companies Act of 2017 is based on the axiom that only those private entities which voluntarily and reliably reveal their beneficial owners can engage in business activities with the state. In other words, companies may receive (non-)monetary consideration from the public sector or deal with public assets only if they disclose and register their beneficial owners in a special register established for that purpose (the so-called Register of Public Sector Partners – RPSP 23 ).

The legislation is constructed around three main principles, partially in reaction to the main criticism of the original public procurement register. But also to offset several systemic weaknesses of the Slovak law enforcement environment. Analyzing these principles one by one, it can be observed that:

(i) First, the scope of the public-private relations that are governed by the Act and provide the link to the obligation to register is very broad; it does not stop with public procurement, as this represents in Slovakia about 20% of public expenditure 24 , but covers the transfer of the majority of EU, state and regional funds and subsidies, state aid, privatization, and sale of state or regional assets, holding of mining rights concessions 25 and others. Focusing on the whole spectrum of legal relationships in which a third party accepts any performance from the state/public funds, it covers Slovak and foreign corporate vehicles concluding Slovak public contracts 26 . This means that corporate vehicles, incorporated, e.g., in Delaware or an offshore jurisdiction, must comply and register in the RPSP before “doing business” involving Slovak (or EU) public funds. In our view, departing from the focus on entities registered in the EU is the only way to deal with the global and shifting web of anonymous entities – due to the free flow of capital, in many cases, the corporate vehicles used in “shady” schemes do not need to set up subsidiaries in the EU to benefit from the public funds’ plans 27 .

(ii) Secondly, the data on beneficial ownership is verified and registered exclusively by local gatekeepers; in other words, the state is utilizing these professional intermediaries to exercise behalf of the state a Know Your Customer (KYC) check on the ownership background of its suppliers or other business partners. As this is a commercial service, the gatekeepers enter co-liability for the accuracy of the verified and registered data. As noted by the World Bank 28 , this can be characterized as a combination of the “central registry” and the “gatekeepers” approach.

(iii) Finally, the compliance and enforcement of the rules are safeguarded by a special court utilizing a rather unique shifted burden of proof which can be regarded as a keystone enabling the Act’s effective enforcement. The special court can commence determination court proceedings on its initiative or upon a ‘qualified motion’ (in practice regularly filed by investigative journalists) if there is reasonable doubt concerning the correctness, accuracy, and completeness of the registered BO data. In nature, this is a so-called non-contradictory civil court proceeding, and the strict criminal law standard of burden of proof does not apply (there is any prosecution that would carry the burden of evidence). In other comparable Slovak civil court determination proceedings involving court investigation (e.g., review of the accuracy of data registered in the Commercial Register), the court’s task is to search for and gather all evidence necessary for the decision. In the determination court proceeding concerning the BO, the court does not determine the beneficial owners of a registered entity – it determines whether the partner of the public sector (PSP) produced reliable proof of the BO’s authenticity, correctness, and completeness data entered in the register. This means the private entity under investigation – which naturally should have straightforward access to evidence concerning BO – must provide substantial evidence on the accuracy of the registered beneficial ownership data to maintain its registration. When combined with the general public’s information (incl. verification documents), shifting the burden of proof is the most vital tool forcing the enablers of the anonymous schemes to pay regard to the Slovak regulation. We are convinced that the webs of formal legal ownership schemes can be transformed, considerably outpacing the regulator’s (court’s) oversight (regardless of its expertise). The costs of maintaining an anonymous structure should not be externalized and therefore borne by taxpayers; on the contrary, these costs should be firmly and unequivocally located with the beneficial owner (society benefits in no way from the concealed ownership of the assets).

This special register (RPSP) is operated parallel to the Commercial Register that collects the information on beneficial owners of all Slovak companies, as required by the 5 AML Directive. Though those data have been publicly accessible too since November 2020, the verification and scrutiny of the registered data on beneficial ownership (no gatekeeper involvement) and the sanctioning mechanism for inaccurate information are much lower. However, to avoid any unnecessary administrative burden to the companies not entering business relations with the public sector, the registration of beneficial owners in the particular registry (RPSP) substitutes for their obligatory registration in the Commercial Registry. It is important to note that the RPSP does not necessarily overlap with the Commercial Registry –. In contrast, the latter strictly follows incorporation principle 29 and applies only to companies registered based on this principle; the scope of the former can be much broader as it utilizes a “functional” link that allows requiring beneficial ownership disclosure also from legal entities that are not Slovak nationals. It applies to any corporate vehicle that engages in a specific, statutorily outlined activity in Slovakia, regardless of its actual seat or incorporation.

