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December 12, 2022

Is this the beginning of the end for beneficial ownership registers?

By Robert Jackman

A bombshell decision on beneficial ownership registers from the EU’s top court has raised questions over the future of corporate transparency across the continent – and potentially in Britain too.

The EU-wide adoption of beneficial ownership registers – which provide public information on company ownership – had been a flagship policy of Brussels’ most recent anti-money-laundering directive.

The new regime was intended to crack down on the misuse of shell companies, given the abuses exposed by the explosive Panama Papers.

Yet, less than two years on from the implementation date, a shock ruling by the European Court of Justice has questioned the legality of the legislation.

The ruling draws on two cases from Luxembourg, in which plaintiffs argued that public access to beneficial ownership registers breached their privacy rights under the EU Charter.
The case challenging public-access Beneficial Ownership Registers was heard at the District Court of Luxembourg

One claimant argued that making the information public and available via internet search engines had put him at heightened risk of kidnap, harassment and extortion.

In a groundbreaking judgement on WM and Sovim SA v. Luxembourg Business Registers, the Court upheld the claim that public access did indeed constitute ‘serious interference’ with citizens’ privacy rights.

The decision is highly unlikely to outlaw beneficial ownership registers in their entirety – but rather heralds the end of unconditional public access.

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Role of beneficial ownership registers in fighting corruption

A key aspect of the ruling is that it makes clear that the Court recognises the right of access to company ownership information among those with a ‘legitimate interest’.

‘I have always thought that public registers were an excessive response to the aims of the anti-money-laundering directive,’ says James Quarmby, a private wealth lawyer at Stephenson Harwood.

‘It turns out quite a few people in the EU agreed with that view.’

While EU lawmakers say they will revisit the directive to ensure compliance with privacy rights, some member states have acted unilaterally.

States including Austria, the Netherlands, Belgium and Ireland have now suspended their beneficial ownership registers – potentially to avoid a similar legal challenge.

Anti-corruption campaigners have been equally speedy in their response, with Transparency International saying the Court’s ruling undermines the fight against kleptocracy.

They have also pointed to the role of public access in exposing high-profile scandals across the continent – including the alleged fraudulent activities of former Czech prime minister, Andrej Babis.

UK ‘cannot ignore’ European judgement on beneficial ownership registers

But what could the decision mean for the UK, given its new-found independence from the EU?

‘The UK is not bound by the EU Court anymore, but it cannot ignore the judgement,’ says James Quarmby.

He points out that the legal basis for the decision stems from Article 7 of the EU Charter, which is a ‘carbon copy’ of Article 8 of the ECHR.

The UK remains a signatory to the ECHR, whose provisions are reproduced in the 1998 Human Rights Act.

As a result, Quarmby says the decision could undermine the legality of the UK’s PSC (People with Significant Control) register.

Rishi Sunak
The ruling came with the British government’s Economic Crime Bill at committee stage

Introduced in 2016, the register requires UK companies and LLPs to provide information on all people who hold ‘significant control’ over them.

He also predicts that the judgement will have consequences for the UK’s efforts to bring overseas territories in line with its own standards.

‘The overseas territories and crown dependencies have promised to introduce public registers by 2023,’ he says.

‘But I think they can now rescind those promises given the high likelihood that to do otherwise would breach the Human Rights Act.’

Likewise, the UK government would also be unable to use the relevant provisions of the 2018 Sanctions and Anti-Money Laundering Act to force those same territories to act.

In any event, the Sovim decision arrives at a less than ideal time for Downing Street, given the passage of the new Economic Crime Bill – and the government’s related pledge to overhaul Companies House.

Yet legal experts dismiss the suggestion that the ruling could derail this work entirely.

Still a place for beneficial ownership registers – with right resources?

‘The UK government has repeatedly stated that it wants the UK to be a place where legitimate businesses can thrive while keeping dirty money out,’ says Fladgate partner Kate Troup.

‘This is possible without having public access to registers of beneficial owners, as long as Companies House, the National Crime Agency and other government bodies have the appropriate resources to analyse the data in the registers and take steps to pursue domestic and overseas criminals.’

‘Even if parts of the UK company registers become closed to the public it is highly likely that the government will proceed with the planned reforms to enable Companies House to act as a more effective gatekeeper and custodian of accurate data about companies, their owners and directors.’

With EU lawmakers set to go back to the drawing board, Whitehall can at least look to their inspiration when it comes to striking the delicate balance between transparency and privacy.

Following Brussels’ lead might not seem like a natural path for post-Brexit Britain. On this occasion, it may prove the only one available.

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