The Importance of Beneficial Ownership Transparency Standards for Georgia and International Trends

News | FIGHTING CORRUPTION | Open Government 31 July 2023

The Importance of Beneficial Ownership Transparency Standards for Georgia and International Trends

 

Transparency of beneficial (final) owners is an important mechanism for preventing corruption. In recent years, journalists and civil monitoring groups drawing attention to the lack of transparency in this area has made the issue all the more pressing. At the same time, it has become clear that tax evasion and concealment of real owners is not merely a stand-alone financial crime but indicates the presence of corruption and a multilayered chai of money laundering, which brings significant harm to a society.

 

According to the definition by the Financial Action Task Force (FATF), beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

 

Countries use a variety of approaches to identify beneficial owners. Owners are recognized according to specific percentile shares they own, their voting rights, or their ownership of property. For example, according to the Fourth EU Anti-Money Laundering Directive, Common Reporting System (CRS), and Automatic Exchange of Information (AEOI), a natural person who owns a 25% (or over 25%) share of a company will be considered a beneficial owner. According to the amendments to the same Directive (AMLD4) made in 2015, EU member countries are required to create a register of beneficial owners.

 

In 2018, the Fifth EU Anti-Money Laundering Directive (AMLD5) was approved, which additionally obliges member states to make existing registers public and provide access to them to any interested person.

 

However, on 22 November 2022, the Court of Justice of the European Union declared it imprudent to have unrestrained access to information on beneficial ownership, stating that this was not compatible with Articles 7 (Respect for private and family life) and Article 8 (Protection of personal data) of the EU Charter of Fundamental Rights. According to the Court’s decision, the mentioned practice is in opposition to fundamental human rights and exceeds the scope of the purpose of the register of beneficial owners. At the same time, noteworthy is the provision contained in paragraph 74 of the Court's opinion, according to which "the press, as well as civil society organizations working on issues related to the prevention of money laundering and terrorist financing, have a legitimate interest in accessing information on beneficial owners".

 

Beneficial Ownership Transparency in Georgia

 

For Georgia, as a transitional democratic country, beneficial ownership transparency is a particularly relevant issue. The primary normative act in the country in this area is the Law of Georgia “On Facilitating the Prevention of Money Laundering and the Financing of Terrorism”, based on which responsible persons and supervisory bodies are able to know who is behind a specific business entity.

 

Georgia is a member of the Open Government Partnership (OGP). OGP member countries, including Georgia, have established Open Governance Inter-Agency Coordination Councils with members from government and civil society organizations. IDFI, along with other civil society organization members of the Council, addressed the Georgian government and its Administration multiple times regarding the creation of a register of beneficial owners (as well as membership in EITI), but the Georgian government has not demonstrated a willingness to recognize and implement this obligation.

 

At this time, in the absence of a unified register of beneficial owners in Georgia, information regarding beneficial owners is only available online in the cases of the activities of commercial banks, the broadcasting sphere, and certain large companies.

 

According to a report published by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – MONEYVAL in November 2020, which was evaluating Georgia’s compliance with the recommendations given to the country by the Financial Action Task Force (FATF) in 2012, out of 40 recommendations, the country has fully implemented 6 recommendations, mostly implemented 21, partially – 12, while one recommendation remained unfulfilled. 2022 also saw the publication of the follow-up report on the implementation progress of 4 specific recommendations (22, 28, 29, and 35), and as a result, recommendation 29 was evaluated as mostly implemented.

 

The topics of transparency and beneficial ownership are addressed in recommendation 24, and in relation to this recommendation, MONEYVAL recognized several gaps in Georgia. Specifically, according to the report, the risks related to legal entities in Georgia have not been analyzed in full. At the same time, the report points out that the mechanisms for acquiring information on beneficial owners does not guarantee the provision of precise and updated information. These mechanisms are also unable to ensure the designation of an authorized person who would be responsible for storing information on beneficial owners and accountable to the government. In addition, the report highlights the absence of a mechanism for the prevention of abuse of ownership of nominal shares in LLCs.

 

MONEYVAL’s report issued a recommendation to Georgia with regard to beneficial ownership transparency to study existing systems and take measures to ensure that appropriate, precise, and updated information about beneficial owners is always available in a timely manner to the competent bodies. The assessment team considered a centralized and systematized database on beneficial owners to be one of the most effective measures for resolving this issue.

 

The Venice Commission also called on the Georgian government to take steps to implement MONEYVAL and FATF recommendations, including with regard to accessibility of information on beneficial owners. The conclusion of the Opinion on the Draft Law on De-oligarchisation reads that in order to fight the concentration of power in the hands of one person, interrelated legislative, administrative, economic, and other measures have been developed and are in effect in the majority of countries. Among such measures are an effective competition policy, anti-corruption and anti-money-laundering measures, measures to ensure media pluralism, rules on the financing of political parties and election campaigns, etc.

 

For the accessibility of information on beneficial owners, it would be best to integrate it into the public register system, where citizens will be able to obtain information about entrepreneurial and non- entrepreneurial legal entities, including partners of registered entities. For maximum effectiveness, it is important for the data to be available in an open format, in accordance with internationally recognized standards, to ensure that the register is compatible with other registers, as well as other countries’ analogous registers, and to ensure that journalists and the civil society have opportunities to conduct monitoring activities.

 

Standards for Register of Beneficial Owners

 

The Financial Action Task Force (FATF) recommendations are the most widespread and proven standards for collecting and processing data on beneficial owners. The FATF is an intergovernmental body of 39 member states that sets international standards for the prevention of money laundering, drug trafficking, arms trafficking, cyber fraud, terrorist financing, and other serious crimes. Currently, more than 200 countries and jurisdictions have committed to implementing various FATF standards.

