This Article discusses significant legal developments in European Law from 2023.
In July 2023, the European Union (EU) implemented its inaugural antitrust measure aimed at addressing foreign subsidies, the Foreign Subsidies Regulation (FSR). This landmark regulation mandates that companies operating within the EU and receiving foreign subsidies must formally inform the European Commission (EC or “the Commission”) of such subsidiaries, especially before quantitatively determined merger and acquisition (M&A) transactions, joint-ventures and public procurement bids.
In October 2023, pre-transaction notification requirements of the FSR went into effect, including an implementing regulation with new notification obligations for transactions above specific thresholds. The implementation of these additional components coincided with the launch of an investigation into potentially illegally subsidized Chinese battery electric vehicles. The timing is no coincidence. Indeed, in the years preceding the FSR, international trade laws and existing EU measures against subsidized goods, such as battery electric vehicles, were decried as ineffective to prevent the harmful effects of financial subsidies on the internal market.
The EC recognized the disruptive impact of non-goods related subsidies, particularly financial subsidies, on competition within the EU’s internal market. To address this issue, the Commission enacted a regulation specifically tailored for this problem. While the EU’s Council and Parliament initially adopted the FSR to safeguard the EU’s internal market, this regulation may have a wider impact.
The FSR fills the gap left by the absence of legislation dedicated to tackling the distortions caused by foreign non-EU states’ subsidies on the single market, especially active or passive subsidizing (e.g., injecting funds or foregoing due tax revenue) as opposed to subsidizing goods. While some industries may be disproportionately impacted by the FSR, it retains a general antitrust purpose to shield the EU’s internal market from adverse competitive conditions provoked by state subsidies, which may come from a non-EU state. Although the FSR’s scope is broad, EU institutions have long rung the alarm bell about particularly distortive practices by Chinese, among other, state-owned or state-subsidized companies that unduly allow these companies to escape adverse market conditions or impose drastically lowered prices on the EU’s internal market. A recent example of this is the Pelješac bridge contract in Croatia, eighty-five percent financed by EU funds, which was awarded to a Chinese firm that bid at much lower prices than its competition.
The FSR gives the Commission several tools to deal with distortions to the internal market caused by foreign subsidies:
Two specific ex-ante provisions impose new pre-transaction filing requirements on determined economic operators in the EU, based on turnover and foreign subsidy amounts as well as on operation types.
Lastly, a broader ex-officio tool applies to all situations where companies active in the EU received foreign subsidies from a third state. Those M&A or joint-venture agreements and public procurements that fall below the thresholds applicable in ex-ante proceedings can still be analyzed under the ex-officio powers of the Commission, which allow the Commission to intervene in a wide variety of situations where foreign subsidies distort competition in the internal market.
The FSR applies ratione temporis to operations, M&A, and joint venture agreements signed and public procurement contracts awarded after July 12, 2023. That is to say, the Commission uses both its ex-ante and ex-officio powers beginning on this date.
Subsidies covered by the FSR include those attributed to parties involved in a concentration or recipients of a public procurement contract in the three years leading up to July 12, 2023 if they meet the criteria specified in the ex-ante filing requirements. Foreign subsidies that are attributed in the five years prior to July 12, 2023, and are identified by the Commission’s ex-officio powers as distorting the market after this date, also fall within the scope of the FSR. Thus, the Commission both guarantees itself jurisdiction over a long-term state subsidization strategy that would otherwise escape the FSR, and prevents adverse effects from quantitatively smaller transactions that would nevertheless have negative effects on competition in the single market. The notification requirements in both ex-ante procedures (detailed under Articles 21 and 29) apply beginning on October 12, 2023.
