Dutch beneficial ownership transparency below par, report finds

The Netherlands is lagging behind where transparency of ultimate beneficial owners (UBO) is concerned, a review by Transparency International has found. The report found while the Netherlands had a good understanding of general anti-money laundering risks and a strong legal framework, when it came to specific UBO-related issues, the countries’ overall score in the technical evaluation was weak and the overall rating in the effectiveness evaluation was “low-to-average”.

Fritz Streiff, project and research officer at Transparency International who co-authored the report (PDF), said the Netherlands was vulnerable to money laundering risks, illegal tax structures and other financial crimes. UBO-related issues played an essential role, which was demonstrated by recent events including the Panama Papers and the Vimpelcom scandal, he said.

In the case of Vimpelcom for example, the Amsterdam-headquartered Norwegian-Russian telecom company paid more than $114.5 million in bribes to Gulnara Karimova, the daughter of the former president of Uzbekistan, to secure access to the Uzbek telecom market.

These bribes, a combination of cash payments and shares transactions, were transferred to a Gibraltar-based company, of which Karimova was the UBO. The share transactions took place under the approval of Dutch notary office Houthoff Buruma, while the cash payments were conducted through the trust desk of ING Bank in Amsterdam.

Vimpelcom itself was audited by EY during the years these payments took place. None of these Dutch gatekeepers flagged the unusual transactions and in the end, it was a Swiss bank, Lombard Odier, that picked up on the irregular activities. Vimpelcom has since settled with Dutch and U.S. prosecutors for $795 million.

Streiff said that Dutch risk analyses insufficiently addressed these types of issues.
According to the report, UBO transparency has been given insufficient special attention in Dutch law, policies or practice, resulting in UBO information and access thereto being fragmented and incidental. It also found the Dutch understanding and identification of specific current and future UBO-related risks to be unsatisfactory, which it said was illustrated by the fact the Dutch government had never conducted an integral national risk assessment (NRA) regarding money laundering risks related to legal persons and arrangements, and that the plans for the first NRA also suffered from shortcomings.

Transparency International also criticised refusals on the part of the Dutch government to consider including registration of foreign trusts in the legislative amendments that are supposed to implement the Fourth Money Laundering Directive (4MLD). Given the number of foreign trusts that have connections to the Netherlands, for example through trustees or beneficiaries that reside in or trust assets are located in the Netherlands, this left a considerable gap in UBO transparency.

4MLD implementation an improvement, but insufficient

Transparency International said the impending implementation of 4MLD, which will include an UBO register, as well as the introduction of a central shareholders’ register, would mean a significant improvement.

“It is important to note that, at the date of writing, it is not yet clear how the [UBO and central shareholders] registers will eventually look like as the proposal and draft bill respectively are still in the middle of the legislative process. [..] However, judging from the legislative plans, it seems that the future registers will address some, but not all, of the main concerns that are reflected in the low score,” Transparency International said.

For example, the responsibility to provide UBO information to the authority administering the register will lie with the entities themselves. It is their duty to supply adequate, accurate information. The plans exclude a penalty for failure to report accurate UBO information.

Companies are, for different reasons, unable to do this effectively all the time.
“A Dutch company with a complicated and multi-layered shareholding structure in foreign jurisdictions, for example including a trust, will encounter serious practical issues when obliged to provide UBO information to the register. While the UBO will have an implicit duty to cooperate with the supplying entity, it is unknown how such duty will be enforced,” the report said.

There is meanwhile no designated authority to check the UBO information provided by the entities. The responsibility partly lies with the supplying entities themselves, which are also supposed to report incorrect UBO information. Transparency International said it was unclear how this checking system would work in practice, given that it was based on self declaration.

There are also other weaknesses. For example, Dutch legislation applies a 25 percent shareholding threshold to UBOs and while the European Commission has proposed to lower this threshold to 10 percent for high risk customers, this lower threshold is not reflected in future legislative developments in the Netherlands. Transparency International said the problem with a 25 percent threshold was that it is easily circumvented.

“Such a threshold can easily be exploited by persons looking to stay under the radar. For example, for more than four shareholders, the 25 percent threshold does not apply,” it said.

In addition to lowering the owner threshold from 25 percent to 10 percent, Transparency International also recommended the Netherlands would ensure that the first NRA, which is scheduled for this year, would specifically include an assessment of the UBO question, including an identification of all relevant and current high-risk sectors, areas, and scenarios that require enhanced customer due diligence measures together with a corresponding risk evaluation. It should also include a forward-looking risk analysis of new and probably future high risk sectors and consult all relevant stakeholders.
Transparency International also called for the designation of an independent authority to verify and double check the UBO information that Dutch companies and other legal entities will be obliged to provide in future when the UBO register comes into effect. Reporting entities which would also need to include foreign trusts with a connection point in the Netherlands, would need to be obliged to
report updates to UBO information on a regular, for example 30-day, basis, and those entities that failed to do so would need to be sanctioned.

Published 10-Apr-2017 by
Wietske Jarvis-Blees, Regulatory Intelligence

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