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Afghanistan

Draft Beneficial Ownership Legislation (AF0017)

Overview

At-a-Glance

Action Plan: Afghanistan Action Plan 2019-2021

Action Plan Cycle: 2019

Status: Active

Institutions

Lead Institution: Ministry of Industry and Commerce

Support Institution(s): Ministry of Industry and Commerce, civil society organizations

Policy Areas

Anti-Corruption, Beneficial Ownership, Legislation & Regulation, Private Sector, Public Participation

IRM Review

IRM Report: Afghanistan Design Report 2019-2021

Starred: Pending IRM Review

Early Results: Pending IRM Review

Design i

Verifiable: Yes

Relevant to OGP Values: Access to Information , Civic Participation

Potential Impact:

Implementation i

Completion: Pending IRM Review

Description

What is the public problem that the commitment will address?
Legislative document on beneficial ownership has not been processed yet, which particularly refers to identification of beneficial owners and prevention of economic crimes. Lack of transparent and standard registration mechanism for beneficial owners caused significant rise in the economic crimes and paved the ground for corruption, attainment unlawful interests and incomes. Therefore, inexistence of legal base caused some officials in procurement and financial affairs exploit the given authorities in their workplaces and ascertain lack of transparency in contracting.

What is the commitment?
Draft and process beneficial ownership framework in participation with CSOs, experts and relevant authorities.

How will the commitment contribute to solving the public problem?
Implementation of this commitment creates a legal baseline for beneficial ownership and prevents exploitations of government officials in contracts. (prevents economic crimes). Misuse of authority in financial and procurement affairs causes surge of economic crimes and increases gap between government and public. Processing of legislative document (framework) on beneficial ownership not only resolves the aforementioned challenges but also prevents loss of public resources. In the meanwhile, a specific procurement and financial affairs mechanism will be developed to differentiate personal and official affairs of government officials.

Why is this commitment relevant to OGP values?
Implementation of beneficial ownership framework paves the way for civic participation in procurement and financial affairs contracting so that transparency and accountability would be raised.

Additional information
The followings are relevant to this commitment:
 National Strategy on Combat against Administrative Corruption
National Plan for Reforms in Justice and Judicial Sector
 Law on Declaration and Registration of Assets of State Officials and Employees
 Law on Money Laundering and Crime Proceeds
 Recommendations by the Financial Action Task Forces (FATF)

IRM Midterm Status Summary

4. Draft and Process Legislative Document (framework) on Beneficial Ownership

Draft and process beneficial ownership framework in participation with CSOs, experts, and relevant authorities.

Main Objective

Implementation of this commitment creates a legal baseline for beneficial ownership and prevents exploitations of government officials in contracts (prevents economic crimes). Misuse of authority in financial and procurement affairs causes surge of economic crimes and increases gap between government and public. Processing of legislative document (framework) on beneficial ownership not only resolves the aforementioned challenges but also prevents loss of public resources. In the meanwhile, a specific procurement and financial affairs mechanism will be developed to differentiate personal and official affairs of government officials.

Milestones

  • Form a mixed Commission to draft legislative document (framework) on beneficial ownership by Ministry of Industry and Commerce in partnership with CSOs.
  • Draft legislative document on beneficial ownership by the Commission in participation with CSOs, experts, and relevant authorities.
  • Publicize the first draft of legislative document on beneficial ownership to collect and incorporate the expert opinions through Ministry of Industry and Commerce’s website.
  • Convene two consultative meetings in partnership with CSOs, government authorities, and relevant organizations to collect and incorporate their opinions into the draft by Ministry of Industry and Commerce.
  • Finalize the legislative document on beneficial ownership in Executive Committee of Legislation Department, Ministry of Justice in participation with CSOs, experts, and relevant organizations.
  • Present the final draft to Legislative Committee in the Cabinet of IRA for recommendations and approval.
  • Present the final version of Law to the Cabinet of IRA for approval.
  • Processing of legislative document on beneficial ownership.
  • Signatory, publication, and enforcement of legislative document on beneficial ownership

Editorial Note: For the complete text of this commitment, please see Afghanistan’s action plan at https://www.opengovpartnership.org/wp-content/uploads/2020/01/Afghanistan_Action-Plan_2019-2021_EN.pdf.

