Differing Implementations of EU Law Could Mute Transparency Reform

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By Jabeen Bhatti

Austria’s implementation of the EU’s most recent anti-money laundering directive includes loopholes that let firms circumvent new transparency mechanisms, analysts say.

Still, it provides a more comprehensive approach than neighboring Germany’s for reporting a firm’s true beneficial owner. In fact, this difference in implementation between member nations—and the European Union’s failure to iron them out—means changes under the EU’s pending Fifth Anti-Money Laundering Directive will likely have little effect in curtailing manipulative business practices, Andreas Frank, an independent anti-money laundering consultant, told Bloomberg Tax.

“There shouldn’t be any differences in the key legal definitions between Germany and Austria—it speaks against the ethos of the European Union,” Frank, who is based in southern Germany and advises the German Parliament, said in a May 7 interview. “It’s an invitation for fraud that’s very concerning.”

Differing Implementations

The Fourth Anti-Money Laundering Directive ( 2015/849), adopted by the European Parliament and EU Council in May 2015, requires a business entity’s “beneficial owner,” or a natural person with at least a 25 percent share in a company, to identify and report themselves in a new transparency registry. All member nations were required to have transposed the directive into national law by June 26, 2018, the date on which the directive went into force, according to the European Commission.

On April 26, the Austrian Ministry of Finance released a decree clarifying reporting stipulations for beneficial owners outlined in its September 2017 implementation of the directive.

Different Scenarios

Most notably, the Austrian reporting requirements for beneficial ownership consider different direct and indirect scenarios for determining a firm’s true beneficial owner. The law takes into account the shareholder status of actors in second-tier and third-tier firms based abroad that possess a majority voting share in an Austrian legal entity.

This lays the groundwork for identifying a beneficial owner and ensuring information is reported in the transparency registry, even if the owner has multiple degrees of separation through offshore firms from the original Austrian company, Markus Meinzer, a senior analyst and director of the London-based Tax Justice Network, an independent tax advocacy network, told Bloomberg Tax in a May 7 interview.

Compared with the Austrian law, Germany’s iteration of the directive isn’t as thorough in its reporting requirements—it negates the obligation for a firm to report a beneficial owner as soon as two offshore entities are involved, Meinzer said.

“The transparency registry’s approach basically results in the absence of an obligation on the company to report a beneficial owner as soon as there are two offshore entities involved,” he said. “We don’t see this exception in the Austrian case at all.”

Germany’s transposition of the EU’s Fourth Anti-Money Laundering Directive entered into law last June 23.

Loophole Present

Both Germany’s and Austria’s implementations of the EU directive, however, still currently allow for the use of unregistered bearer shares, a practice by which beneficial ownership can change hands without being tracked, simply by way of handing over a physical stock certificate to a new person, Meinzer said.

This practice is outlawed in the Fourth Anti-Money Laundering Directive, and a disclosure of bearer shares is required in both countries’ implementations of the directive. But Germany hasn’t specified a final deadline for when this must happen, and Austria hasn’t set a deadline for when firms must be penalized for not adhering to the new rules.

This means companies can still “engage in business, trade and money laundering without the current beneficial owner recorded anywhere,” Meinzer said.

By contrast, in anticipation of the Fourth Anti-Money Laundering Directive, the U.K. in 2015 abolished bearer share structures via new beneficial ownership reporting requirements.

“This loophole or mechanism for money laundering is no longer available in the U.K.,” Meinzer said. “The opposite is true for Germany and Austria, where you still have companies in the business registers that can be active in business, trading and money laundering, yet they don’t have to disclose the bearer shares and still have bearer shares in circulation.”

Not Effective

Ultimately, differing interpretations of the fourth directive between member nations undermine the ethos of EU, Frank said.

Frank filed an infringement procedure against Germany’s iteration of the law late last year in an attempt to call attention to persistent problems present in German states’ implementation of EU directives, but the request is still pending.

“After 25 years, we need a money-laundering regulation that’s understandable in every member state,” Frank told Bloomberg Tax, referring to the EU’s first anti-money laundering initiative, which took effect in 1993. “If you have such profound differences in two German-speaking countries, then something’s wrong with the system. It shouldn’t be that difficult.”

The EU currently has filed no infringement proceedings against Germany, but 10 member nations have received reprimands from the EU for their non-transposition of the latest anti-money laundering rules as of March, according to European Commission documents.

The European Commission didn’t immediately return a request for comment.

Without supranational pressure to harmonize implementation across member nations, and with the Fifth Anti-Money Laundering Directive expected to take shape within a year, it is likely that such gaps in member states’ laws “will continue to live in the new law,” Meinzer said.

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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