According to a recent review 30 , out of the Top 100 Slovak companies (ranked according to their 2020 profit), only 11 companies fall outside the Act’s scope. Therefore, their beneficial owners are registered with Commercial Register only and are not subject to higher scrutiny. The remaining 89 Slovak companies have their beneficial owners reviewed and verified by gatekeepers and recorded according to the Act with the special register (RPSP). 

After five years in operation, the Act’s benefits are already measurable. Out of more than 31,000 private Slovak and foreign entities registered, only around 15 natural persons – Cypriot citizens – registered as beneficial owners 31 . That gives us the notion that data accuracy is on the right track. Hundreds of Cypriot shell companies, which Slovak persons directly or indirectly own, disclosed their ownership and managing structures and registered their real beneficial owners. 

A recent study 32 confirms that for the years 2018 and 2019, approximately 15.000 public contracts meet the de minimis threshold (below) and are worth around EUR 29 bn. Only 40 public contracts worth EUR 15,5 mil. were missing the registration of beneficial owners in the special register (RPSP). The statistics for the years 2019 and 2020 were even better; only 25 public contracts worth EUR 5,5 mil. were lacking the disclosure of beneficial ownership of the suppliers.

Thanks to the Act and the expert approach of the judges at District Court Zilina, which keeps the RPSP, several court proceedings with regional oligarchs started and forced these persons to admit their status of beneficial owners in companies receiving negligible amounts from the public sector 33 . The recent investigation of the European Commission on a possible conflict of interest of the Czech Prime Minister, Mr. Babiš, was based on the data from this particular registry 34 . The application of the Act also led to the first fines recently imposed by the District Court Zilina, making the Act a genuinely effective tool for controlling the persons who benefit from public funds. 

On the other hand, despite the undisputed benefits of the Act, some applicational and interpretative uncertainties have emerged. After all, it has been a unique law, passed when there was no comparable template in any other country.

An amendment to the Act came into force on 1 September 2019 (Amendment). It provides a specification of specific terms and a modification of several provisions of the Act to narrow down the possibilities of circumventing the law and, at the same time, eliminate its applicational deficiencies. 

Partners of the Public Sector, Beneficial Owners, and Authorized Persons 

Every person who is not an entity of public administration that has a statutorily-defined business relation with the public sector or wishes to enter into such a relation is obliged to register. Such a person is called a Partner of the Public Sector (PPS). Statutorily-defined ties with the state include, amongst others: receiving financial means from the public budget, receiving property rights from the public sector, being a supplier in public procurement, or fulfillment of other statutory criteria (for instance, as a mining permit owner or a PPP operator). Several de minimis thresholds apply. A person receiving financial means, assets, or rights not exceeding EUR 100.000 in a “one-shot transaction” or repeating consideration from a contract worth more than EUR 250.000 is not considered a PPS. To be able to assess the “value of the contract,” i.e., to decide whether or not the company has any obligations under the Act, the Amendment provided a potential PPS with detailed instructions on how to calculate the value of the relation (e.g., the value of a contract – excl. VAT; it does not add up from other agreements among the same parties). The Amendment also provides a specific definition of the public undertaking. An entity falling under this definition is considered a public sector entity. Its business partners must follow the obligations under the Act subject to an important exemption: private entities acquiring goods and services from public undertaking in their regular course of business are exempted. A new exemption also applies to banks and other financial institutions. 