Ratione materiae the FSR applies to foreign financial contributions received by undertakings or economic operators in the EU from third party non-EU States that distort competition in the internal market. Thus, the FSR does not target subsidies generally, but rather applies only to those subsidies that unduly benefit an undertaking in a manner unlikely to occur under normal competition conditions. In Article 3, the FSR gives an explicitly non-exhaustive list of foreign financial contributions that constitute a foreign subsidy that confers a benefit on an economic undertaking in the EU. The FSR differentiates foreign financial contributions from foreign subsidies, using the latter formulation specifically to designate foreign financial contributions that upend competition in the internal market. Under Article 3, foreign financial contributions that can be qualitatively considered direct or indirect foreign subsidies include, but are not limited to, the transfer of funds or liabilities (such as capital injections or loan guarantees), the foregoing of revenue (such as tax exemptions), or the provision or purchase of goods or services.
A foreign subsidy need not be disbursed to fall under the jurisdiction of the Commission and the scope of the FSR (Article 15). Thus, economic operators engaged in the EU must keep track of both previously disbursed foreign financial contributions and undisbursed foreign financial contributions that they became entitled to receive during the previous five years before July 12, 2023.
While the FSR may itself have implied that disclosure requirements are relatively limited, the subsequent Implementation Regulation significantly widened disclosure requirements through the two ex-ante notification requirements. Indeed, this category of subsidies also requires disclosure, in forms FS-CO or FS-PP, of individual subsidies amounting to at least one million euros and coming from countries that granted at least forty-five million euros (in concentrations) or four million euros (in public procurement procedures) total in the three preceding years. Disclosure is not required for deferrals of tax payments, tax reliefs of general application, or provision or purchase of goods or services at standard market rates.
Article 5 of the FSR also points at foreign financial contributions that are most likely to distort the market. Among the latter are particularly distortive subsidies such as guarantees that are unlimited in amount or duration, attributed by a third state to an undertaking, and foreign subsidies that directly facilitate an M&A or joint-venture operation. For a subsidy within this category (i.e., subsidies particularly likely to distort competition in the internal market), detailed disclosures must be made if the subsidy amounts to one million euros or more and the subsidy is received by a party to a concentration or public procurement within the three years immediately preceding the signing or attribution.
On the opposite end, in Articles 4.3. and 4.4 the FSR provides that a subsidy granted over a consecutive period of three years and valued below four million euros is deemed unlikely to distort the market, while a subsidy under the de minimis threshold of 200,000 euros is deemed non-distortive in the single market.
Ratione personae, the FSR applies to entities with economic activities in the EU. Article 1 makes the FSR applicable to all economic actors in the EU, including those directly or indirectly controlled by a state. Previous Commission investigations into subsidized goods, and the ensuing World Trade Organization Dispute Resolution Organ cases provide some insight into the entities the Commission may assimilate to foreign states in its application of the FSR. The FSR does not directly define the entities, but they are assumed to be any party liable to partake in concentrations in the EU. In Article 2.3, the FSR does refer to definitions of economic operators, bidders in public procurement procedures, held in various directives. Article 20, in turn, focuses on detailing the situations where a concentration arises, which largely follow the notions of M&A, joint ventures and control acquisitions.
In applying the FSR, the Commission has broad investigative powers and has a wide array of remedial tools at its disposal. The Commission follows its antitrust modus operandi as visible in previous decisions and in dedicated antitrust regulations. Through either its ex-officio powers or ex-ante notifications, once the Commission finds that a financial contribution constitutes a subsidy, it determines whether the subsidy distorts the market by improving the competitive position of its recipient while harming competition on the internal market. If the Commission finds that a subsidy distorts competition in the internal market, the Commission then conducts a balancing test. It weighs the EU’s antitrust, industrial and other policies, the potential positive effects of the subsidy on a specific economic sector (e.g., lower prices benefiting consumers or technological advancement) against the negative effects the subsidy may have on competition in the internal market.
Using its ex-officio power, the Commission implements a two-stage review of a subsidy that distorts the market. To gather evidence, the Commission may use preliminary reviews, in-depth reviews, and inspections. Among the host of other remedial tools at its disposal, the Commission may make requests for information, impose or accept interim measures, and impose redressive measures. Article 21 and 29 of the Regulation explicitly make several of these tools applicable in ex-ante procedures targeting notifiable subsidies in concentrations and public procurements.
