Transparency & Trust: The Problem with Beneficial Ownership

The response to the UK government’s proposals as set out in a discussion paper entitled Transparency & Trust is expected in early 2014.

In brief, the proposals, as set out in the discussion paper, are as follows:

• Where the legally registered owner of shares holds those shares as a nominee for different beneficial owners, then details of the beneficial owners would have to be notified to Companies House (presumably as part of a company's annual return process) and would therefore become a matter of public record.

• Bearer shares should be abolished as they allow shareholders to hide behind the document and their names to not appear on the company's register of shareholders (which is publicly accessible through Companies House).

• Where directors are acting as nominees on the instructions of a third party, then the identity of the person exercising actual control must be disclosed to Companies House.

Whilst the proposals only relate to UK companies, they should be viewed in the context of similar commitments on transparency made in June 2013 by all G8 heads of government and also by the UK's Crown Dependencies (Isle of Man and the Channel Islands) and Overseas Territories (which include Bermuda, the Cayman Islands, the British Virgin Islands and the Turks and Caicos).  These broader international proposals include proposals for the registration of beneficial interests in relation to trust structures as well as companies.

As a follow up to the discussion paper, on 31 October 2013 UK Prime Minister David Cameron publicly stated that a list of the owners of so-called ‘shell companies’ would be published in order to discourage tax evasion. Mr Cameron went as far as to say that the current ability to keep beneficial ownership private had lead to “questionable practice and downright illegality”. Therefore, the information collected relating to beneficial ownership of UK companies would be made available in a public register. The assumption is that this register would be searchable through Companies House much like information which can be gleaned through a search of a company’s publicly available information declared in its annual return.

In the context of the proposals, a beneficial owner is defined as anyone with more than 25 per cent of the shares or voting rights in a company or who otherwise exercises control over the company or the way in which a company is run.  Individuals who collectively with others hold more than 25 per cent and agree to vote the shares together would be treated as a beneficial owner.  Where company shares are held in trust and the trustees hold an interest in more than 25% of the shares or voting rights or otherwise exercise control it is proposed that the trustee should be disclosed.  Beneficiaries might also be disclosable in certain circumstances, for example, if they had express powers to acquire or dispose of shares (although this seems unlikely unless a beneficiary is named as a protector or some other form of consent holder in relation to the shares in the company and even then a power of consent is not the same as a power to buy or sell shares or other assets).  It is proposed that companies should have a right to obtain information about beneficial ownership from their shareholders. This would be linked with a legal requirement on companies to identify the beneficial owners of any block of shares representing more than 25 per cent of the voting rights. These measures could be reinforced by placing a new legal ownership on beneficial owners to disclose their beneficial ownership of the company.

These proposals are not especially surprising. The G8 and the OECD are pushing for greater transparency globally and increasing pressure is being put onto jurisdictions which enable individuals to hide behind corporate nominees. Most offshore centres are actively seeking to input the FATF Recommendations 24 and 25[1], which address transparency and beneficial ownership of legal persons and arrangements. Both state that countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons and express trusts (including information on the settlor, trustee and beneficiaries) that can be obtained or accessed in a timely fashion by competent authorities.

The French authorities took steps in 2011 to force trustees to disclose information relating to French resident beneficiaries and settlors, threatening substantial fiscal penalties if the required information is withheld. In December 2013 a new law came into effect in Italy requiring Italian residents to disclose the value of directly or indirectly held foreign assets which includes assets held in trust where they are beneficial owners.

The introduction to the Transparency & Trust discussion paper sets out clearly that the aim of the new proposals is to help the government tackle tax evasion, money laundering and terrorist financing. It will improve the investment climate and make doing business easier.

However, the discussion paper makes no reference to the reasons why people want to stay hidden in the first place. Of course no one would argue on the side of those who are involved in criminal activity and effective measures which combat money-laundering and tax evasion are only to be welcomed. But there are any number of reasons why an individual or groups of individuals may wish to remain anonymous, not least of which may be concerns for personal security and legitimate asset protection.   It is far from unheard of for assets to be aggressively nationalised in the wake of political or regime change or subject to criminal attack.  Nominee and trust arrangements are commonplace in the context of international succession planning where assets may be held for minor heirs or beneficiaries who may not legally be entitled to own those assets or, in certain circumstances, where it is not advisable for young or vulnerable individuals to have full control of family assets, in particular where there is considerable wealth involved. 

The discussion paper clearly acknowledges the current inability to force foreign companies to comply with the new requirements – so how effective will the new rules be in relation to shares which are held by foreign corporate nominees?

What if the shares in a UK company are held, as is sometimes the case for wealthier, non-resident or non-domiciled private individuals and families, in offshore holding companies the shares in which are held by nominees or by trustees? Where trusts are employed as a succession planning mechanism, it is often the case that there is no ‘real’ beneficial owner.  This difficulty has become all too apparent in the context of the new French legislation referred to above where any named (or even implied) beneficiary of a trust who is French resident can find himself treated as a beneficial owner for the purpose of the trust disclosure obligations.

The new Italian rules throw up the same issues: just who is a beneficial owner?   Does being named as the object of a discretionary power in a trust deed mean someone is a beneficial owner – any number of trust lawyers – and indeed Italian experts on trusts – would beg to differ. What of the family member named in the trust deed who has a mere hope of benefitting if a multitude of conditions are satisfied and even then in the sole discretion of the trustees…with the consent of the protector…in consultation with other adult beneficiaries – in all likelihood he or she doesn’t even know that this remote possibility of benefit exists. Is it appropriate then that a member of the public can access this information through a search of a public register?

The Italian approach has been to identify ‘capital beneficiaries’, that is beneficiaries who are identified in the trust deed and are entitled to 25 per cent or more of the trust capital, beneficiaries who are members of a class of beneficiaries in whose main interest the trust has been established or acts or a person who exercises control in respect of more than 25 per cent of the assets. This attempt to identify beneficial ownership, in particular when referring to beneficiaries who are members of a class, entirely ignores the concept of a fully discretionary trust – but it seems that in relation to identifying the beneficial owners of trust the options are limited.

The new UK proposals relate to companies and there is no suggestion at this stage that they should extend to trusts. However, in order for the proposals to be fully effective in the long term, extending this approach to trusts (or at least attempting to) is the next logical step and is certainly contemplated in a number of offshore jurisdictions.

Where foreign shareholders are involved from the outset one can envisage a process which is already in place in a number of popular offshore jurisdictions whereby, on registration, shareholders should be obliged to provide detailed information regarding ultimate beneficial ownership. The administrative burden on Companies House would dramatically increase but the concept itself does not seem unworkable. But the problem remains that it is sometimes not possible to identify any beneficial owner. And what of the example in the discussion paper about shareholders working together to exercise control over 25 per cent or more of the shares – will that always be obvious?

In general, the UK government’s commitment to increase the transparency of companies is to be welcomed in underlining the attractiveness of the UK as a well-regulated jurisdiction for investment and business. However, if the proposals on transparency are to be implemented to full effect, they need to be formulated in the context of a broader global initiative with consideration given to the importance of protecting personal information, in particular in the context of minors and legitimate asset protection and personal security concerns.

[1] The Financial Action Task Force (FATF), an inter-governmental body established in 1989, has issued Recommendations which are intended to serve as internationally endorsed global standards against money laundering and terrorist financing and the aims of which are to increase transparency and enable countries successfully to take action against illicit use of their financial systems

Charles Russell Speechlys
Cheltenham, Doha, Dubai, Geneva, Guildford, Hong Kong, London, Luxembourg, Manama, Paris and Zurich.