A natural person who benefits from the activities of a PPS is a so-called Beneficial Owner (BO). The definition of the BO is taken over from the 4 AML Directive and is basically the same for any other purposes of the Slovak law; it means that Slovakia uses a single BO definition, with one minor exception for the Act (so-called joint or coordinated execution of rights, which means that someone may not meet the definition and threshold of BO on its own, but it may meet it together with one or multiple other persons). BO either exercises control over a legal entity (solely or jointly with another person) or receives an economic benefit from the business of that legal entity. A special regime applies to issuers of shares regularly traded on the stock market and their subsidies. In such a case, provided no natural persons fall under the definition of the BO, the members of the statutory body are registered instead of BOs. The Amendment narrowed down the previously broad scope of top managers required to be written in such a case and enabled any BO to register the company address instead of its residence under certain circumstances.  

The active gatekeepers, so-called Authorized Persons (AP), entitled to conduct a registration of a PPS into the register can be an attorney-at-law 35 , a public notary, a bank, or a branch of a foreign bank, an auditor, or a tax advisor. The AP must have a registered seat or place of business in the Slovak Republic and independently collect and assess all available information about the BO in a verification document. In this document, the AP determines the basis upon which the BO has been identified or verified and identifies the PPS shareholders and management structure. The verification document is a crucial component of the system. It provides for an “up to date snapshot” of the ownership and controlling form in a consistent chain of facts connecting the PSS to the beneficial owner. Moreover, as this document is made public and chronologically stored, it makes any ex-post tampering with the title chain, organizational structure, or controlling rights more difficult.

BOs of the PPS must be verified on December 31 of each calendar year if an AP registers a PPS in the register, if there are register changes regarding the BO and AP, if a contract or its amendment is concluded, or if consideration exceeds EUR 1 mil. An agreement has been received. Under the Amendment, voluntary verification is possible at any time. The advantage of such a voluntary verification is that unless there is a change in the BO, no additional proof is needed if the verification was conducted over the past six months. 

Where incorrect or incomplete information about the BO is provided in the register, a fine will be imposed by the respective court in an amount corresponding to the economic benefit gained by the PPS. If it is not possible to determine such a benefit, a flat rate ranges from EUR 10.000 to 1 mil. will be set. 

In addition, the executive bodies of a PPS can be fined from EUR 10.000 to 100.000 and will subsequently be banned from holding an executive body office in any private company based on       registration into a “disqualification registry.” For two years following the removal of the PPS from the RPSP by the court’s decision, a      company cannot be registered again and is therefore prevented from trading with the state or receiving public funds. The AP acts as a guarantor for paying the fine imposed on the PPS executive body unless the AP can prove it acted with professional diligence during registration/verification. The guarantee is a vital ex-post accountability feature of the combined approach that, on the one hand, relies on the data registered in the RPSP and, on the other hand, entrusts professional service providers with the task of verifying the data concerning BO. 

The RPSP, including the BO verification documents, is accessible online to the general public, naturally including investigative journalists. Anybody can file a qualified motion to the registration court to examine the registration of the BO. “Qualified” means that facts justifying the doubts about the accuracy and validity of registration must be presented. In case the court opens the examination proceedings, the “tables turn,” and it is up to the PPS to bear the burden of proof and provide sufficient evidence concerning the accuracy of the registered information.

Other applications of the Beneficial Ownership data 

Transparency of beneficial ownership should not be the aim; it is a tool for effective regulation, policymaking, and law enforcement. 

Corporate vehicles with anonymous ownership structures can significantly weaken law enforcement nationally. This is an implicit characteristic of disjoining ownership and accountability. Any legal regulation that requires transparent disclosure of ownership structure to be effective can be undermined beyond practical use by the existence of anonymous corporate systems. This applies not only to public law regulation but also to the regulation of purely commercial matters. 

For example, in public law, a state may have a legitimate interest in prohibiting cross-media ownership (TV and radio broadcast, newspapers). However, suppose the state cannot reliably identify the ultimate owners of the relevant media. In that case, it cannot uphold the ban, thus creating only an appearance of having no cross-media ownership. This can be even more damaging than not having the restrictive regulation. 

In private law, a good example is the protection of companies’ creditors, e.g., insolvency law regulation, where shareholders are treated as a class of residual creditors that are satisfied only in case all other “outside” creditors are met in full. This principle, which also presumes that shareholders cannot acquire a company’s assets without adequate consideration, is supplemented by further generally recognized regulations such as claw-back claims. These principles and rules, all protecting bona fide creditors, are complicated to uphold if the shareholders do business with their failing company indirectly and use anonymous structures. 

