Illicit Financial Flows

Money laundering is the process whereby large amounts of illegally obtained money – typically through corruption, kleptocracy or organised crime – are made to appear legitimate. For instance, criminals may invest illicit funds into high value assets to disguise the true origin of their large wealth. The funds coming from the illicit activity are considered “dirty”, and the laundering process makes it look “clean”.

In recent years, the Pandora Papers and other scandals have demonstrated how easy it is to launder dirty money into the EU’s legal financial system, which is only as resilient as its weakest link.

We at TI EU recommend critical actions to strengthen the EU’s fight against illicit finance. This includes increasing EU-level involvement in anti-money laundering supervision and entrusting the European Anti-Money Laundering Authority (AMLA) with regulatory standards development and European Asset Registry management. We advocate for public access to beneficial ownership registers, including for journalists and civil society organisations. Addressing the lack of transparency in existing real estate ownership is another essential step.

A beneficial owner ultimately owns or controls a legal entity, such as a company or trust, and is entitled to benefit from its assets, income, or profits. While the legal ownership of the entity may be held by another person or a complex web of companies, the beneficial owner is the true owner who enjoys the economic benefits of and exercises real control over the entity’s affairs.

Efficient public scrutiny of beneficial ownership data is integral in unveiling corruption, crime, and other misconduct. When it comes to identifying the actual individuals concealed within corporate entities, authorities face significant challenges when investigating and countering transnational crimes linked to concealed beneficial ownership.

Historically, civil society and the media have frequently utilised beneficial ownership information to uncover unlawful financial flows. For example, Transparency International Czechia’s (TI-CZ) uncovered Czech Prime Minister Andrej Babiš’s sole beneficiary status in Agrofert, a large agriculture company. This finding was enabled by Slovakia’s public beneficial ownership register, underlining the importance of transparent information for companies involved in public contracts or licences.

Asset recovery entails the complex process of tracing, freezing, confiscating, and eventually disposing of assets gained through criminal means (think luxury items, like yachts, for example), thereby facilitating the return of these proceeds to their rightful owners or the victims of the crime.

Developing countries lose billions of euros each year through corruption, misappropriation of public funds, and bribery. Many of these illicit funds are parked in Western countries, often in highly secretive jurisdictions or real estate investments.

The recovery of confiscated assets is regarded as one of the most important measures for combating organised crime, illicit financial flows, and corruption. It is considered a key strategy in the battle against organised crime and corrupt practices, as it disrupts the financial gains of wrongdoers.
Europol states that the amount of money currently being recovered in the EU is only a fraction of estimated criminal proceeds: 98.9% of estimated criminal profits are not confiscated and remain at the disposal of criminals. Of the 2.2% of the proceeds of crime that were provisionally seized or frozen, only around 50% of all provisionally seized/frozen assets are ultimately confiscated.

At TI EU, we advocate for several critical recommendations. Firstly, Member States should enhance data collection throughout all stages of the asset recovery processes. Secondly, ways of confiscating assets in the absence of a criminal conviction should be explored.

Lastly, the return process should be grounded in the principle of social reuse, redirecting recovered assets towards socially beneficial purposes like public projects, healthcare, education, or community development initiatives, thereby transforming the proceeds of crime into resources for societal betterment. When wealth has been stolen from a third country, a transparent procedure involving civil society should guide its return to the country of origin.

If you’d like to find out more about asset recovery, you can consult our “Guide to strengthening the Asset Recovery Framework”, or take a look at our infographic.

‘Golden visas’ and ‘golden passports’ allow individuals to gain the rights associated with residency and citizenship in return for investment in that country.

Golden Visas

Golden Visas, also known as ‘Residency by Investment (RBI) schemes’, allow foreign individuals and their families to gain residency rights by investing in a country’s economy. While these programmes grant residency and work rights, they don’t provide full citizenship.

Dangerously, these schemes can attract individuals with questionable financial and political ties, posing a risk of money laundering. We urge the EU to implement strong due diligence measures, background checks and physical presence requirements. We also support the introduction of physical presence requirements to mitigate risks.

Golden Passports

Golden Passports, or ‘Citizenship by Investment (CBI) schemes’, offer full citizenship and a passport in return for a significant financial contribution. This includes voting and working rights. However, the sale of citizenship has been associated with corruption, as seen in the 2020 case of Cypriot officials selling citizenship to foreigners linked to crime and corruption.

Recognising the threats to European values and the potential for harbouring corrupt or criminal individuals, TI EU strongly advocates for the banning of citizenship-by-investment schemes.

It is crucial that the EU approach to sanctions is uniform, to ensure the integrity and effectiveness of sanctions as a diplomatic tool.

The ongoing Russian aggression against Ukraine shows how vital a robust sanctions regime, technically referred to as “EU restrictive measures”, is. These sanctions are a fundamental component of the European Union’s foreign policy and are typically employed in response to violations of international law, human rights abuses, or other grave transgressions committed by states or individuals. These measures encompass actions such as freezing assets, imposing travel restrictions, or restricting trade, and they are not only directed at governments but also at entities and individuals responsible for reprehensible conduct.

Presently, the European Union confronts a significant challenge in effectively enforcing these sanctions, primarily due to varying rules on sanctions evasion among its Member States. The crucial step towards ensuring consistent and effective application of sanctions throughout the EU in the future lies in harmonising these disparities.

In December 2022, the European Commission took a significant stride by proposing a Directive that delineates criminal offenses and their repercussions for violating EU sanctions.

At TI EU, our advocacy focuses on combating sanctions violations by identifying enablers—professionals possessing specialised legal knowledge or holding positions within relevant industries—who facilitate sanctions evasion. To achieve this goal, cooperation, transparency, and information sharing among Member States are imperative. The EU must also implement a global anti-corruption sanctions regime, allowing sanctions to be imposed on corrupt governments worldwide. Additionally, the collection of statistics on EU sanctions violations will play a pivotal role in shaping responsive and effective policies.

It’s time for fiscal transparency and corporate accountability.

In the current international financial system, multinational companies are under no legal obligation to disclose information regarding their activities, profits and the taxes they pay in each country of operation. Key financial data is published annually in a consolidated financial statement. This allows some companies to obscure their presence in jurisdictions with low- or zero tax rates, use legal loopholes to hide their profit-shifting practices aimed at reducing their tax bills, and avoid public scrutiny and accountability altogether.

The current system makes it impossible to understand what is happening within a group of companies from a tax perspective and track their contributions to the societies they operate in. On top of this, as many of the recent corporate scandals have shown, acts of corruption are very often aided by the use of opaque company structures and secrecy jurisdictions. The use of offshore companies and their lack of transparency pose increasing risks for local communities, a healthy business environment and society at large.

The EU can put an end to multinationals’ secrecy by adopting mandatory legislation on corporate tax transparency, requiring companies to publish key financial information on a country-by-country basis, so called public “country-by-country reporting” (CBCR).

Transparency International EU is currently focusing its efforts on an advocacy campaign aimed at adopting EU legislation on corporate and tax transparency.

The primary purpose of this legislation is to increase corporate accountability and transparency by providing citizens with adequate information to assess multinationals’ economic activities, payments, structures and whereabouts. Basic information on where companies are located, how many people they employ, what profits they make and how much they pay in tax is crucial to achieve this objective.