German, Swedish Banks Back Tougher Beneficial Owner Rules

German banks support stricter beneficial ownership rules for companies and trusts, while the leading Scandinavian bank backed an offshore corporate economic substance test to help comply with EU laws against money laundering and tax evasion.

Testifying before the European Parliament’s Panama Papers investigative committee, the Association of German Banks told panel members that pending revisions to the EU Anti-Money Laundering Directive should close loopholes that prevent full transparency of offshore companies and trusts.

“Tougher beneficial ownership rules that make it easier to identify the true owners of companies would be helpful,” said Thorsten Hoche, chief of the legal department of the Association of German Banks. “This is something we would support because it’s a challenge we face while trying to help our members prevent money laundering and tax evasion.”

Michael Kemmer, the general manager of the Association of German Banks, also testified that his group supports registers for trusts.

“I would remind you that before all other stakeholders, it was the European banking industry that first advocated introducing registers of data about beneficial owners during consultation on the Fourth Anti-Money Laundering Directive,” Kemmer said. “ And given the complexity of this issue, that is only the beginning.”

The testimony from Hoche and Kemmer, both of whom often faced hostile grilling over the role of German banks in setting up approximately 1,200 offshore companies in Panama via Mossack Fonseca & Co., came as the EU expects, by the end of February, to vote on amendments to a pending revision to the EU Anti-Money Laundering Directive. Many EU lawmakers want tougher beneficial ownership rules, especially on trusts, compared to the most recent revision of the EU AMLD.

However, other EU lawmakers argue that public registries would violate EU data privacy rules. EU finance ministers in December approved a version of the pending AMLD legislation that doesn’t require mandatory public registries of trust beneficial owners.

Another key AMLD issue at stake is whether stricter rules should be adopted to require all shareholders—no matter how small—to be listed.

Corporate ‘Subtance’ Test

Meanwhile, Matthew Elderfield, the chief compliance officer with Stockholm-based Nordea AB, which is the largest bank in Scandinavia, told EU lawmakers rules on defining “substantive” corporate activity to help break down complex offshore structures would be helpful.

“It is a very difficult job to examine an offshore company to determine if there is substantial economic activity,” said Elderfield, who was brought in to oversee Nordea compliance efforts after the Panama Papers revealed that the financial institutions helped set up more than 500 offshore companies in Panama and in other tax havens. “There are issues we are looking at such as multiple layers to a company, asymmetrical money flows. But it is difficult to analyze the corporate structures to determine substance. A corporate substance test would be helpful.”

Currently, EU countries are drawing up a tax haven blacklist due to be finalized by 2017. In the coming weeks, EU members hope to agree on a key “fair” corporate tax criterion involving offshore financial centers to be used in determining when a country or jurisdiction could be targeted. A majority of EU member states want to use an “economic substance test” similar to what Elderfield referenced to determine whether countries or jurisdictions with zero or nominal corporate tax rates are offshore financial centers used to shelter money.

EU Member Countries Divided

EU member countries led by Ireland, the U.K., Malta, Estonia and others have blocked efforts in the Council of Ministers led by Germany, France and Italy to come up with a precise offshore economic substance test to root out financial centers that are tax havens.

EU finance ministers are tentatively scheduled to take up the issue again Feb. 21 in an effort to reach an agreement.

“We are certainly hoping that the testimony we have heard today will emphasize the need to agree on an economic substance test to determine whether countries that are nothing more than an offshore financial center with zero corporate tax rates are a tax haven,” said Jeppe Kofod, a Danish member of the European Parliament and co-rapporteur of the Panama Papers investigative committee. “It should be obvious that any country with a zero corporate tax rate is indeed a tax haven.”