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22/01/24
Beneficial Ownership Registers 2.0: What Can Be Expected After The European Court Of Justice Decision Of 22 November 2022?
Public registers of the beneficial owners of companies (UBO registers) had become the ‘new normal’ in most of Europe. Since 2016, the United Kingdom (UK), the European Union (EU), and the countries of the European Economic Area (EEA) had enacted registers of the ultimate beneficial owners (UBO) of their corporate entities. Such registers could be easily accessed by anybody, often free of charge and in most cases in an anonymous and untraceable way. Some suggestions were voiced that this set-up could be an invasion of the individuals’ right to privacy. Nonetheless, the mainstream approach was that such a limitation of a fundamental right was necessary for the sake of a higher ideal of transparency and more specifically for an effective fight against money laundering (AML).
On 22 November 2022, the European Court of Justice (ECJ), in its decision on the joint cases C-37/20 and C-601/20, was a game changer. The ECJ stated that unrestricted public access to the UBO registers is unlawful insofar as it is a breach of the fundamental right to privacy and is not proportionate to its stated goals.
The immediate result of this decision was a diversified situation across the EU, with different member states taking different approaches. In order to better appreciate the positions taken by some EU jurisdictions it may be useful to review the path which led to the creation of publicly accessible UBO registers and to consider the salient statements in the ECJ decision.
The ‘PSC Register’ In The UK: Is There A Slight Inconsistency?
The first country ever to come up with the idea of a freely searchable UBO register was the UK, where a register of ‘Persons with Significant Control’ (PSC) over local corporate entities (the PSC Register) was created in 2016 under the Small Business Enterprise and Employment Act 2015 (SBEEA).
More precisely, the Companies Act 2006 was amended under the SBEEA and all the UK companies were requested to establish and regularly update their own PSC register.
The maintenance of the PSC register was modelled under that of the register of members, an obligation that was already in place for every UK company [1]. More specifically, a company receiving a request by a third party to search its PSC register has to comply within 5 working days [2] or, if it is not satisfied that the request is being made for a ‘proper purpose’, it may seek a court order to determine that matter.
This judicial review of the propriety of any request for access to the PSC register or the register of members appears to be a reasonable balance between the requirements of transparency and the protection of privacy. The two reported cases in relation to searches of the registers of members of UK companies appear to confirm that abuse is far from unthinkable in these situations. In Burry v Knight [3], access was denied based on evidence that the applicant intended to harass the other shareholders in a private vendetta. In Burberry Group plc v Richard Charles Fox-Davies [4], access was denied because the applicant would not disclose the details of the people to whom the information would be further disclosed and the request was made for an improper purpose (ie extracting a fee from traced shareholders of a public company).
Nonetheless, this judicial review is in fact purely theoretical as far as the PSC register is concerned because all UK companies are also required to file their PSC information with Companies House [5], where it can be freely and anonymously accessed by everybody.
This appears to be a slight inconsistency in the drafting of the SBEEA but the result is that public UBO registers in the UK are there to stay, at least for the time being.
UBO Registers Under The EU AML Directives: From ‘Legitimate Interest’ Test To Unrestricted Public Access
UBO registers were introduced in the EU under Directive (EU) 2015/849 (the 4th AML Directive), which regulated three possible ways to access them: (a) unrestricted access by the competent authorities in charge of the fight against money laundering; (b) access limited to the purposes of customer due diligence for the “obliged entities” (ie financial intermediaries and other professionals subject to AML obligations); and (c) access granted to people and organisations, provided they could demonstrate a legitimate interest.
The early adopters of the 4th AML Directive, such as France and Austria, had introduced some robust mechanisms to test the existence of a legitimate interest on the part of an applicant. In France, access could be obtained only pursuant to an order by the competent commercial court, while in Austria, an administrative procedure was handled by the authority in charge of the UBO register.
While the 4th AML Directive had not yet come into force in many EU member states, a new Directive (EU) 2018/843 (the 5th AML Directive) was introduced to make a number of amendments to the original text. The most significant for our purposes was Article 30(5)(c), where the requirement of a legitimate interest test was replaced with unrestricted access to “any member of the general public”.
The ECJ Decision Of 22 November 2022: Unrestricted Public Access Is Unlawful
Article 30(5)(c) of the EU AML Directives was declared to be unlawful by the ECJ in its decision of 22 November 2022.
The court noted that unrestricted public access to the beneficial ownership information of companies is a breach to the fundamental right to privacy that is protected under Articles 7 and 8 of the EU Charter of Fundamental Rights (the Charter). The Charter is not a directly applicable EU law but it states the fundamental principles and values that must underpin every piece of EU legislation.
The seriousness of the invasion of privacy under publicly accessible UBO registers was expressly recognised by the ECJ. First, a combination of the UBO information of companies with the financial information that is also freely available in the registers of commerce of all the EU member states (where companies are obliged to publish their annual financial report) would allow profiling of people in a way that goes well beyond the requirements of the AML law. Furthermore, unrestricted and anonymous public access meant that the information could be obtained and shared in a way that would be almost impossible to trace, thus leaving very limited remedies available in case of abuse.