IRM Design Report Assessment

Verifiable:

Yes

Relevant:

Access to Information, Civic Participation

Potential impact:

Moderate

Commitment Analysis

This commitment aims to establish a legal framework for the government to develop a public registry of information on beneficial ownership of legal entities. Given the complexity of the subject matter, the action plan does not specify whether the legal framework would manifest in the form of an executive decree or legislation. [42] The main focus would be to establish regulations for the collection and publication of beneficial ownership information. The Ministry of Industry and Commerce will lead the implementation of this commitment, in collaboration with civil society stakeholders.

Afghanistan does not currently have a law mandating public disclosure of beneficial ownership information from private sector actors. According to the Ministry of Industry and Commerce, there are many unidentified tax evasions within the business sector. Law enforcers have not been able to act on these due to the lack of reliable beneficial ownership information. [43]

When this commitment was created, the Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) oversaw and analyzed financial transactions. The center works in accordance with the 2014 Law on Money Laundering and Proceeds of Crime. [44] In a provision of that law, the definition of “beneficial owners” is “the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted,” as well as “persons who exercise the ultimate effective control over a legal person or arrangement.” [45] Further provisions in the law outline how failure to identify beneficial owners when performing financial transactions could result in the transactions being flagged as suspicious activity. [46]

Integrity Watch Afghanistan reported in 2015 that illicit financial flows allow corrupt politicians and government officials to channel the money they acquired illegally. Such activity comes at the expense of public funding for services such as education, health, and infrastructure. [47] According to the Ministry of Finance, about 65 percent of funds are illicitly earned, transferred, or used, including funds linked to money laundering, tax evasion, corruption, bribery, and lost customs revenues. [48] In 2015, it was estimated that illicit financial activities in Afghanistan amounted to 1 billion USD, mainly from drug trafficking and smuggling, corruption in procurement contracts, and unregulated trade. [49]

FinTRACA was established in 2004 to address these problems. However, Afghanistan has yet to establish a mechanism that is compliant with best practices on beneficial ownership transparency, to prevent the misuse of legal persons for money laundering or terrorism financing. The Financial Action Task Force (FATF) has outlined such measures. [50] FATF addressed this in the most recent update to the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation in 2019. FATF emphasized that countries should take measures to ensure that beneficial ownership information is available to competent authorities in a timely, adequate, and accurate fashion. Within OGP, the United Kingdom has set new standards on beneficial ownership transparency by creating a public register that is widely used by the public. [51]

This commitment is relevant to the OGP values of access to information and civic participation. Beneficial ownership transparency could increase access to previously inaccessible information. It could also create new opportunities for public scrutiny through the participation of civil society organizations and experts in the process of developing the legal framework.

If fully implemented as written, this commitment could have a moderate potential impact. The initiative marks an important step for Afghanistan to tackle issues of money laundering and tax evasion. However, the commitment falls short of promising transformative potential impact due to the lack of specificity on the scope and provisions of the proposed legal framework. For example, it is unclear whether the framework would regulate all legal entities with business activities in Afghanistan or only the ones that participate in public procurement of goods and services. [52] The commitment also does not specify key aspects to operationalize such transparency, such as data collection and verification, or the information publication format.

Going forward, the Ministry of Industry and Commerce could consider the following recommendations:

