Abstract
In this large-scale empirical study, we examine drivers of compliance with the first filing requirement for the Ultimate Beneficial Owners (UBO) register in Belgium, which results from the implementation of the 4th EU Anti-Money Laundering Directive. Our focus on nonprofit organizations (NPOs) is inspired by their strong objection against the UBO regulation and their lower UBO compliance compared to for-profits in Belgium. We show that UBO compliance is significantly improved by the introduction of an administrative monetary fine, and is positively related to reliance on donations and grants, capacity of the organization, and NPO age. Our study implies a meaningful contribution to the scarce literature on nonprofit compliance.
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Notes
While there exists a significant body of research on NPO self-regulation, including compliance-oriented self-regulation aimed at discharging accountability towards funders, watchdog entities, accreditation agencies, etc. (Bies, 2010), research on NPO legal compliance is very scarce.
Unlike other categories, the general public has to prove a legitimate interest to get access to the UBO register. This requirement is applicable from February 17, 2023 onwards (not before) and was introduced after a decision of the European Court of Justice that access by the general public imposed a violation of the fundamental right to privacy. Access is then further restricted to data for the specific entity for which the legitimate interest has been shown. (Alper, 2023).
In the current paper we focus on the first-time filing requirement for the UBO register. However, besides this first-time filing requirement, legal entities have to validate the information in the UBO register on an annual basis (i.e., confirm that the information is up-to-date and thus still accurate). We do not examine (consider) subsequent validation (nor updates) of the information in the UBO register.
The normative motivation for compliance relates to regulatees’ combined sense of civic duty to obey the law and agreement with the appropriateness of a given regulation (Winter & May, 2001). In the current paper, we rely on financial statements data and we are therefore unable to capture the sense of civic duty to obey the law. As discussed earlier (cf. Section 2), the UBO requirements were not considered appropriate by NPOs and their interest groups. Nevertheless, we are unable to capture agreement with the appropriateness of the UBO requirements at the organization level. So, unlike the other motivations, we are unable to test the normative motivation in this paper.
Luypaert et al. (2016) show that the majority of Belgian firms filing their financial statements late (i.e., after the legal deadline), file their financial statements in the week before an administrative sanction (ranging between 120.00 EUR and 360.00 EUR) becomes applicable (i.e., the administrative sanction only becomes applicable one month after the legal deadline has passed).
These scandals all have their own nature: Poverello—lack of transparency and not using donations for the mission; Let’s go urban–mismanagement and self-enrichment by the founder (and her family)); Samusocial–weak internal controls and self-enrichment by board members; and Vriendenkring Kempische Steenkoolmijnen—self-enrichment and money laundering.
The Belgian AML law follows the territoriality principle and is applicable to all financial institutions (either domestic or foreign) with establishments in the Belgian territory (Nationale Bank van België, n.d.).
As an alternative, we also considered an ordered logit regression. Both estimation techniques typically lead to similar results (Hahn & Soyer, 2015). As demonstrated by Hahn and Soyer (2015), the logit alternative is preferred in the presence of extreme independent variable levels (which is not applicable to our data). As discussed in Sect. 5.3, our findings are robust to using the logit alternative (i.e., results are very similar).
We did not get the actual filing dates (but rather a dummy variable denoting whether the deadline was met or not). Having the actual dates, we would be able to examine whether a clustering in filings occurred just before the deadline, which would allow a stronger test for H1. However, in the absence of these dates, we are restricted to our current analyses.
We consider accounting data from accounting period 2019 to construct our independent variables. We opted for data from accounting period 2019 because the deadline for the initial filing fell in 2019 (cf. supra) and NPO characteristics in that specific accounting period thus best reflect the NPO’s situation at the moment of the (initial) deadline. Nevertheless, as part of the additional analyses (Sect. 5.3), we consider some alternatives with regard to the timing of the independents.
The file received from the Belgian Ministry of Finance contained 145,234 organizations, which largely corresponds to the 140,188 NPOs identified by the Koning Boudewijnstichting (2022). Importantly, not all Belgian NPOs are required to file financial statements. Size criteria determine whether (and the format of) financial statements have to be filed. Small NPOs that exceed no more than one of the following size criteria (at balance sheet date of the last accounting period): (i) 5 employees (expressed as full-time equivalents); (ii) total revenues of 334,500 EUR (excluding VAT and non-recurring revenues); (iii) total assets of 1,337,000 EUR; and/or (iv) total liabilities of 1,337,000 EUR are allowed to maintain a simplified accounting system and file simplified FS with the local court of justice (and thus not with the NBB–these simplified FS are not publicly available). In the absence of publicly available FS, these small NPOs can thus not be included in our analyses.
McNemar’s Chi-squared = 645.00 (p-value = .000).
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The authors express their gratitude to the Belgian Ministry of Finance (with Antonella Lorrocha as contact person) for providing them with the UBO data required for the purposes of this study.
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Reheul, AM., Van Caneghem, T. To comply, or not to comply: the question is why. Eur J Law Econ (2024). https://doi.org/10.1007/s10657-024-09804-0
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DOI: https://doi.org/10.1007/s10657-024-09804-0