The ECJ concluded that such a serious invasion of privacy is not proportionate to the purposes it allegedly furthers. It is not demonstrated that public access to the UBO registers contributed to the effectiveness of the fight against money laundering and, more generally, “transparency” is not a principle that by itself can justify a restriction to a fundamental right of the individual [6].
Reactions To The ECJ Decision: (1) UBO Registers Accessible Only To Competent Authorities And Obliged Entities
Most EU member states took their UBO registers offline on the same day as the ECJ decision or in the immediately following days of November 2022.
The competent authorities could continue to rely on their dedicated channels to access the registers in their investigations, but the compliance officers of the “obliged entities” saw their activity severely undermined by the inability to access the beneficial ownership information of their corporate clients.
This issue was addressed by some EU member states that host significant financial centres, such as Luxembourg and Cyprus. In Luxembourg, the authority in charge of the UBO register established a procedure as early as December 2022 [7], where each “obliged entity” must enter into a contractual agreement with the register and formally undertake to access its information only for customer due diligence purposes. In Cyprus access continues to be granted to the obliged entities provided that each application is accompanied by a solemn declaration that it is being made in the performance of customer due diligence.
Reactions To The ECJ Decision: (2) Unrestricted Public Access To UBO Registers Remained In Place
Not all the EU member states reacted in the same way to the ECJ decision that public access to the UBO registers is unlawful. France and some Nordic countries have maintained their UBO registers on-line where they can still be fully accessed by everybody for free.
As early as 19 January 2023 the French Ministry of Finance issued a communiqué explaining that while in-depth analysis is being conducted on the implications of the ECJ decision, the UBO register remains open to the general public for the sake of transparency.
This is a direct challenge to the ECJ construction of EU law, which should be binding on all the EU member states and could justify an infringement proceeding but the French press expressly ridiculed this very proposition [8].
Reactions To The ECJ Decision: (3) Journalists Have A Legitimate Interest By Definition
A reasonable consequence of the ECJ decision of 22 November 2022 should be that the approach under the 4th AML Directive was the correct one. UBO registers are a useful tool in the fight against money laundering and they should be accessed by the competent authorities, by the obliged entities for the purposes of their customer due diligence, as well as by everybody that can demonstrate a legitimate interest to that effect.
The European Parliament advanced a political view that certain people, and particularly journalists, non-profit organisations, and academics should be deemed to have a beneficial interest in their own right [9].
This position is likely to be considered in the expected EU legislation that will harmonise the treatment of UBO registers across the Union. In the meantime, it found its way in the Austrian law amending the local UBO register and making it accessible to journalists, civil society organisations, and academics. This new system has come into force in Austria on 1st August 2023.
What Next?
The ECJ decision of 22 November 2022 was undoubtedly a “path breaker” in the tension between transparency and privacy. More significantly, it was a salutary reminder that the rule of law and fundamental human rights such as privacy must supersede the political fashion of the time.
A new piece of legislation is expected and will create a level playing field in the ways UBO registers can be accessed. It is difficult to predict which of the approaches referred to above will prevail. The new composition of the European Parliament after the 2024 elections will certainly have a bearing on its political choices.
The USA is also enacting a non-public UBO register at the federal level under their Transparency Act, and a similar legislative initiative is under way in Switzerland.
The legal and technical basis for unrestricted public access to these registers is questionable, but the political pressure for transparency in certain countries appears to trump all human rights concerns.
1 Companies Act 2006, s 116 - 117
2 Companies Act 2006, s 790P.
3 [2014] EWCA Civ 604.
4 [2015] EWHC 22.
5 Companies Act 2006, s 853I.
6 ECJ decision, para 62 “Accordingly, the principle of transparency, as it results from Articles 1 and 10 TEU and from Article 15 TFEU, cannot be considered, as such, an objective of general interest capable of justifying the interference with the fundamental rights guaranteed in Articles 7 and 8 of the Charter, which results from the general public’s access to information on beneficial ownership”.
7 Luxembourg, LBR Circular 22/01.
8 Le Monde, 1st September 2023.
9 https://www.europarl.europa.eu/news/en/press-room/20230327IPR78511/new-eu-measures-against-money-laundering-and-terrorist-financing
Paolo Panico
Paolo Panico is a solicitor in Scotland and a director of Private Trustees SA, an independent trust company in Luxembourg, and of Teton Trust Company LLC, a regulated trust company in Wyoming (USA). Paolo is chairman of the STEP Europe Region and a member of the Council and Board of STEP Worldwide as well as deputy chairman of the International Tax Planning Association (ITPA). Paolo teaches at the Master in Wealth Management of the University of Luxembourg and at the LLM of the University of Liechtenstein. His publications include: Private Foundations. Law and Practice (Oxford University Press, 2014), International Trust Laws, 2d ed (Oxford University Press, 2017), and as editor Beneficial Ownertship Registers: The STEP Handbook for Advisers (Globe Law and Business, 2021) and Trust Laws in Cyprus: An International Perspective (Globe Law and Business, 2022).
