It is common practice across the globe that anonymous shell companies are formed to hold funds or conduct financial transactions to disguise money trail of wealth accumulated through illegal activities.

Though the formation of shell companies is not illegal, however, protection provided to owners of shell companies through secrecy laws creates difficulties for law enforcement agencies to trace their illegally obtained assets and invoke relevant legal provisions to punish them for their unlawful activities.

Shell companies have no physical address, employees, business operations or real assets. Due to the high level of secrecy, they facilitate criminals, terrorists, and money launderers for concealing their illicit proceeds.

The only way forward to get access to these shell companies is disclosure of their beneficial ownership along with individuals’ bank accounts in secret jurisdictions.

Law enforcement agencies consider hurdles in obtaining such information as primary obstacles in tackling financial crimes.

As we have highlighted in ‘New FATF guidelines: Shell companies and beneficial ownership’ [Business Recorder, March 17, 2023] that in March 2022, Financial Action Task Force (FATF) members agreed to introduce strict guidelines related to beneficial ownership by amending FATF recommendation 24 to make sure that competent authorities have access to, and updated information on true ownership of companies in the hope that this step would help prevent organized criminal gangs, corrupt and sanction evaders from using anonymous shell companies to stash their dirty money and camouflage illicit activities.

Subsequently, on March 2022, FATF issued comprehensive guidelines on ‘Beneficial Ownership of Legal Persons’ revising Recommendation 24 that requires all jurisdictions to provide access to beneficial ownership registry or it’s like to public authorities.

The watchdog expects that this step would help identify real owners of shell companies and trace illegally obtained assets.

However, revision of FATF recommendation 24 regarding disclosure of beneficial ownership is not something which seems opposed to the decision of the Court of Justice of the European Union pronounced in the joint cases C-37/20/Luxembourg Business Registers (LBR) and C-601/20.

Decision of the tribunal d’arrondissement de Luxembourg (Luxembourg District Court, Luxembourg) as reported in the press release that two actions brought by a Luxembourgish company and by the beneficial owner of such a company, respectively, which had previously unsuccessfully requested LBR to restrict the general public’s access to information concerning them.

Since that court considered that the disclosure of such information is capable of entailing a disproportionate risk of interference with the fundamental rights of the beneficial owners concerned, it referred a series of questions to the Court of Justice for a preliminary ruling concerning the interpretation of certain provisions of the anti-money-laundering directive and the validity of those provisions in the light of the Charter of Fundamental Rights of the European Union (‘the Charter’).

While deciding the case, the Court held: “In the light of the Charter, the provision of the anti-money-laundering directive whereby Member States must ensure that the information on the beneficial ownership of corporate and other legal entities incorporated within their territory is accessible in all cases to any member of the general public is invalid.

The Court further stated that the general public’s access to information on beneficial ownership constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data, enshrined in Articles 7 and 8 of the Charter, respectively.

Indeed, the information disclosed enables a potentially unlimited number of persons to find out about the material and financial situation of a beneficial owner.

Furthermore, the potential consequences for the data subjects resulting from possible abuse of their personal data are exacerbated by the fact that, once those data have been made available to the general public, they can not only be freely consulted, but also retained and disseminated”.

The court held that the legislature thereby pursues an objective of general interest capable of justifying even serious interferences with the fundamental rights enshrined in Articles 7 and 8 of the Charter of fundamental Rights of the European Union, and that the general public’s access to information on beneficial ownership is appropriate for contributing to the attainment of that objective.

Though the decision of the court is to deny the general public access to beneficial ownership to avoid its misuse or violate privacy but it does not bar the same where it is appropriate to share the information for attainment of specific objectives.

Similarly, the United States came under review by FATF in 2016 mutual evaluation report that identified the gaps related to timely access to adequate, accurate and current beneficial ownership information to combat money laundering and terrorist financing.

In response to the requirement of FATF, the United States has introduced the Corporate Transparency Act of 2019 (CTA) that addresses this challenge by requiring companies to disclose beneficial owners’ details to Financial Crimes Enforcement Network (FinCEN) when the company is formed and in its annual filings.

The final rule related to beneficial ownership would be implemented by January 2024 according to which, FinCEN’s database of beneficial ownership information would be available to law enforcement agencies and, with customer consent, to financial institutions for purposes of complying with their ‘‘Know-Your-Customer’’ regulatory requirements.

The CTA’s disclosure requirements define beneficial owners as including all-natural persons who exercise substantial control over a company, own 25% or more of the equity interests of a company, or receive substantial economic benefits from the assets of a company.

The CTA further requires applicants seeking to form a corporation or a limited liability company to file a list of its beneficial owners with FinCEN at the time the company is formed requiring that list of beneficial owners must include the same information that financial institutions are required to collect under FinCEN’s Customer Due Diligence (CDD) rule i.e., the full legal name, date of birth, current residential or business address, and a current identifying number, such as a driver’s licence or passport number, for each beneficial owner.

The CTA also expects companies to file annually with FinCEN a list of its current beneficial owners, as well as a list of any changes in beneficial ownership that may have occurred during the previous year. Since the data privacy laws of the United States are very strict, leakage/sharing of data without requiring consent is considered seriously.

The CTA also ensures that data of beneficial ownership is not misused therefore, privacy is protected requiring FinCEN to oversee access and appropriate use of beneficial ownership information by eligible law enforcement agencies.

Policy safeguards explained in the law that outline protocols through which law enforcement agencies can access FinCEN’s beneficial ownership information by adhering to the following:

• Protect privacy of any beneficial ownership information.

• Ensure that any law enforcement agency requesting beneficial ownership information from FinCEN has an existing investigatory basis for its request.

• Ensure that only authorized users at law enforcement agencies (who have undergone appropriate training) are permitted access to database and that their authorized user status is verified through appropriate mechanisms such as two-factor authentication.

• Include an audit trail of every law enforcement agency’s request for beneficial ownership information; and

• Require annual audits by FinCEN and by each law enforcement agency that has access to the beneficial ownership database, to ensure that those agencies are using the beneficial ownership information appropriately.

Violation and misuse of provisions of CTA attract strict criminal penalties. Since the European Court has already passed instructions that open public access to the beneficial owner registers of EU member state companies is no longer valid, as it is in contravention of Articles 7 and 8 of the Charter of the Fundamental Rights of the European Union, disclosure of such information is appropriate under certain circumstances.

Cautionary steps contained in the CTA can be the guiding principles for EU countries to comply with FATF recommendation 24.

(Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023