As the dust settles on meeting the deadline of 31 January 2023 for registration of offshore entities on the UK’s new Register of Overseas Entities, it is a suitable moment to take stock of the ebb and flow of the argument between transparency and privacy when it comes to public access to registers of beneficial ownership. That argument has now become heated again in the light of the judgment of the Court of Justice of the EU in Joined Cases C-37/20 and C-601/20. To understand this, it is necessary to look at the development of the EU directives on this subject.
Registers of beneficial ownership were not a new concept in 2003 when the Financial Action Task Force (FATF) established the first international beneficial ownership transparency standard (Recommendation 24), but the last two decades have seen increased use of central registers and considerable expansion in the information registers should hold.
Recommendation 24 as originally issued said that countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons which can be accessed by competent authorities. This was strengthened in 2012 and revised in March 2022. At the same time the FATF opened a public consultation on draft updated guidance which closed in December 2022. It met to discuss the comments in February 2023 and issued the updated guidance in March 2023.
The revisions to Recommendation 24 require countries to use a ‘multi-pronged approach’ and to adopt a risk-based approach, with accurate information being made available through verification. The focus is very much about ensuring that competent authorities can gain timely access to verified data. However, the guidance does also consider whether there should be public access and paragraph 109 encapsulates the arguments for and against:
“Finally, countries may consider facilitating public access to basic and beneficial ownership information. Public access to this information can enable civil society, other organisations and individuals to cross check the information, which may in turn help to; ensure that information is accurate, adequate, and up-to-date and to identify potential misuse of legal persons (e.g., in tax evasion, fraud, or corruption schemes). However, public access alone is not a sufficient mechanism to ensure accuracy of information. In contemplating the extent and arrangement of public access, countries should take into account data protection rules and other privacy, security, and confidentiality concerns, and consider limiting what basic and beneficial ownership information is made publicly available or applying a tiered approach to information disclosure (basic to detailed information), e.g. based on legitimate interest.”
As central registers have been set up, so decisions have had to be made about the extent of public access. In the EU the Fourth Anti-Money Laundering Directive (Directive (EU) 2015/849) (AMLD4) had to be implemented by June 2017 when the UK was still a full member of the EU. Article 30 was concerned with corporates and other incorporated entities and paragraph 5 provided:
“Member States shall ensure that the information on the beneficial ownership is accessible in all cases to:
(c) any person or organisation that can demonstrate a legitimate interest.
The persons or organisations referred to in point (c) shall access at least the name, the month and year of birth, the nationality and the country of residence of the beneficial owner as well as the nature and extent of the beneficial interest held.
For the purposes of this paragraph, access to the information on beneficial ownership shall be in accordance with data protection rules and may be subject to online registration and to the payment of a fee. The fees charged for obtaining the information shall not exceed the administrative costs thereof.”
Article 30 (9) permitted exceptions to access by the public where there was the possibility of disproportionate risk for the beneficial owner or the beneficial owner was a minor or incapacitated. Article 31 echoed the same provisions on access for trusts plus the additional possibility of a written request being filed for information where a trust has a controlling interest in an entity other than ones covered by Article 30. Crucially, legitimate interest was not defined.
However, AMLD4 was swiftly followed by the Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) and critically this changed the position on public access to central registers. There are overtones of the FATF Guidance in recital (30):
“Public access to beneficial ownership information allows greater scrutiny of information by civil society, including by the press or civil society organisations, and contributes to preserving trust in the integrity of business transactions and of the financial system. It can contribute to combating the misuse of corporate and other legal entities and legal arrangements for the purposes of money laundering or terrorist financing, both by helping investigations and through reputational effects, given that anyone who could enter into transactions is aware of the identity of the beneficial owners. It also facilitates the timely and efficient availability of information for financial institutions as well as authorities, including authorities of third countries, involved in combating such offences. The access to that information would also help investigations on money laundering, associated predicate offences and terrorist financing.”
Article 1(15) amended Article 30(5) as follows, taking away the requirement of legitimate interest:
“paragraph 5 is replaced by the following:
(c) any member of the general public.
The persons referred to in point (c) shall be permitted to access at least the name, the month and year of birth and the country of residence and nationality of the beneficial owner as well as the nature and extent of the beneficial interest held.
Member States may, under conditions to be determined in national law, provide for access to additional information enabling the identification of the beneficial owner. That additional information shall include at least the date of birth or contact details in accordance with data protection rules.”
The position on trusts was not changed – legitimate interest was still required. But Member States had to define it.