 

Specifically, the 24th recommendation of the FATF concerns the transparency of beneficial owners, although it should be noted that these standards are of a general nature. A more detailed breakdown in this regard is offered by the Beneficial Ownership Data Standard (BODS) of Open Ownership (OO), which defines a common data format and provides a consistent method for collecting, processing, exchanging, and publishing beneficial ownership information. A non-exhaustive list of the main categories, subcategories, and components of beneficial owner data is shown in this table in accordance with the BODS standard, with a complete technical guide available on the Open Ownership website itself.

 

Deliberation and Conclusion of the Court of Justice of the European Union

 

Two lawsuits have been filed with a court in Luxembourg by a Luxembourg company and its beneficial owner seeking to restrict public access to beneficial owner registers. The court rejected the claim, following which the case went on to the European Court of Justice, which recognized the open access to information on the beneficial owners as unlawful, finding it to be inconsistent with Article 7 (Respect for private and family life) and Article 8 (Protection of personal data) of the EU Charter of Fundamental Rights.

 

According to the Court's decision, obtaining information about beneficial owners must be justified by “legitimate interest”, as prescribed by AMLD4. AMLD5's repeal of this provision and full disclosure of the registers was based on the European Commission's argument that the concept of legitimate interest is vague and difficult to interpret. However, the Court states that the difficulty of interpreting the statutory term "is not a sufficient basis for an obligation under EU law to ensure public access to this information" (paragraph 72).

 

The Court also addresses the issue of media and civil society organizations, stating that "the press, as well as civil society organizations working on issues related to the prevention of money laundering and terrorist financing, have a legitimate interest in accessing information about beneficial owners" (paragraph 74). This indicates that the Court's decision cannot become a basis for restricting access to information for investigative journalists and civil society organizations, although it is expected that, in practice, access to data on beneficial owners will become procedurally more difficult.

 

Response

 

The European Parliament's Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice, and Home Affairs jointly announced that the registers of beneficial owners in member states should immediately be opened to journalists and civil society organizations. The European parliamentarians also requested to ensure the mutual compatibility of the registers of the member states and to adopt a unified access framework (in case of confirmation of legitimate interest, the right of access should be extended to the registers of all the member states).

 

In addition, on 28 March 2023, MEPs of the European Parliament's Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs voted and supported a new legislative package against money laundering and the financing of terrorism, which serves to strengthen efforts in this direction and includes three main initiatives, specifically:

 

- The "Single EU Rulebook", which includes provisions on due diligence practices, transparency of beneficial owners, and the use of anonymous financial instruments (crypto-assets and new entities such as so-called crowdfunding platforms).

 

EU Sixth Directive on Anti-Money Laundering and Countering the Financing of Terrorism (AMLD6), which includes contains provisions on national supervisory and financial intelligence units, as well as guarantees for competent authorities to have access to necessary and reliable information, including registers of beneficial owners. It additionally includes a new obligation to create real estate registers taking into account beneficial ownership information and provides additional responsibilities and powers for the authorities responsible for beneficial ownership registries to ensure verification of beneficial ownership information. The new directive also defines specific tasks for national Financial Intelligence Units (FIUs) and establishes a framework for cooperation between them.

 

- The initiative to establish a European Anti-Money Laundering Authority that will have oversight and investigative powers and authority in all EU member countries.

 

Another issue that the civil sector is actively advocating to be considered in AMLD6 is the concept of legitimate interest, which had many flaws in the framework of the Fourth Directive (which became the reason for the subsequent universal access obligation in the Fifth Directive). Firstly, all Member States used different criteria to determine legitimate interest. An entity may have been recognized as having a legitimate interest in one country and gain access to the relevant register but not in others. Civil society organizations, international organizations, and experts in the field have requested in an open letter that AMLD6 include concrete and uniform measures and safeguards to prevent abuse of such discretion. The open letter also focuses on protecting the privacy of the users of the registers. As beneficial owner registries in the EU are likely to revert to a user registration regime, AMLD6 must ensure that data on access to information on beneficial ownership is not shared with companies or their beneficial owners under any circumstances. This is necessary, on the one hand, to ensure that suspicious companies are not able to react, and on the other hand, to prevent any pressure on investigative journalists.

 

Conclusion

 

At the moment, Georgia still has not fulfilled a significant part of the international commitments taken in the area of combating money laundering, including measures to address the transparency of beneficial owners. At the same time, the issue becomes even more urgent against the background of the growth of legal entities registered by Russian citizens in recent years, which requires a sharp response to ensure maximum transparency of their funding sources and activities.

 

The existing legislative framework of Georgia is not sufficient to respond to current challenges. Taking into account international standards, it is important to create a unified register, including data collection, processing, and storage in an open format to ensure that in the future the register will be mutually compatible and allow the exchange of data with similar registers of other countries.

 

The decision of the ECJ will undoubtedly have a large-scale impact on ongoing global processes in the area of transparency of beneficial owners. Some impact is expected to spread indirectly outside of Europe, to countries that are not subject to the ECJ's jurisdiction and are currently working to transform but develop legislation to promote beneficial owner transparency.

 

Although the decision of the ECJ considers the publicity of the registers unlawful, it should not become the basis for restricting the media and civil society organizations from accessing information, since the Court itself recognizes and notes the "legitimate interest" of these entities, and at the same time, the EU member states actively work on developing appropriate frameworks to ensure with free access to databases for individuals with such legitimate interest.

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