  • Extend opportunities for participation in the process of developing the legal framework to more civil society stakeholders. Involve private sector representatives beyond the reviewing of draft documents.
  • The commitment could result in a more significant outcome if the legal framework clearly outlines important aspects for successful beneficial ownership disclosure. These aspects could include reporting, the data collection process and responsible entities, the verification process, and the format of publication.
  • The implementation of this commitment could benefit from an opportunity to re-engage the Extractive Industries Transparency Initiative (EITI). Afghanistan has been a member since 2010 but was temporarily suspended in January 2019 for inadequate overall progress on the EITI standards. [53] While EITI generally caters to specific sectors, this commitment could benefit greatly by learning from EITI experiences in other countries that have achieved beneficial ownership transparency in the extractive sector. Those learnings could then be used as key references in developing or strengthening the legal framework proposed under this commitment.
[42] Integrity Watch Afghanistan, interview by IRM researcher, 3 June 2020.
[43] Maitullah Omid (Ministry of Industry and Commerce of the Islamic Republic of Afghanistan), interview by IRM researcher, 6 June 2020.
[44] Law on Anti-Money Laundering and Proceeds of Crime, Government of the Islamic Republic of Afghanistan, accessed July 2020, http://www.fintraca.gov.af/assets/Laws/Anti-Money%20Laundering%20and%20Proceeds%20of%20Crime%20Law.pdf.
[45] Ibid., p. 7.
[46] Ibid., p. 17.
[47] Integrity Watch Afghanistan, Curbing Illicit Financial Flows in Afghanistan, 2015, https://iwaweb.org/wp-content/uploads/2016/04/IFF-report-English-2-for-screen.pdf, p. 1.
[48] Ibid.
[49] Javid Ahmad, “Dirty Money in Afghanistan: How Kabul Is Cleaning up the Illicit Economy,” Foreign Affairs, 7 September 2016, https://www.foreignaffairs.com/articles/afghanistan/2016-09-07/dirty-money-afghanistan.
[50] Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, updated June 2019, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf, p. 20.
[51] Open Government Partnership, OGP Global Report: Volume 2, 2019, https://www.opengovpartnership.org/wp-content/uploads/2019/06/Global-Report_Volume-2.pdf, p. 2.
[52] Integrity Watch Afghanistan, interview by IRM researcher, 14 June 2020.
[53] “Afghanistan Temporarily Suspended for Slow Progress,” Extractive Industries Transparency Initiative, 2019, https://eiti.org/news/afghanistan-temporarily-suspended-for-slow-progress.

Commitments

  1. Revise Law on Recruitment and Authority of Attorneys General

    AF0014, 2019, Access to Justice

  2. Revise Law on Local Government

    AF0015, 2019, Legislation & Regulation

  3. Establish Anti-Corruption Commission

    AF0016, 2019, Anti-Corruption

  4. Draft Beneficial Ownership Legislation

    AF0017, 2019, Anti-Corruption

  5. Portal for Processing Legislative Documents

    AF0018, 2019, Capacity Building

  6. CSO Monitoring of Education

    AF0019, 2019, E-Government

  7. Develop Electronic Complaint System for Local Government

    AF0020, 2019, Capacity Building

  8. Reform and Strengthen Education Data

    AF0021, 2019, Access to Information

  9. Participation in Local Budgeting

    AF0022, 2019, Fiscal Openness

  10. Electronic Revenue Collection System

    AF0023, 2019, Capacity Building

  11. Co-Create University Curriculum

    AF0024, 2019, Education

  12. Reform Promotion System for Police Officers

    AF0025, 2019, E-Government

  13. Monitoring Framework for Medicine Wholesalers

    AF0026, 2019, E-Government

  14. Monitoring of Private and Public Health Centers

    AF0027, 2019, E-Government

  15. Participation in National Budget

    AF0028, 2019, Fiscal Openness

  16. Open Justice for Anti-Corruption

    AF0029, 2019, Access to Justice

  17. Women's Empowerment Plan

    AF0030, 2019, Gender

  18. Establishment of Women Grand Council

    AF0031, 2019, Gender

  19. Law on Processing, Publishing and Enforcing Legislative Documents

    AF0002, 2017, Legislation & Regulation

  20. Courts to Address Violence Against Women

    AF0003, 2017, Access to Justice

  21. Public-Police Partnership Councils

    AF0004, 2017, Capacity Building

  22. Registering Assets of Government Officials

    AF0005, 2017, Anti-Corruption

  23. Scheme for Establishing Health Service Accreditation Entity

    AF0006, 2017, Capacity Building

  24. Urban Improvement National Policy

    AF0007, 2017, Infrastructure & Transport

  25. Protection Policy for Women Under Conflict and Emergency Situations

    AF0008, 2017, Fiscal Openness

  26. Civil Society Monitoring Plan for Education and Higher Education

    AF0009, 2017, Education

  27. Plan for the Establishment of a Joint Committee Overseeing the Implementation of the Anti-Corruption Strategy

    AF0010, 2017, Anti-Corruption

  28. Strengthen the Information Mechanism in 60 Governmental Agencies

    AF0011, 2017, Access to Information

  29. Starred commitment Implementing Open Contracting

    AF0012, 2017, Access to Information

  30. Starred commitment Public Participation in Road Network Projects

    AF0013, 2017, Infrastructure & Transport

  31. Starred commitment Mechanism of Public Partnership in Inspection Process

    AF0001, 2017, Anti-Corruption

Open Government Partnership