European Union lawmakers have pushed forward a controversial plan that would publicly identify the ultimate owners of companies, prompting fears from the international trusts industry and law firms about a threat to privacy.

European Union lawmakers have pushed forward a controversial plan that would publicly identify the ultimate owners of companies, prompting fears from the international trusts industry and law firms about a threat to privacy.

Under updated draft anti-money laundering rules approved by members of the European Parliament in the economic affairs and the justice and home affairs committees on Thursday last week, the ultimate owners of companies and trusts have lost their anonymity and will have to be listed in public registers in EU countries. A further vote is due in March.

While casinos are included in the scope of the draft rules, decisions to exclude other gambling services posing a low risk are left to member states.

"The outcome of this vote is a big step forward in the fight against tax evasion and a clear call for more transparency," said Dutch Green MEP Judith Sargentini, in a statement.

"By approving the establishment of beneficial ownership registers, the committees have shown that they are serious in their demand to finally break with the tradition of hidden company ownership," she added.

Concerns
The proposals have already led organisations such as the Society of Trust and Estate Practitioners to warn that any such register must not compromise the legitimate privacy of users of trusts, for example. The issue of whether the ultimate beneficiaries of entities such as trusts should be fully disclosed has been a thorny one for policymakers in recent years, particularly given attempts to crack down on alleged tax evaders and certain forms of avoidance.

Deputy Chief Executive of STEP George Hodgson said that the decision could potentially impose bureaucratic burdens on millions of families in the UK and require them to publicly register details of plans they may have put in place to provide for family members.

"In the UK most homes owned jointly are legally held in trust, as are life insurance policies and trusts are widely used to provide for vulnerable family members. HM Revenue and Customs research confirms that in around a quarter of cases, trusts are used to help protect vulnerable family members rather than hide illicit funds," said Hodgson.

"While STEP supports efforts to make anti-money laundering rules more effective, most UK trusts are very low risk in money laundering terms. The establishment of public registers will result in little gain for significant cost and loss of privacy for UK families," he added.

Filippo Noseda, partner and joint wealth planning practice group leader at international law firm Withers, criticised the legislation for being a tool used for the collection and general accessibility of data and said he believed the best way to fight money laundering was through improved regulation.

"This new legislation, if adopted by the parliament in March, will mean that families' internal affairs become public knowledge, regardless of whether there is any tax at stake. What this means is a crass intrusion into the private sphere and of family life (something that is protected by the European Convention on Human Rights), without any public interest and in violation of the principle of proportionality," said Noseda.

Geoffrey Todd, a partner in the private client and tax team at law firm Boodle Hatfield, said: "Whilst it is appreciated that greater transparency may help prevent criminal activity and tax evasion, many might feel the proposals go beyond what is required to achieve this aim.”

EU fine print
According to the new anti-money laundering directive, public central registers would list information on the ultimate beneficial owners of all sorts of legal arrangements, including companies, foundations and trusts. The draft rules would apply to banks and financial institutions, and also to auditors, lawyers, accountants, notaries, tax advisors, asset managers, trusts and real estate agents.

The committees’ amendments are to be put to a vote by parliament as a whole in March. The new parliament to be elected in May will begin negotiating the legislation with the European Commission and the Council of Ministers, which will be chaired by Italy, in the second half of this year.

The EU believes the new rules will ensure greater transparency and better overview of financial transactions, making it harder to set up fake companies and transfer dirty money from one account to another.

Money laundering accounted for 2.7 per cent of the world's GDP ($1.6 trillion) in 2009, according to the UN. New technologies have made it even easier for criminals such as drug dealers, financial schemers and counterfeiters to launder their dirty money.

Common techniques include issueing invoices for fictitious services for less than the value declared, enabling a company to justify the amounts it has in its bank accounts, making them legitimate.

Another method is to "pre-wash" illicit funds in bank deposits made through shell companies or businesses (also known as front companies) that are directly or indirectly linked to a criminal organisation.