The establishment of a register of BO, such as RPSP, enables the legislator to prescribe registration of beneficial owners also in particular policy fields such as media ownership or in certain situations where anonymity can seriously harm legitimate interests, such as interests of creditors when a “hidden” shareholder lodges large claims against an insolvent company 36 .

Furthermore, other existing public policy legal instruments such as foreign direct investment screening procedures 37 , subsidy schemes 38 , unexplained enrichment laws 39 , or asset declarations of officials 40 can be substantially upgraded by using the concept of verified and transparent BO registration.

The overall impact of the Act tested by “benchmarking” and recent challenges.

By adopting the Act, Slovakia has taken over a role model position as a country. By applying the highest standards of due diligence and KYC to its business partners, the state increases the transparency of public spending. It makes corruption and illicit financial flows in general much more difficult. 

Such an approach aligns with the 10th FATF Recommendation that aims at customer or supplier due care. It can be assumed that similar motivation led the US Congress to pass the H.R.6395 – William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 41 . It stipulates in Section 885 that all companies receiving federal contracts above USD 500.000 must publicly disclose their beneficial ownership information. This is critical because investigations in the US into abuse of government spending have routinely found companies with anonymous ownership structures to be dangerous facilitators of corruption and misconduct 42 .

The strong momentum about the transparency of BO data in the US continues with the Biden administration. The 2021 U.S. Strategy on Countering Corruption 43 aims to enhance beneficial ownership transparency regulations that “help identify bad actors hiding behind opaque corporate structures,” enacting first-of-their-kind laws that target “those closest to real estate transactions” to reveal when real estate is used for money laundering, making it harder for certain gatekeepers to evade ownership scrutiny and through international cooperation bringing greater transparency to the global financial system.

Furthermore, due to the Pandora Papers, the FATF recently initiated multiple actions to raise the international standards of beneficial ownership transparency 44 . Reviewing the impact and importance of the Act, it must be stated that the international standards are progressing towards the level that Slovakia has been successfully using since 2017 45 .

Making public which natural person (in)directly deals with the public sector has a positive impact on the competition of entrepreneurs. The aspect of an unlevel playing field plays an increasing role in all market economies. If companies benefit from a preferred treatment from the public sector due to their ownership structure, fair competition becomes inevitably distorted. Such preferential treatment can result in excessive prices for the public sector and “dumping” strategies in private tenders. Thus, according to the Act, any administrative costs related to commercial verification are positively balanced by removing market disturbances caused by a lack of transparency in private-state relations. 

Furthermore, progressive tools of the Act represent the involvement of the gatekeepers in the verification process. Several years before international scandals have drawn widespread attention to the essential role of specific professional industries in international money laundering, corruption schemes, and tax evasion, the Act had recognized the need to incentivize these professionals to investigate, verify and disclose beneficial ownership of companies. Recent evidence shows that in pursuit of personal interest, the intermediaries often create corporate enabling structures that facilitate illicit activities of political and economic elites. Thus, motivating them to work for the “side of the light” rather than serve the “side of the dark” (to become gatekeepers instead of enablers) turned out to be a very successful strategy in Slovakia. 

In the future, not only governmental actions but also actions of private stakeholders endorsing values such as integrity, transparency, and accountability shall gain importance in the fight against illicit financial flows. Unifying Framework 46 , a value‑based self‑regulatory framework for private sector intermediaries strategically positioned to prevent or interrupt illicit financial flows, is just one example.

Further standardization and harmonization of the definition of beneficial ownership on the international level and interconnectivity of the different beneficial ownership registers (based not exclusively on the Business Registers Interconnection System (BRIS) 47 and the Beneficial Ownership Registers Interconnection (BORIS) 48 ) shall prevent false statements and circumventing of the rules concerning local beneficial ownership registries. 

At the time of the final edits of this article, Ukraine was invaded by Russia. The global geopolitical impact of this war and the sheer size of repercussions triggered by it on all levels of liberal societies go far beyond the scope of this paper. Nevertheless, it has become clear that it will no longer be possible to turn a blind eye to the level of tolerance and even acceptance of illicit finance flows into the developed economies in the last three decades. Societies that have tolerated criminal, illegal or unethical, and immoral provenience of funds based on pragmatic justification or rationalization of mutual benefit stand as weak opponents in the fight for liberal democratic values. 