In the meantime, the UK had fully committed to the concept of registers of beneficial ownership for companies, land and trusts, and now has three fully functioning central registers. The information on the People with Significant Control Register (PSC) at Companies House is publicly available unless the exception for disproportionate risk to the individual is successfully invoked. The Trust Register was initially not public but now is if the legitimate interest requirement or controlling interest requirement is successfully met and there is no disproportionate risk to the individual; given that a request on either ground has to be specific about the money laundering or counter-terrorist financing which will be detected or prevented, it may be difficult to meet these requirements. Finally, the Register of Overseas Entities, also at Companies House, protects certain information (for example, information about a trust which is a registrable beneficial owner) and can also protect information about an individual which would normally be available for public inspection if an application is successfully made about the disproportionate risk which disclosure would entail for the individual.
The UK also was concerned about the position of the Crown Dependencies and Overseas Territories and whether they would grant public access to their registers. Unexpectedly, the Sanctions and Anti-Money Laundering Act 2018 contained an amendment which required the Secretary of State no later than 31 December 2020 (subsequently extended to 2023) to prepare a draft Order in Council requiring the government of any British Overseas Territory that has not produced a publicly accessible register of the beneficial ownership of companies to do so.
Pressure for the re-assertion of the original 2020 deadline for the Overseas Territories, coupled with pressure to impose it on the Crown Dependencies (a difficult demand constitutionally), continued during the passage of the Financial Services (Implementation of Legislation) Bill 2017-2019. This legislation did not proceed but on 19 June 2019 the Crown Dependencies announced that they would introduce publicly accessible registers by 2023.
Then in November 2022 the debate re-ignited. The EU Court of Justice in Joined Cases C-37/20 and C-601/20 had to consider the validity of the changes to Article 30 paragraph 5(c) of AMLD4 by AMLD5 and whether the fundamental rights in Articles 7 and 8 of the EU Charter of Fundamental Rights were infringed. The Court heard the Commission’s observation at the hearing that ‘the criterion of ‘legitimate interest’ was a concept which did not lend itself easily to a legal definition. While the Commission had considered the possibility of proposing a uniform definition of that criterion, it had ultimately decided not to do so on the ground that the criterion, even if defined, remained difficult to apply and that its application could give rise to arbitrary decisions. The Court did not consider this a reason to fail to provide a definition. Nor did it find that the public access conferred a proportionate benefit which justified interference with the fundamental rights. On a number of grounds it found that the change to Article 30 paragraph 5(c) was invalid.
The ruling came as a surprise to non-governmental organisations and journalists on the one hand and legal practitioners on the other hand. In response to the decision, Member States rapidly began to restrict access to their registers and transparency groups reacted with alarm to the changes they were seeing.
So where does this leave the transparency argument?
None of this will derail the drive to central registers given the information they provide to competent authorities. In Europe it seems likely that the Sixth Anti-Money Laundering Directive (AMLD6) will now have to address the concept of legitimate interest in more detail. On 7 December 2022 the EU Council issued a press release on a new Directive, AMLD6, and referred to the fact that Member States would have to ensure that any legal or natural person that can demonstrate a legitimate interest, including journalists and civil society organisations involved in detecting or preventing money laundering and terrorist financing, has access to information held in the beneficial ownership registers. The EU Parliament has confirmed its acceptance of this proposal and trilogue discussions are set to start between the EU Parliament, the EU Council and the EU Commission.
The CJEU ruling only applies to the Member States of the EU. But the Crown Dependencies announced in late December 2022 that they would delay the implementation of full public access to beneficial ownership registers until they had taken legal advice. Many of the Overseas Territories are in a similar position.
In the UK, which is no longer bound by the CJEU ruling but still bound by the European Convention on Human Rights (Article 8 of which is similar to Article 7 of the EU Charter), there has been consideration of the Economic Crime and Corporate Transparency Bill currently going through the Parliamentary process. This Bill repeals local PSC registers, so that there will only be the central PSC register. Previously a proper purpose filter was applied to applications to local registers, no such filter was applied to the central register. The Government has concluded that the filter undermines transparency and the public interest benefits, and that removing it does not put them in breach of the ECHR, bearing in mind the significant safeguard of being able to apply for the non-disclosure exception on the grounds of disproportionate risk.
The policy paper issued at the end of January 2023 by the UK’s Department for Industry and Business Strategy states that the Government has analysed the EU cases and the compatibility of the PSC and ROE registers with the ECHR and concludes that they are compliant with Article 8 of the ECHR. In other words they are relying strongly on the non-disclosure exception on the grounds of disproportionate risk. Arguably they are over-emphasising the significance of this exception which has a high bar before it can be invoked and they are conveniently ignoring the absence of any legitimate interest requirement. But it is consistent with the UK’s record of commitment to some level of public access.
It remains to be seen how the EU will address the concept of legitimate interest and what implications that will have for public registers in the Member States, and how it may influence the Crown Dependencies and Overseas Territories.
Helen is a Consultant at BDB Pitmans LLP. She specialises in estate and tax planning for individuals, families and trustees, usually with an international dimension. She regularly writes and speaks on trust and tax topics.