Complexity of Beneficial Ownership Rules in European Union’s New AML Regulations

On January 18th, 2024, the European Council and Parliament agreed on the new Anti-Money Laundering Rules, bringing a harmonised approach to fight money laundering and terrorist financing in 27 countries' block.

New rules have garnered attention for reasons like expanding the list of obligated entities to most crypto sectors,? professional football clubs and agents, and traders of luxury goods such as precious metals, precious stones, jewellers, horologists, and goldsmiths.?

These AML rules also introduce enhanced due diligence measures for cross-border correspondent relationships for crypto-asset service providers and credit and financial institutions handling large amounts of assets for high net-worth individuals.?

One of the distinguishing features of the new AML rules is the clarification regarding the determination of beneficial ownership and accessing that information through beneficial ownership registers.? While these rules may bring transparency, they may pose some implementation challenges.

Here are the key features of Ultimate Beneficial Ownership in New AML Rules:

Definition of Beneficial Ownership:

• Beneficial ownership, as defined in the provisional agreement, pertains to individuals who effectively control or derive benefits from the ownership of a legal entity, such as a company, foundation, or trust, even if the legal title or property is held under another name.

Components of Beneficial Ownership:

• The agreement outlines two essential components of beneficial ownership - ownership and control.
• Both components must be scrutinized to identify all beneficial owners of a legal entity or across different types of entities, including non-EU entities conducting business in the EU or acquiring real estate in the EU.

Threshold for Beneficial Ownership:

• Additionally, the agreement establishes the threshold for beneficial ownership at 25%.

Clarification on Related Rules:

• Furthermore, the agreement addresses rules related to multi-layered ownership and control structures, ensuring that concealing ownership through multiple layers of companies is no longer viable.
• Concurrently, data protection and record retention provisions are clarified to streamline the work of competent authorities, making it more efficient and expeditious.

Implications of New AML Rules in Determining Ultimate Beneficial Ownership

Addressing the challenges in determining business ownership is critical to the recent regulation because, according to statistics issued by the EU, 80% of active criminal networks exploit complex business ownership structures for illicit activities.

The European Union is home to some of the world’s leading investment hubs with lucrative opportunities in business sectors including real estate, often attracting criminals looking for ways to legitimise their ill-gotten wealth.?

?In July 2023, OCCRP revealed that “France’s abundance of high-end property, particularly in Paris and on the French Riviera, make it an attractive destination for dirty money. While the country has relatively open property registries, anti-corruption advocates say lax enforcement and loopholes still make it possible to use French real estate purchases to launder money and hide illicit funds.

As a result, over two-thirds of French real estate owned through companies is held anonymously, Transparency International and the Anti-Corruption Data Collective said in a report based on available data on French company and real estate ownership.”

A definition of what constitutes business ownership, including threshold shareholding stake of 25% and parameter of significant control indeed gives clarity on ownership determination criteria, but the process of determination could be difficult considering how complex ownership structure is often used to shield the original beneficiary and available information could not be sufficient enough.

For financial institutions and businesses determining accurate UBO (Ultimate Beneficial Owner) of client and counter-party,? is necessary, to comply with sanctions screening requirements, Anti-money laundering rules, and ESG (Environmental, Social, and Governance) requirements.?

This becomes more essential when governments introduce stricter regulations such as doing supply chain due diligence to ensure that sanctioned and banned entities don’t use third parties to avoid screening.

The real challenge is that obligated entities may not always be available with enough “Good-quality” data to determine who is the ultimate beneficial owner of the client business or counter-party?

Businesses within European Unions complying with UBO regulations, may file necessary information (according to new rules ) in UBO registers of their countries, but what about the businesses in non-EU jurisdiction? This is because the new regulations clarify that ownership and control need to be analyzed to identify all the beneficial owners of that legal entity or across types of entities including non-EU entities when they do business in the EU or purchase real estate in the EU.?

UBO registries of the EU may not be sufficient for businesses in the EU when businesses need to determine ownership of non-EU counterparts.

Furthermore, UBO determination requirements under new EU AML Rules, are about one jurisdiction only, other jurisdictions have their requirements.?

Poor data quality, due to available data not matching the requirements stipulated in laws, inhibits the accurate identification and verification of beneficial owners.? Insufficient, outdated, or erratic beneficial ownership information makes screening challenging.?

Businesses need help assessing the multi-layered control and ownership, which is crucial in scrutinising the persons with significant control as part of the AML obligations.? It calls for extra vigilance and awareness about the partner ownership tree before business onboarding.??

It is a pressing priority for the business world to establish a practical framework for a comprehensive and trustworthy business verification process. A multi-pronged mechanism is recommended, which combines multiple registries and provides swift access to the Business Information, explicitly defining the ultimate beneficial owners, according to requirements set in AML rules as in the case of the European Union.?

This implies that any tool helping businesses in the determination of who owns the client and partner entity must be able to offer a 360-degree overview so that businesses can go international without worrying about non-compliance with sanctions or ESG regulations, only because they cannot know who owns the partner entity due to lapses in official data points.