Regarding economical sanctioning, the idea of asset and beneficial ownership transparency must return to the center of the discussion. The disconnection of wealth from the liability for the conduct behind its amassing must be effectively challenged and canceled. Russian oligarchs shielded by complex ownership structures and their ‘enablers’ in developed countries must feel again that they have a ‘skin in the game.’

What is down the road?

The new 2021 EU Anti-Money Laundering Package 2021 (6 AML Pack) supports greater harmonization of transposing EU AML rules into national law, enhances supervision at the EU level via a new office (Anti-Money Laundering Authority – AMLA), and better coordination of financial intelligence units (FIUs). These rules will include harmonized beneficial ownership requirements. There shall be a further alignment of the FATF with the EU to create a blocklist and gray list under the FATF. A listing by FATF will also now trigger an EU listing and obligatory enhanced due diligence and countermeasures proportionate to risks stemming from the relevant country. It was reported that the new regulations and 6 AML Pack will only start to apply in 2026 as the AMLA needs to be up and running to prepare technical and regulatory standards that will complete the single rule book 49 .      

The expectations are high that the 6 AML Pack will settle the ongoing backlash of some stakeholders against BO transparency based on data protection rules (GDPR). A more precise position of the EU is desperately needed, especially after the release of the Opinion 12/2021 of the European Data Protection Officer regarding the 6 AML Pack, which states that “beneficial ownership information should only be accessible for identification and prevention of money laundering” and only “to competent authorities who are in charge of enforcing the law and to obliged entities when taking customer due diligence measures.” 50 In light of the measurable success of the transparency of the BO data to the broad public under the Act, we are advocating a pro-transparency approach. We believe that the recent opinion of Attorney General 51 shall be shared by the CJEU (in litigation concerning the transparency of BO data) as the lowest possible denominator 52 .     

Several “lessons learned” in Slovakia from the introduction of the RPSP and taking into account the future obligations resulting from the 6 AML Pack could be incorporated as an upgrade of the registration and verification process within the Commercial Register: By the same token, all these principles could also be considered as further improvements of the efficiency of the international standards created by FATF or the EU AML framework. 

(i.) First, dividing the registration process at the Commercial Register into a “fast track” and “slow track.” Outsourcing at least a partial verification of the data on beneficial owners of companies that qualify for the slow track based on a “red flag indicator list” to third parties, for example, attorneys-at-law, who shall be in the future eventually entitled to execute electronically certain corporate registration services directly with the Commercial Register (i.e., without the need to involve the scrutiny of the respective registrar court) is an option. Automated checks of submitted data could accompany in-depth verification within the slow track (e.g., the actual existence of the address of an individual registered with the Commercial Register). 

(ii.) Secondly, the obligation to prepare and submit (even without making it publicly available) a comprehensive verification document that describes the algorithm used by the third party or company itself during the identification process of the beneficial owners could substantially limit the maneuvering space for ex-post “modification and alternations.” 

(iii.) Finally, shifting the burden of proof in case of an official complaint about the accuracy of the registered data on beneficial ownership could encourage the public, investigative journalists, competitors, and NGOs to watch about the inconsistencies in compliance with the obligations.      

Conclusively, alongside other prominent international research initiatives, further enhancement and involvement of the IT and machine learning tools, including AI, could better utilize the existing data by their material evaluation and aggregation 53 . Further interconnectivity or merger of the current public registers and data sets represent a “low hanging fruit” in the continuing anti-corruption endeavors. For example, the Register of Public Contracts 54 contains data about companies awarded public contracts, and the values of these contracts could be easily linked with the RPSP. A standard interface could enable the public or other “watchdogs” to search for natural persons as beneficial owners of different companies commercially dealing with individual state institutions and find out the aggregated public funds received by the respective person. On the other side, this functionality could also enable “filter” a top list of beneficial owners of each public institution and illustrate the total volume of the specific state-private commercial relation in the figures.