Parties that do not cooperate or violate notification requirements, intentionally or not, are exposed to fines. A party investigated through the Commission’s ex-officio powers that supplies incorrect, incomplete, or directly misleading information is exposed to a fine of up to one percent of its aggregate turnover, which is calculated based on the revenues of the preceding financial year. Shorter term, periodic penalties may amount to up to five percent of the daily aggregate turnover.
A party to a concentration under investigation through the ex-ante procedure faces a fine of up to one percent of its aggregate turnover for an erroneous notification. Circumvention of the notification requirement, or implementation of a suspended or prohibited concentration, exposes a party to a fine of up to ten percent of its aggregate turnover.
For public procurements, the penalties applicable to ex-officio procedures under Article 17 apply. On top of those fines, the Commission may, similar to the situation with concentrations, impose a fine of up to one percent of an economic operator’s aggregate turnover for misleading or incorrect information in notifications. That fine is correspondingly increased to ten percent of the aggregate turnover if the economic operator failed to notify or tried to circumvent the notification of notifiable subsidies (i.e., subsidies triggering the ex-ante procedure).
In light of the broad applicability and reach of the FSR, companies operating within the EU will need to gather comprehensive data regarding any foreign financial contributions they receive from third-party states. Moreover, the more demanding provisions of the FSR necessitate collection of information on foreign financial contributions dating back five years prior to October 12, 2023, particularly if they continue to exert anti-competitive effects. The threshold for the value of these subsidies, which may be as low as one million euros, becomes pertinent, especially when a subsidy is designated as likely to induce distortions to the internal market. Thus, the FSR’s broad applicability is likely to lengthen the time necessary for award of public procurements, as well as the signing of M&A and joint-venture deals, and increase due diligence requirements.
A parallel may be drawn between the FSR and U.S. President Joe Biden’s administration’s Merger Filing Fee Modernization Act of 2022, which includes two sections dedicated to curbing subsidies from foreign countries. But, the subsidies targeted by this legislation primarily originate from countries the United States identifies as entities of concern, and thus, as strategic threats. Consequently, the Act is much more limited in scope than the FSR. The absence of a close comparison only underscores the specificity of this regulation, prompting inquiries into how it interacts with international trade law texts and bodies, as well as the possibility that it may trigger retaliatory legislation. Given the broad applicability of the FSR and, in turn, the broad powers it grants the Commission, the application of the FSR will have to be closely watched in years to come.
“We must keep it firm in our minds that technology is the core combat capability”
– Xi Jinping – October 2017
“On export controls, we have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors . . . .That is not the strategic environment we are in today . . . . We must maintain as large of a lead as possible. Earlier this year, the United States and our allies and partners levied on Russia the most stringent technology restrictions ever imposed on a major economy . . ., forcing Russia to use chips for dishwashers in its military equipment . . . . Export controls can be a new strategic asset in the U.S. and allied toolkit to impose cost on adversaries, and even over time degrade their battlefield capabilities.”
– Jake Sullivan – September 2022
“We are now living in a totally new era” – Henry Kissinger – May 2022
This section discusses the aftermath of the U.S. export controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (China) imposed by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) on October 7, 2022. As recently as October 17, 2023, BIS updated last year’s measures in an attempt to close several loopholes that weakened the efficiency of those measures. The U.S. government’s implementation of semiconductor-related export controls targeting China is a landmark decision in the relationship between the two countries. The unilateral imposition of these controls has not only led to increased tensions between the two superpowers, but also had a far-reaching geopolitical impact when Japan and the Netherlands, global leaders in the semiconductor industry, presented similar national export measures following the U.S. export controls. Although these national controls do not mention China specifically, they have the same de facto result, controlling the export of semiconductor goods and technologies to China. These controls mark a new era in the use of export controls in global technology trade as an instrument to protect national security and foreign policy interests against the background of ever-growing geopolitical tensions in the continuing race for technological superiority over competing countries, such as China.
