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By Joe Kirwin
Pending European Union plans to establish beneficial ownership public registries for companies and commercial trusts in order clamp down on tax evasion face rejection among EU member states because of data protection concerns.
Ahead of a Dec. 20 meeting of member states, EU diplomats—and documents seen by Bloomberg BNA—indicate that the transparency amendments to the EU Anti-Money Laundering Directive have been dropped from the legislation. This is understood to be part of a compromise drawn up by Slovakia, which holds the rotating EU presidency.
The plans to establish public registries were proposed in the wake of the Panama Paper revelations.
Originally proposed in July by the European Commission, Slovakia’s revised legislation calls for “a coherent legal framework that ensures better access to information regarding beneficial ownership of trusts and similar legal arrangements once they are registered across the Union.”
The Slovakian EU presidency hopes to forge an agreement Dec. 20 among EU member states.
New compromise text states that “rules that apply to trust and similar legal arrangements in respect to access to their beneficial ownership information should be comparable to the corresponding rules that currently apply to corporate and other legal entities.”
The compromise legislation, which also needs approval of the European Parliament, calls for EU member countries to have the right to give persons of “legitimate interest” access to the registries of beneficial owners of companies and trusts.
“Member states shall define legitimate interest both as a general concept and as a criterion for accessing beneficial ownership information of each and every category of corporate or other legal entity or trust or similar legal arrangement in their national law,” says the compromise text, which is expected to be approved Dec. 20.
According to an EU diplomat working on the legislation, the public registry data protection concerns were first raised by the legal service of the Council of Ministers in October.
The same diplomat told Bloomberg BNA that subsequently, the European Data Protection Supervisor raised concerns Nov. 18 about the “the legal background, justification and proportionality” of the mandatory public registries of beneficial owners of companies and trusts.
“While some member states led by Austria, Germany, Denmark, Spain, the Netherlands and Portugal would have preferred to provide full public access to beneficial ownership information on companies and business-type trusts, they can accept access on the basis of legitimate interest,” the EU diplomat told Bloomberg BNA.
“Member states will still have the option to provide for public access at national level and the concept of legitimate interest is to be further defined at national level.”
The office of the European Data Protection Supervisor confirmed Dec. 15 that it is preparing a legal opinion on the issue of the public registries of trust and company beneficial owners, but it won’t be finalized until January 2017.
At the same time, the European Commission told Bloomberg BNA it rejects claims by the Council of Ministers legal service that data protection issues weren’t considered when the proposal was drawn up earlier in 2016.
Meanwhile, advocacy groups such as the Tax Justice Network accuse the EU member countries of backtracking on commitments made in the wake of the Panama Papers when it comes to increased transparency about beneficial owners of trusts in order to clamp down on tax evasion.
“It is shocking that within a year all the outrage over the Panama Papers has given way once more to business as usual,” Markus Meinzer, an official with the Tax Justice Network, told Bloomberg BNA by e-mail.
“This compromise reflects the status quo from before the Panama Papers and is the combined result of successful lobbying by the U.K. government, allied trust secrecy jurisdictions such as Malta, Cyprus and Luxembourg as well as the apathy of Germany and France.”
Transparency International official Laure Brillaud told Bloomberg BNA by e-mail that concerns about data protection and public registries are “subjective” and “can be used as arguments to drive a political agenda.
“We believe that it is possible to ensure that requiring public access to beneficial ownership information is entirely consistent with the technical requirements of the current data protection rules,” Brillaud said.
She also noted that countries such as the U.K. and the Netherlands already have set up company beneficial owner public registries.
Transparency International and others are also critical of the requirement that only persons of “legitimate interest” would have access to registries of beneficial owners of companies and trusts.
“The interpretation of what legitimate interest means will be left at the discretion of member states,” Brillaud said.
“We know for a fact that this may be done in a quite restrictive way such as requiring people to go through court to demonstrate legitimate interest or to grant access only in the event of ongoing legal proceedings to involved parties.”
Another key provision proposed by the European Commission to clamp down on tax evasion called for new transparency thresholds for beneficial ownership registration.
Currently, only owners with more than 25 percent ownership of a company must be revealed, but advocacy groups such as Tax Justice Network and Transparency International say the 25 percent threshold is easily circumvented.
To eliminate the loophole, the commission proposed that trusts or companies called passive non-financial entities that function as intermediary structures and do not create income but primarily channel it from other sources must reveal the names of anyone with 10 percent or more of ownership.
However, according to the Slovak presidency compromise text, the 10 percent threshold for passive non-financial entities has been dropped.
The move by EU countries to significantly weaken the European Commission proposals from July has disappointed the commission. But an EU executive body official told Bloomberg BNA expressed confidence that the European Parliament would support its proposal.
Negotiations in the European Parliament began in earnest in late November and will continue through the first quarter of 2017 when a vote is due. The first draft of a report that serves as the basis of negotiations has been published, with all of the commission’s measures on public registries and beneficial ownership.
“Member states act as if the Panama Papers and Bahamas Leaks scandals had not happened,” Fabio de Masi, a German member of the European Parliament, told Bloomberg BNA Dec. 14. “Access restrictions to corporate registers are inefficient, costly to administer and run counter to the fundamental idea of transparency.”
He predicted that contrary to what EU member countries are expected to approve on Dec. 20, the European Parliament will back measures that prevent exemptions “in order to prevent the cancer of illicit financial flows and offshore secrecy.”
After both the Council of Ministers and the European Parliament approve their respective versions of the legislation, the two sides must agree on a compromise version of the bill before it becomes law.
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