Just as the Panama papers reveal the mayhem that can be caused by secret shell companies, the European Union is set to relax ownership transparency requirements for shell companies in its forthcoming Fourth Anti-Money Laundering Directive.
The Tax Justice Network is calling for the European Parliament, the European Commission and the Heads of State of European Union Member States to address three serious shortcomings in the fourth European Anti-Money Laundering Directive (2015/849,) a common European framework designed to establish an EU-wide approach to preventing the laundering of the proceeds of crime. It is scheduled to come into force by mid-2017 across the European Union.
Unless the proposed rules are tightened, shell company abuses will become easier in Europe.
The common thread in the Panama Papers is secrecy, enabling perpetrators to launder illicit proceeds of corruption, tax evasion, drugs money and much more. In order to escape law enforcement, they depend on secrecy — very often through using shell companies, trusts and foundations available in most countries worldwide. Intermediaries such as lawyers, notaries, family offices and banks help create and handle those structures.
In 2005 (2005/60), the rules for identifying the owners of offshore companies who seek to open accounts, hold shares or buy property in the European Union included rules to identify the real owner(s) of offshore companies — the so-called “beneficial” owner(s).
According to the existing rules from 2005, a beneficial owner in the European Union has to be the ‘natural person' actually controlling the legal entity, no matter how many lawyers of nominees, shell companies or trusts are placed in between (see Article 3.6, on page 8). So a Panama or British Virgin Islands company has to reveal its real beneficial owners to the relevant EU banks, lawyers and notaries involved. Failing to comply with those obligations (by, for example, recording a nominee director instead,) is sanctioned, and can be a criminal offence.
Now, the European Union in its 2016 amendments under the 4th Anti-Money Laundering Directive propose adding an exception to this requirement for all legal entities.
The incoming rules contain an ambiguity that will invite abuses, allowing an exception where the bank, notary or lawyer can record (instead of the true beneficial owner) the “natural person(s) who hold the position of senior managing official(s)” (see Article 3.6.a.ii, on page 14).
Of course these “senior managing officials” could be nominee directors — the bread and butter of secrecy: they are a shield between the companies (and the assets they hold); and the real beneficial owners. These nominees sometimes manage of thousands of shell companies each — and under the incoming rules they can be defined across the European Union as the beneficial owners.
Furthermore, the fourth Anti Money Laundering Directive contains some good news: it will create registries of beneficial owners of shell companies. However, in November 2014 Germany's government (together with Malta and Cyprus) opposed a mandatory provision to publish this new registry's data, even against the more progressive positions of the UK, French, Italian and Spanish governments. Publication is only permitted, not mandatory. The UK and Netherlands have agreed to a public registry, but many governments including Germany will preserve the veil of corporate secrecy in Europe — and across the World.
Last but not least, the current Directive suffers another major loophole: while foundations are covered by the new mandatory registration of ownership, trusts (the Anglo-Saxon cousins of foundations) have been excluded. As was revealed on 7 April 2016, British Prime Minister David Cameron intervened personally in 2013 to stop offshore trusts from being included in EU proposals for a crackdown on tax avoidance. These structures can be used to cause the same or even worse damage as shell companies.
John Christensen said:
“We have always said that any registry of beneficial ownership must include offshore companies, trusts and foundations. To fail to do that would simply result in a stampede towards any vehicles not included in public registry. It's not rocket science.”
Alex Cobham, Director of Research at TJN, said:
“Politicians across the world who are welcoming the Panama Papers have to realize that they don't need to rely on lucky leaks. They can simply close their markets — where all the real economic activity takes place — to any entity from a jurisdiction that does not freely publish registers of beneficial ownership. Pretty soon, you'd find those jurisdictions turn themselves around.”
Andres Knobel, a consultant at TJN, said:
“The current EU plans are a huge missed opportunity and would exacerbate the impact of offshore secrecy across Europe. We have to remind our political leaders that the people want public transparency, not more of the same institutional corruption.”
Nicholas Shaxson said:
“Why should we allow masked offshore investors to undermine the integrity of our economies? If you are going to set up legal entities in Europe, then it should be clear who owns them so that crime-fighters can do their jobs.”