On October 7, 2022, the United States shook the world of export controls and unilaterally issued sweeping new export controls on advanced semiconductors and semiconductor manufacturing equipment and tools to China. The amendments made to the Export Administration Regulations (EAR) by BIS aimed to limit China’s ability to procure advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors used for military purposes. BIS published an interim final rule to implement these semiconductor-related amendments to the EAR in the Federal Register on October 13, 2022. Although the Year in Review 2022 edition briefly discussed the new U.S. export controls, it is essential to outline the contents of these controls in order to understand the 2023 amendments and reflect on their global impact in the past year.
The 2022 U.S. export controls rule, briefly put, addresses U.S. national security and foreign policy concerns in two key areas. First, it enforces stringent export controls on specific advanced computing semiconductor chips, transactions related to supercomputer end uses, and dealings with certain entities identified in supplement No. 4 to part 744 of the EAR, also referred to as the Entity List. Second, the rule introduces new controls on particular semiconductor manufacturing items and transactions involving specific integrated circuit (IC) end uses.
The new U.S. export controls signify the next step in the technology war between the United States and China, with technology at the heart of rearranging the global export control landscape. In that context, these unilateral U.S. export controls were considered a major diplomatic gamble. Although the United States maintains a dominant position in many categories of the semiconductor manufacturing industry, the long-term success of these measures was contingent on aligning with U.S. allies to prevent backfilling the Chinese semiconductor industry by (mainly) Dutch and Japanese competitors of U.S. companies. The Netherlands holds a significant role in the potential success of the Chinese semiconductor industry as they are the world’s only manufacturer of the most advanced lithography equipment available, which is crucial for developing and producing semiconductors. Access to this advanced machinery is necessary for the Chinese semiconductor industry in its technological progress and to avoid being overshadowed technologically by “the West.” Transforming these unilateral U.S. export controls into multilateral controls was therefore deemed a substantial challenge and a central diplomatic priority for the Biden administration. Because Dutch and Japanese semiconductor companies dominate categories of semiconductor manufacturing equipment that U.S. companies do not, diplomatic discussions between the Netherlands and Japan were highly anticipated.
In response to the October 7, 2022, measures, China filed a complaint with the World Trade Organization (WTO) on December 12, 2022. In its complaint, China requested consultations with the United States with respect to the measures related to trade in certain advanced computing semiconductor chips, supercomputer items, semiconductor manufacturing items and other items, as well as their related services and technologies destined for or in relation to China. On December 21, 2022, the Russian Federation (Russia) requested to join the consultations based on the argument that it has a substantial trade interest in these consultations. According to Russia, the U.S. export controls have an impact on the export of non-US made products to Russia. Further, Russia requested to join the consultations because “the United States has adopted and maintained measures related to trade with Russia.” The United States responded on March 3, 2023, that in its view, issues of national security are political matters not susceptible to review or capable of resolution by WTO dispute settlement since every Member of the WTO retains the authority to determine for itself those measures that it considers necessary to the protection of its essential security interests. While the United States accepted China’s request to enter into consultations, the status of the consultations are currently unknown.
On January 28, 2023, the United States secured a deal with the Netherlands and Japan to join the new semiconductor export controls. The exact details of how the Netherlands and Japan would join the U.S. export control measures were not published at that time. The legal frameworks of export control regimes in the Netherlands and Japan differ significantly from the U.S. system. As a member of the EU, the Netherlands maintains an export control policy implemented at an EU level through the EU Dual-Use Regulation. The Netherlands took a leap of faith by deciding to implement unilateral national export control measures without the usual support and backing of the EU. To understand the challenges for the Dutch legislator following the U.S.—Dutch—Japanese Semiconductor Export Controls Deal, we briefly compare the differences between the different export control regimes below.