Conclusion

The sheer size of illicit finance flows has widely recognized that depriving many countries of funding for their public needs, such as education or health care. Still, it also distorts free-market competition and directly threatens and undermines independent institutions and democracies. A crucial measure in combat illicit finance is to expose who owns shell companies and other illegally-obtained funds. We strongly believe that transparency of beneficial ownership of corporations and other legal vehicles must become a new standard. The openness of legal, lawful (formal) requests has become a standard after the corporations became a prevalent part of the business environment. Information on the legal rights of entities kept solely within the national realm is no longer sufficient to face the unrestricted nature of global financial transactions. The globalized financial world that knows no national borders require a new approach to reveal the beneficial ownership behind the seemingly unlimited and ever-shifting combinations of legal structures. Close cooperation with intermediaries is essential to become true gatekeepers and not enablers. The Slovak RPSP is a uniquely innovative and effective tool that leads along this road.

Notes

  1. https://www.unodc.org/unodc/en/money-laundering/overview.html
  2. Speech of Slovak Minister of Justice, Mrs. Kolikova at the side event of 2021 UNGASS “Enlisting Gatekeepers in the Fight Against Illicit Financial Flows”,  https://www.justice.gov.sk/Stranky/aktualitadetail.aspx?announcementID=3407 
  3. https://star.worldbank.org/sites/default/files/2021-06/WEF_Gatekeepers_A_Unifying_Framework_2021.pdf The total amount of illicit finance crossing the globe solely related to trade, according to research by Global Financial Integrity (GFI), amounted to USD 8.7 trillion in the ten years from 2008 to 2017, representing trade payments between 135 middle- and low-income countries and thirty-six advanced industrial nations. See The Report by GFI, March 3, 2020: “Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008– 2017.”
  4. As noted by US Secretary of the Treasury Janet L. Yellen at the Summit for Democracy, https://home.treasury.gov/news/press-releases/jy0524
  5. As noted by US Secretary of the Treasury Janet L. Yellen at the Summit for Democracy, https://home.treasury.gov/news/press-releases/jy0524
  6. Nye, J. (2017). Corruption and political development: A cost-benefit analysis. Political Corruption, https://doi.org/10.4324/9781315126647-26.
  7. In 2016, Robert Barrington (then CEO of Transparency International UK, now Professor of Anti-Corruption Practice at Centre for the Study of Corruption (CSC) at University of Sussex) criticized UK’s rules on revolving door as “woefully out of date”, opening the door for former public officials to leverage their position of entrusted power for private gain, without proper oversight, and came to following conclusion: “The revolving door is a corruption time-bomb at the heart of British politics.” https://blogs.lse.ac.uk/politicsandpolicy/lobbying-loopholes-honours-and-revolving-doors-without-reform-the-government-perpetuates-corruption/ It needs to be added, that the ‘revolving door’ has two ways and in Eastern Europe, local oligarchs are able appoint their nominees to generally underpaid influential public offices (e.g. at tax authorities) but keep them on their own payroll. See e.g. https://spectator.sme.sk/c/22554521/how-the-mafia-took-over-the-police-detained-tax-inspector-tells-his-story.html
  8. https://www.linkedin.com/pulse/zodpovedn%C3%A9-podnikanie-alebo-ke%C4%8F-sa-firmy-nemusia-hanbi%C5%A5-leontiev/
  9. https://www.europarl.europa.eu/news/en/press-room/20210517IPR04145/conflict-of-interest-and-misuse-of-eu-funds-the-case-of-czech-pm-babis One of the reasons of the defeat of Mr. Babis and his party in the Czech parliamentary elections in 2021 was that he was one of the 35 world leaders named in ICIJ’s Pandora Papers just few days before the election. https://www.icij.org/investigations/pandora-papers/czech-prime-ministers-party-narrowly-loses-re-election-days-after-pandora-papers-revelations-in-surprise-outcome/ 
  10. https://panamapapers.sueddeutsche.de/articles/56fec05fa1bb8d3c3495adf8/
  11. Chief Justice Marshall referred to the corporation as “an artificial being, invisible [and] intangible” and to its “individuality,” as being evident in such features as its power to sue and amenity to suit and its durational existence defined without regard to the lives of its shareholders. Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819)
  12. https://www.europarl.europa.eu/cmsdata/155724/EPRS_STUD_627129_Shell%20companies%20in%20the%20EU.pdf