Liz Nelson, a director of TJN, said:
“After Panama Papers, we have to let go the naïve notion that anonymous private companies serve any legitimate purposes. These shell companies are like weapons, and if we cannot control their producers, we must ensure tight regulation of their owners”.
Markus Meinzer said:
“The EU has already planned to reopen the Directive in the 2nd Quarter of 2016 in order to beef up anti-terror financing provisions after the disastrous recent attacks. Surely the scale and system of abuse revealed through Panama Papers warrants to add crucial public transparency to this proposal”.
Notes to editors:
We are an independent international network focused on tax justice: the role of tax in society, and the role of tax havens in undermining democracy, boosting inequality and corrupting the global economy. We seek to create understanding and debate, and to promote reform, especially in poorer countries. We are not aligned to any political party.
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The “senior managing official(s)” backdoor shows how much reluctance there is at the level of the decision makers (national and federal) to fully commit to dealing with tax avoidance.
The pressure on them from the professional institutions and individuals who benefit from the missing millions and billions must be immense. It’s a lot of cash you can no longer cheat your way to.
I’m not sure how much impact it will have on the real rogues in countries where corruption is widely expected, though. I suspect there will more like billionaire cellist, and great friend of Vlad Putin, Sergei Roldugin.
While I agree with this and do not dispute the rightness of fair and balanced tax policies, it is my fear that the war is lost. So just what forms of tax or money raising will governments resort to? We ought to start worrying about this and the potential consequences for the future.
Someone has just referred me to a letter of Engels from 1892:
” For the rest, Americans have for some time been providing the European world with the proof that a bourgeois republic is a republic of capitalist business men in which politics are only a business deal, like any other; and the French, whose ruling bourgeois politicians have long known this and practised it in secret, are now at last also learning this truth on a national scale through the Panama scandal. In order, however, that the constitutional monarchies should not be able to give themselves virtuous airs, every one of them has his little Panama: England the scandal of the building-societies, one of which, the Liberator, has thoroughly “liberated” a mass of small depositors from some £8,000,000 of their savings; Germany the Baare scandals and Löwe Jüdenflinten (which have proved that the Prussian officer steals as he always did, but very, very little–the one thing he is modest about), Italy the Banca Romana, which already approaches the Panama scale, about 150 deputies and senators having been bought up; I am informed that documents about this will shortly be published in Switzerland-Schlüter should look out for everything which appears in the papers about the Banca Romana. And in holy Russia the old Russian Prince Meshchersky is indignant at the indifference with which the Panama revelations are received in Russia and can only explain it to himself by the fact that Russian virtue has been corrupted by French examples, and “we ourselves have more than one Panama at home.”
Belle Epoque V.2?
As a result of this latest item from you I have just subscribed to the Tax Justice Network. Many thanks.
Richard, not sure I understand even my own point but I’m going to try to make it, please bear with. About the crash, could the offshore total which surely is massive if not quantifiable (taken out of economies that fell to the crash) have significantly cushioned overall liquidity at the time to have stopped or part-stopped the effect of 2008? Other matters also arise such as wondering whether individual bankers who directly contributed to the crash and consequently had lucrative careers and big bonuses resurrected for them by state bail-out could ironically have had big personal amounts of cash stashed offshore all through events that brought (bring!) the state squeezing the poor and the middle.
I feel confused and somewhat confess to a nervous naivety in asking, but sense that the extent may even shock many of us who are prepared even not to be shocked. I have just read this 2002 Guardian article http://www.theguardian.com/money/2002/may/25/tax.politics and what smacks between the eyes (including New Labour getting big donations from the avoidance mob) is 1) how bad it’s been for so long 2) it’s easy to see how financial influence with government enabled deregulation that enabled the crash.
I worked on this issue from 2002
No one did before we began the TJN – it was just unknown
Anyone would think the EU was a vehicle of the neoliberal global elite.
It makes you wonder how many times developing countries have been denied the taxes rightly owed to them by multinational companies operating in their jurisdictions, when you read this story (which has got a bit lost with the Cameron political battle going on).
Just goes to show the whole system is completely screwed up!
http://www.bbc.co.uk/news/world-africa-35985463