Both the Netherlands and the United States are participating states in the Wassenaar Arrangement, an export control regime with 42 member states controlling the export of arms, dual-use goods and technologies. The U.S. alignment with the Wassenaar Arrangement is mainly regulated through the U.S. Commerce Control List. But, the 2018 Export Control Reform Act (ECRA) also allows the United States to impose export controls on items not covered by the Wassenaar Arrangement. This is relevant because amendments and updates to the Wassenaar Arrangement’s control lists can only be accomplished when the participating states reach consensus. As such, any member of the Wassenaar Arrangement, such as Russia, can block proposed amendments to its control list. The current geopolitical circumstances and the fact that plenary decision-making meetings only take place once per year, however, have resulted in a deadlock situation, making it difficult, if not impossible, to add new items to the list and try to keep abreast with technological developments, especially in the field of semiconductor technology. The ECRA, however, enables the United States to move ahead on the implementation of export controls of this semiconductor technology unilaterally, thereby allowing the United States to act swiftly in case of new technological developments that ‘threaten’ national security and foreign policy interests.
The Netherlands’ participation in the Wassenaar Arrangement is further aligned through the rules and regulations of the EU and, more specifically, the EU Dual-Use Regulation. Although the EU export control system reflects the commitments under the Wassenaar Arrangement, it lacks the unilateral powers, at least at an EU level, to act in a similar way compared to how the United States is able to act under ECRA. The recast of the Dual-Use Regulation in 2021, however, provided the possibility for individual Member States to impose further controls on non-listed items and technology under specific circumstances, by amending and broadening the catch-all provisions. Articles 4 and 9 of the Dual-Use Regulation allow individual Member States to unilaterally control the export of items and technology not listed in the Wassenaar Arrangement. These two catch-all provisions allow Member States to impose additional controls (i) if they are deemed critical in the prevention of the proliferation of weapons of mass destruction, or (ii) for reasons of public security, including the prevention of acts of terrorism, or for human rights considerations. Furthermore, Article 9 of the Dual-Use Regulation also allows Member States to coordinate their export controls on items for which export controls have not been agreed multilaterally.
Moreover, it is important to note that export controls in the EU are country-agnostic, meaning they are not targeted at specific countries but rather at the goods or the technology itself. Unlike the United States, the EU has never enforced export controls aimed at a particular country, except in cases of sanctions regimes or arms embargoes. Not surprisingly, it has been widely argued that the EU should update its strategic approach to export controls after the October 7, 2022 measures, since the current policy is unable to fully protect EU security interests. Before discussing the EU’s plans to update its approach towards better coordination on strategic export controls, an outline of the Netherlands controls for the advanced semiconductor manufacturing equipment is provided below.
The Dutch Minister for Foreign Trade and Development Cooperation sent a letter on March 8, 2023, to the House of Representatives of the States General announcing forthcoming national export control measures concerning advanced semiconductor manufacturing equipment. The Minister informed the House of Representatives that the Netherlands considers it necessary, for reasons of national and international security, to impose controls on advanced semiconductor manufacturing equipment with the utmost urgency by setting up a national control list by public ministerial order (Ministerial Order).
In response, China issued a formal complaint with the Dutch government, urging the Netherlands not to follow in the footsteps of certain countries that are, according to China, abusing national export control measures. In addition, a spokesperson for the Chinese Foreign Ministry has threatened to take retaliatory measures against the Netherlands.
Despite China’s complaints and concerns, on June 30, 2023, the Minister published a Ministerial Order implementing Dutch national export controls for advanced semiconductor manufacturing equipment. The legal basis for this Ministerial Order stems from Article 9 of the Dual-Use Regulation, which, as outlined above, allows EU member states to take additional export control measures based on public security interests or human rights considerations.
