New EU ruling on the balance between transparency and the right to privacy

The ruling has already caused some Member States to close their public registers of beneficial owners, and the Danish Business Authority is currently scrutinising the judgment to determine its consequences.  

But the consequences of the ruling are not as far-reaching as they may seem at first glance. Companies that are required to take customer due diligence measures will still have access to the necessary information on beneficial ownership. And the individual companies will also still have to report information on their beneficial owners to the Central Business Regis-ter. However, the ruling may affect the access of the public to such information. 

In its judgment, the Court strikes a complex balance between, on the one hand, the right to privacy and protection of per-sonal data enshrined in Articles 7 and 8 of EU’s Charter of Fundamental Rights and, on the other, the need to prevent money laundering and terrorist financing. According to the Court, a principle of proportionality should be applied in bal-ancing the two sets of rules, and the rights protected by the Charter outweigh the right of access to information on benefi-cial ownership. This despite the claim by other EU institutions that public access to information on beneficial ownership may prevent money laundering and terrorist financing, because it has a deterrent effect, allows controls, and contributes to investigations.  

Background

The EU ruling on beneficial ownership is the result of some cases in Luxembourg, where two companies had requested that access to their beneficial ownership information be restricted with reference to provisions in Luxembourg law imple-menting the Fourth and Fifth Anti-Money Laundering Directives (Directive 2015/849 and Directive 2018/843). The re-quests were refused, and the parties filed a lawsuit at the Luxembourg courts, which stayed the proceedings and referred the question to the Court of Justice for a preliminary ruling.

One of the questions that was referred concerned the validity of a provision in the Fifth Anti-Money Laundering Directive, which requires Member States to make information about beneficial ownership of companies etc. accessible to the gen-eral public. For this purpose, reference was made to Articles 7 and 8 in EU’s Charter of Fundamental Rights, which guar-antees the right to respect for one’s private and family life and the right to protection of one’s personal data.

A beneficial owner is, as a general rule, the natural person(s) who ultimately owns or controls a company, either directly or indirectly. The Fourth Anti-Money Laundering Directive, as amended by the Fifth Anti-Money Laundering Directive, requires EU Member States to ensure that companies and other legal entities incorporated within their territory obtain information on their beneficial owners and hold this information in a central register. 

Before implementation of the Fifth Anti-Money Laundering Directive, the Fourth Anti-Money Laundering Directive required  Member States to ensure that the information on beneficial ownership was accessible to “any person or organisation that can demonstrate a legitimate interest in it” as well as to competent authorities, etc. In exceptional circumstances, access to the information could be restricted, where such access would expose the beneficial owner to the risk of fraud, kidnapping etc., or where the beneficial owner was a minor or otherwise incapable. 

With the implementation of the Fifth Anti-Money Laundering Directive, the information became accessible to the general public. It is still possible under the new directive to restrict access to the information in exceptional situations that will ex-pose the beneficial owner to disproportionate risk, risk of fraud, kidnapping, etc., or where the beneficial owner is a minor or otherwise legally incapable. 

Judgment of the European Court of Justice

The Court held that the general public’s access to information on beneficial ownership constitutes a serious interference with the right to privacy and the right to protection of personal data enshrined in Articles 7 and 8 of the Charter. The Court noted, inter alia, that the information is accessible on the internet to anyone, meaning that persons seeking to obtain in-formation about a beneficial owner’s material and financial situation for reasons unrelated to money laundering and terrorist financing have free access to such information. The Court further argued that personal data, once made availa-ble to the public, can be retained and disseminated, making it more difficult for the data subjects to defend themselves against abuse. 

Purpose of the amendment of the Fifth Anti-Money Laundering Directive

The Court observed that the purpose of giving the general public access to information on beneficial ownership was to prevent money laundering and terrorist financing by creating, by means of increased transparency, an environment less likely to be used for those purposes. According to the Court, such a purpose may justify even serious interference with the fundamental rights guaranteed in the Charter.  

The Court held that public access to information about beneficial ownership is appropriate for attaining such purpose, because increased transparency will contribute to creating the desired environment. 

Need for the amendment to the Fifth Anti-Money Laundering Directive

The Court did not find, however, that the interference with the rights guaranteed by the Charter was limited to what is strict-ly necessary. The Council and the European Commission had stated, inter alia, that the concept of “legitimate interest” as used previously had given rise to practical difficulties because of the lack of a uniform definition. In addition, the criterion was difficult to define and would, even if defined, remain difficult to implement. The Court rejected these arguments, noting that the difficulty in describing the specific circumstances under which the public must have access information on beneficial ownership is no reason for the legislature to provide for the general public to access that information. 

The Court also observed that the persons who would get access to information about beneficial ownership through public access (i.e. financial institutions, authorities, the press, and civil society organisations) with reference to the recitals of the Fifth Anti-Money Laundering Directive would in any circumstances either have a legitimate interest in or would have an-other independent right to access to that information. In these circumstance, it was not necessary to give public access to the information. The fact that public access to the information could contribute to combating misuse of corporate entities, etc. and help criminal investigations did not change this finding. 

Proportionality of the amendment to the 5th Anti-Money Laundering Directive

Finally, the Court held that the interference with the rights enshrined in the Charter was proportionate to the aim of pre-venting money laundering and terrorist financing. The Court referred, inter alia, to the fact that the relevant provisions allowed for information which is not sufficiently defined or identifiable to be made available to the public. Furthermore, competent authorities and entities required to conduct customer due diligence have an independent right of access to information on beneficial ownership. 

The serious interference with the Charter rights which public access to the information implied could, according to the Court, not be offset by any benefits of such interference as compared against the former regime, where access was sub-ject to the existence of a legitimate interest. The fact that Member States could make access to the information conditional on online registration and, in exceptional circumstances, grant exemptions from access to that information by the general public did not change this finding. 

Conclusion

In these circumstances, the European Court of Justice found the provision in the Fifth Anti-Money Laundering Directive providing for public access to beneficial ownership information invalid. 

Read the judgment here.