  13. Emile et. al. (2012) The Puppet Master: How the Corrupt Use Legal Structure to Hide Stolen Assets and What to Do About it, https://openknowledge.worldbank.org/handle/10986/2363 
  14.  From a less favourable viewpoint, these actors are also called „enablers“. See Vogl, F. (2021): The Enablers. Rowman & Littlefield Publishers.
  15. Bullough, O. (2019). Moneyland: Why Thieves And Crooks Now Rule The World And How To Take It Back, https://www.amazon.com/Moneyland-Inside-Story-Crooks-Kleptocrats/dp/125020870X 
  16. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html
  17. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32015L0849 
  18. Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843 
  19. Zigo, D. (2021) “Beneficial Owners” Policy: Comparison of its Efficacy in the West with Prospects for Curbing Corruption in China, unpublished academic paper
  20. Act No. 343/2015 Coll. Act on Public Procurement and on the Alteration and Amendment of Certain Acts, https://www.slov-lex.sk/pravne-predpisy/SK/ZZ/2015/343/20210506 
  21. Act no. 315/2016 Coll. on the Register of Public Sector Partners and Amendments to Certain Acts, https://www.slov-lex.sk/pravne-predpisy/SK/ZZ/2016/315/20191101 
  22. Act No. 297/2008 Coll. Act on Protection against Money Laundering and Terrorist Financing and on the Amendment to Some Acts, https://www.slov-lex.sk/pravne-predpisy/SK/ZZ/2008/297/20210101 
  23. https://rpvs.gov.sk/rpvs/
  24. https://www.nrsr.sk/web/Dynamic/DocumentPreview.aspx?DocID=428797
  25.  Even though the beneficial ownership disclosure obligation of any enterprise that applies for, or holds a mining right concession is not as economically important as the same obligation for public procurement participation, in many natural resources rich countries, it could be the most significant feature of a beneficial ownership register (RPSP).
  26. As outlined below, from the point of view of territorial application, this is one of the most important features of the special register distinguishing it from the valid AML Directive – concept based on interconnected national registers – allowing it to review beneficial ownership of foreign corporations, including off-shore corporations.
  27. According to a study published by Hudson Institute (Nate Sibley and Ben Judah, Countering Global Kleptocracy: A New US Strategy for Fighting Authoritarian Corruption), “the United States is also a leading global producer of these legal entities. Given that shell companies are often used for legitimate business purposes, this in itself might signify nothing more than the relative size of the US economy. But the “Delaware LLC” has become synonymous with shady financial dealings, and the same might be said of other US states engaged in a race to the bottom on financial secrecy.” The anecdotal evidence from Slovak practice shows that many off-shore companies were directly involved in dealings with the Slovak authorities prior to the enactment of the Act.
  28. See World Bank (2020) “Enhancing Government Effectiveness and Transparency: The Fight Against Corruption,” World Bank, Washington, DC, p. 252.
  29.  In line with the Art. 30 of the 5 AML Directive: ‘Member States shall ensure that corporate and other legal entities incorporated within their territory are required to obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. The Member States shall ensure that breaches of this Article are subject to effective, proportionate, and dissuasive measures or sanctions.’
  30.  https://www.finstat.sk/ ; Status: July 14, 2021
  31.  https://www.finstat.sk/ ; Status: February 15, 2021
  32. https://transparency.blog.sme.sk/c/514094/kazimir-podpisal-zmluvy-s-ratingovymi-agenturami-bez-zapisu-do-protischrankoveho-registra.html
  33. https://transparency.sk/sk/prve-pokuty-protischrankoveho-sudu-advokati-bugala-durcek-boli-v-konflikte-zaujmov-pri-overovani-kmotrikovych-firiem/
  34. https://www.transparency.org/en/press/andrej-babish-is-our-controlling-person-czech-republic
  35. Acting as an AP is not considered as attorney activity – therefore in case an attorney-at-law acts as AP for a client, its actions and relation to the client are not subject to attorney-client privilege.
  36. This insolvency law application is already implemented in Slovak regulation. 
  37. https://www.uianet.org/fr/actualites/india-covid-19-and-fdi-screening-mechanisms
  38. https://www.oecd.org/coronavirus/policy-responses/covid-19-emergency-government-support-and-ensuring-a-level-playing-field-on-the-road-to-recovery-1e5a04de/