The official rationale for these controls is to prevent Dutch goods and technology from being used for undesirable purposes like military deployment or the creation of weapons of mass destruction, to prevent long-term strategic dependencies, and to maintain the Netherlands’ position as a technological leader. Neither the letter to the House of Representatives nor the Ministerial Order itself, however, mentions China as the targeted country of the measures, and neither is there any reference to cooperation with the United States or Japan in this respect. Although not officially stated, the new Dutch national export controls are deemed to be primarily aimed at China as a country of concern. That China is not explicitly mentioned as a country of concern, can easily be explained from the intention to avoid any geopolitical backlash and tensions between the Netherlands and China. Nonetheless, in the ongoing technological rivalry between the United States and China, the Netherlands has expressed its support for the United States and thereby has become part of the technology competition between the two rival countries.
On June 20, 2023, the European Commission (the Commission) published a Joint Communication to the European Parliament, the European Council, and the Council on “European Economic Security Strategy.” The Commission stipulates that the EU needs a comprehensive strategic approach to economic security, de-risking and promoting its technological edge in critical sectors. The Commission considers a new approach necessary because of, inter alia, the speed with which critical new technologies are emerging and the blurring of boundaries between the civil and military sectors. Although China is not mentioned specifically in the Joint Communication, it is apparent that these arguments are targeting China and its technology industry.
The Commission further stipulates that due to heightened geopolitical tensions and risks to national security “some EU Member States and third countries have stepped up national controls to limit the export of critical technologies outside, or in some cases building on, the processes established in the multilateral export control regimes such as advanced semiconductor manufacturing equipment or equipment related to quantum computing” showing the need for greater flexibility in the EU export control regime.
In any event, the Commission indicated that it would propose a new framework before the end of 2023 to enhance its current export control regime to address risks related to, amongst others, technology security and strengthen the EU’s role as a global actor. At the time of writing, however, a proposal by the EU is not yet published.
On October 3, 2023, the Commission adopted a recommendation on critical technology areas for the EU’s economic security for further risk assessment and published a list of ten critical technologies, selected based on their “transformative nature,” the risks of civil and military fusion, and of enabling violation of human rights. As a first step, however, the Commission recommends that Member States, together with the Commission, conduct a collective risk assessment of the four technology areas with the highest likelihood of presenting the most sensitive and immediate risks related to technology security and technology leakage by the end of 2023. These areas are: (i) advanced semiconductor technologies (including photonics); (ii) quantum technologies; (iii) artificial intelligence technologies; and (iv) biotechnologies.
Furthermore, in order to ensure that sensitive technologies do not fall into the wrong hands and to ensure better coordination of export controls at an EU level, on October 20, 2023, the EU enabled new “autonomous” controls through the publication of the first compilation of EU Member States’ national export control lists. This action allows Member States to impose authorization requirements on exports of goods and technology included in other Member States’ control lists, as long as these are included in the European Commission’s own compilation. The list includes the Netherlands’ controls on advanced semiconductor manufacturing equipment, as well as the export controls imposed by Spain on, amongst others, quantum computing and other emerging technologies.
Some have labelled the current EU’s response cumbersome at best, risking becoming a policy taker rather than a policy maker. Because the EU is also highly dependent on China and the supply chain, the EU is struggling to tailor its new export control policy to address its technological security concerns without directly mentioning China.
On October 17, 2023, BIS released two interim final rules (collectively, the October 2023 IFRs) designed to update export controls on advanced computing semiconductors and semiconductor manufacturing equipment, as well as items that support supercomputing applications and end-uses, to arms embargoed countries, including China, and to place additional related entities in China on the BIS Entity List. The official rationale of the October 2023 IFRs is that these updates were necessary to maintain the effectiveness of the semiconductor-related controls, close loopholes, and ensure that they remain durable. Part of the background of these additional controls may also be the EU’s cumbersome response in this situation thus far, and the dissatisfaction of the Dutch approach that still allows for the sale of older DUV models to China. Consequently, the United States decided to implement the October 2023 IFRs, which contain three main rules.
The first, the Advanced Computing/Supercomputing Interim Final Rule (AC/S IFR), is a set of regulations aimed at controlling the distribution of chips and preventing circumvention efforts, especially those related to China’s use of subsidiary firms to obtain controlled technology. The AC/S IFR has two main parts. In the first part, it adjusts the thresholds for regulating chips that are controlled, resulting in more chips being subject to U.S. export controls. The second part of the AC/S IFR updates rules to combat circumvention efforts.