  39. https://thedocs.worldbank.org/en/doc/734641611672284678-0090022021/original/BeneficialOwnershipTransparency.pdf, page 253
  40. e.g. Moldovan Law no.133/2016 that governs declarations of income and personal assets, conflicts of interest, and incompatibilities, restrictions, and limitations requires disclosure of the beneficial owners of financial assets and accounts if their total value exceeds 15 annual salaries.
  41. https://www.congress.gov/bill/116th-congress/house-bill/6395
  42. https://thefactcoalition.org/defense-bill-includes-two-landmark-transparency-provisions/
  43. https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/06/fact-sheet-u-s-strategy-on-countering-corruption/
  44. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-consultation-r24.html
  45. The proposed changes to the 24. FATF Recommendation on transparency of beneficial ownership are encouraging countries creating a central register of beneficial owners or an “alternative mechanism”. Slovakia has created such register for companies dealing with public assets or funds (RPSP). FATF proposes that countries “consider” public access to beneficial ownership information. Slovakia provides full public and online free-of-charge access to the beneficial ownership information from its special register. FATF also requires a 25% beneficial ownership threshold as a “maximum”. Slovakia even lowered the threshold for family members and other shareholders acting jointly. FATF finally accepts the need to cover foreign entities, for example off-shore companies that have a “sufficient link” in the national beneficial ownership registries. Slovakia requires all foreign entities doing business with public sector to register its beneficial owners. FATF requires that the collected data contains “adequate information that is sufficient to identify the natural persons who are the beneficial owners”. Despite some GDPR pushback, Slovakia collects and publishes date of birth of beneficial owners as a crucial identification. Importantly, FATF recognizes that beneficial ownership information shall be verified. RSPV provides for compulsory verification of beneficial ownership data by so called gatekeepers, professionals like attorneys, notaries, banks etc. These professional service providers are co-liable for the accuracy of the beneficial ownership data. FATF specifies one month as an example of a “reasonable period” within which information should be changed. Among other verification events, Slovakia requires the beneficial ownership information to be verified before each receipt of public funds exceeding 1 mil. EUR. On top of these high international standards on beneficial ownership, Slovakia requires the publishing of the verification document describing the “algorithm” of how the beneficial ownership was identified by the respective professional, including all the layers of ownership and control. Slovakia also implemented a “reversed burden of proof” in case the registered beneficial ownership information is contested by the public.
  46. https://star.worldbank.org/resources/role-and-responsibilities-gatekeepers-fight-against-illicit-financial-flows-unifying
  47. Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019L1151 
  48.  4 AML Directive
  49. https://ec.europa.eu/info/publications/210720-anti-money-laundering-countering-financing-terrorism_en
  50. https://edps.europa.eu/system/files/2021-09/21-09-22_edps-opinion-aml_en.pdf
  51. https://curia.europa.eu/jcms/upload/docs/application/pdf/2022-01/cp220012fr.pdf
  52. It was concluded that public access to BO information established by the existing AMLD does not result in a disproportionate interference with the rights to respect for private life and to the protection of personal data, guaranteed by Articles 7 and 8 of the Charter. The main arguments are: the rather limited nature and extent of the data available to the general public, existing relationship between the data subjects (UBOs) and the purpose of the data processing, namely the prevention of money laundering, the existence of derogations put in place by the AMLD aimed at ensuring a proportionate and balanced approach and at guaranteeing respect for fundamental rights and application of the GDPR to the processing of personal data taking place within the framework of this regime.

  53. https://www.microsoft.com/en-us/research/group/societal-resilience/articles/revealing-the-hidden-structure-of-corruption/
  54. https://www.crz.gov.sk/
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Andrej Leontiev, Radovan Pala, Fighting money laundering must go hand in hand with transparency of beneficial ownership, Aug 2022,

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