The updated rules expand licensing requirements to forty-three additional countries, including those in D:1 (covers countries with national security risks), D:4 (covers missile technology), and D:5 (covers arms-embargoed countries). The updated countries include those with a high circumvention risk, such as Kyrgyzstan, which has seen an increase in trade in chips despite having limited imports and exports of chips over the past years. Overall, this update significantly expands the previous geographic export restrictions and makes it harder for potential Chinese military end-users to obtain controlled technology.
The second rule relates to semiconductor manufacturing equipment (SME). Key changes made from the October 7, 2022 rule include the following: imposing controls on additional types of semiconductor manufacturing equipment; refining and better focusing the U.S. persons restrictions while codifying previously existing agency guidance to ensure U.S. companies cannot provide support to advanced Chinese semiconductor manufacturing while avoiding unintended impacts; and expanding license requirements for semiconductor manufacturing equipment to apply to additional countries beyond the PRC and Macau, to twenty-one other countries for which the United States maintains an arms embargo.
The third rule expands the number of entities added to the U.S. Entity List, to which the export of certain technology is prohibited. This update adds to this list thirteen entities involved in developing artificial intelligence that threatens U.S. national security and foreign policy objectives.
Whereas the aftermath of the 2022 controls showed the U.S. willingness to cooperate with its allies to limit the Chinese semiconductor industry, the aftermath of the 2023 controls shows that the United States is still very much inclined to take necessary steps unilaterally to put a hold to the further development of that industry. For a successful outcome, however, ongoing support from U.S. allies, such as the Netherlands and Japan, is paramount.
In recent years, the EU has issued a significant number of directives to combat money laundering, illegal profits, and the financing of terrorism. But in November 2022, the European Court of Justice (ECJ) established a significant roadblock to the availability of personal data that could arguably be used to help combat such crimes.
The ECJ implemented this roadblock in the joined cases WM v. Luxembourg Business Registers and Sovim v. Luxembourg Business Registers. The cases concerned the implementation of Article 30(5)(c) of EU Directive 2015/849 into Luxembourgish law, as amended by Directive 2018/843 (the Fifth Anti-Money Laundering Directive or 5AMLD). The 5AMLD established the Luxembourgish Register of Beneficial Ownership (RBO), and in doing so, prescribed that any member of the public could access personal information regarding a beneficial owner registered within the RBO.
After scrutinizing the pertinent evidence, the ECJ convened in the Grand Chamber, and articulated its position that the public access to beneficial owners’ data, as found in business registers across the EU, infringed upon the fundamental rights to life and privacy protections stipulated in Articles 7 and 8 of the Charter of the European Union Fundamental Rights.
The ECJ noted that the risk of violating one’s fundamental rights is heightened by the fact that once information is published, it can be freely accessed, stored, and disseminated without an opportunity to “defend themselves effectively against abuse.”
It is noteworthy that in recent years, numerous international organizations and institutions beyond the European Union, such as the United Nations, International Monetary Fund, and European Central Bank, among others, have identified the combat against money laundering, illicit profits, terrorism financing, and sanctions avoidance schemes as a strategic imperative for ensuring stability in the global economy. In contrast to the ECJ’s ruling in Luxembourg Business, these entities contend that providing public access to registry data enables individuals and entities, including the press, to act as watchdogs in the market, thereby exposing and addressing abuses.
Nonetheless, the ECJ has been very clear that this system of public access to data is not necessary to fight money laundering or related crimes. Similarly, the ECJ has observed that the safeguards provided by the EU Directive, are ineffective. In summary, the European Court of Justice (ECJ) asserted that the responsibility to combat money laundering, illegal profits, and terrorism financing rests with public authorities and financial institutions, rather than individual citizens or other private entities.
Authors in order of appearance: Haider Ali; Sebastiaan Bennink; Luigi Pavanello.
