31/12/17

From Big Debate

The Big Debate: Should There be a Mandatory Register of Beneficial Ownership of Corporate Structures in Every Country?

Featuring comment from:

Amy Bryant, Deputy Chief Executive Officer, Jersey Finance

"Simply put, no, there should not be a mandatory register of beneficial ownership of corporate structures in every country".

 

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Judith Sargentini, MEP, Group of the Greens/ European Free Alliance

"In a time of increasing financial insecurity at a global level, there is a need for firm action. Transparency is key in the fight against money laundering, terrorism financing, tax evasion and tax avoidance".

 

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Paolo Panico, Solicitor (Scotland) and Avocat (Tableau IV), Luxembourg

"At a time when the Western way of life is threatened by repeated terrorist attacks, it is irresponsible to sacrifice privacy, one of the fundamental values of the Western civilization, for the sake of a misconceived idea of transparency".

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Zosia Sztykowsi, Project Coordinator, Open Ownership

"The real question is not whether we should have central registers of beneficial ownership, but why the global community hasn’t yet taken this assertive step toward ending the abuse of anonymous company ownership".

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Jason Allison, Partner, Walkers Global

"Participants in the financial marketplace have perfectly legitimate reasons for wanting to preserve a degree of privacy.  The non-public beneficial ownership regime, coupled with the existing anti-money laundering regime is an effective system which helps guard against illicit activity".

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Lucy Frew, Partner, Walkers Global

"The introduction of the beneficial ownership regime is less significant for the Cayman Islands than it might be for other jurisdictions because the Cayman Islands’ largely institutional, regulated business model is accustomed to providing beneficial ownership information to meet a variety of international requirements".

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Amy Bryant, Deputy Chief Executive Officer, Jersey Finance

Simply put, no, there should not be a mandatory register of beneficial ownership of corporate structures in every country.

I understand that this sounds contradictory because, after all, Jersey has had a central register in place since 1989, and by law, trust and company service providers (TCSPs) must provide full details of beneficial ownership and control on incorporation to the Jersey Financial Services Commission (JFSC).

And yes, we even adhere to international standards on beneficial ownership – widely accepted to be set by the Financial Action Task Force (FATF).  Also, for the last 30 years Jersey has shared information on beneficial ownership with authorities such as the National Crime Agency.

So, if we’re already ‘following the rules’, why wouldn’t we want a mandatory register of beneficial ownership of corporate structures in every country?

Our opposition to central registries is based on academic research on the value they provide in achieving corporate transparency and deterring financial crime.

Cambridge University Professor of International Relations, Professor Jason Sharman found that:

“It is simply not possible to say that centralised registries work better than the leading alternative, and it is demonstrably wrong to say that they are the only way of achieving corporate transparency. A beneficial ownership regime based on licensed corporate service providers (CSPs) is a better solution…CSPs have an incentive to ensure records are accurate in that false records may lead to a revocation of their licence.”

Although the ‘Jersey Model’ is a market leader in terms of its approach to handling beneficial ownership information, endorsed by authorities including the OECD, the World Bank and MONEYVAL, we would argue that public registers are not the most effective way to deter financial crime.

Why? Because public registries are typically passive; they perform an archival function, not an investigative or enforcement role. To be effective and deter criminal activity, the information on a registry must be verified, accurate and timely.

As an example, Companies House in the UK does not verify information provided in annual returns or incorporation documents; it is simply a repository of information rather than a regulator.

However, the current requirement of the European Directive, or Fourth Anti-Money Laundering Directive (4MLD), requires Member States to establish a central register of beneficial ownership information.

So which standard or process helps prevent criminal activity?

Some suggest that public scrutiny of a register would help prevent criminal activity.

The UK Government in 2013 proposed improvements to transparency of beneficial ownership and prepared to tackle tax evasion, money laundering and terrorist financing by making public a register of company beneficial ownership, or a public register of persons with significant control (PSC). Jersey’s response to this proposal was clear: registers holding information on beneficial ownership should not be made public.

Jersey’s view remains unchanged. In fact, this is a shared view with the European Data Protection Supervisor (EDPS) who believes beneficial ownership information should only be available to entities “in charge of enforcing the law” due to the significant unnecessary risks for individuals’ rights to privacy and data protection.

Privacy is another fundamental issue when thinking about public registers. Public registers risk overlapping between disclosing information in the public interest and information which interests the public, potentially with grave consequences.

It is notable that in October 2016, the French Supreme Court published a decision challenging the legality of the government’s public register of trusts. In December, the same court declared the public aspect of country-by-country reporting as unconstitutional. Does this demonstrate an international trend against making this information publicly available?

 

There are alternative ways by which the same ends can be met without the violation of human rights; the Jersey model is a leading example of this.

Judith Sargentini, MEP, Group of the Greens/ European Free Alliance

Worldwide, between 1.5 and 2.8 trillion US dollars is lost annually due to money laundering. For developing countries, the consequences of illicit financial flows are even worse, aggravating the existing inequality – three times as much money is illegally leaving Africa than comes in through official development aid. These are staggering numbers. It is money that makes a difference to the viability of a society.

In a time of increasing financial insecurity at a global level, there is a need for firm action. Transparency is key in the fight against money laundering, terrorism financing, tax evasion and tax avoidance. Although countries, to a large extent recognise the importance of this principle at the international level (the G20 for instance), much still needs to be done. Investigative journalists have repeatedly communicated the pitfalls in our response. Lux-leaks, Swiss-leaks, Panama Papers and many more revelations demonstrate that complicated chains of companies and trusts allow money to be laundered – money that should be spent on tackling hunger, building schools, hospitals, roads, and educating teachers, nurses and doctors.  

The anonymity, secrecy and opaqueness that companies and trusts allow are misused by persons with bad intentions. To prevent criminals using our legal systems in such a manner, transparency for the public is required. Public scrutiny plays an essential role.

We also see the importance of making certain information public in other fields. The business registers in EU Member States are public because it is important for a potential contracting party to understand who its counterpart is. The beneficiaries of Common Agricultural Policy (CAP) payments are published because it concerns the use of EU funds. The global Extractive Industries Transparency Initiative (EITI) demands public disclosure of the beneficial owners of oil, gas and mining companies which is crucial to achieve good governance in this sector.

That is why I have advocated for increased transparency, to reveal who actually owns a company or a trust. In 2015, we concluded the 4th Anti-Money Laundering Directive. We demanded a public register of who ultimately owns a company or a trust, a so-called UBO register. Despite the initial opposition of the Council and the Commission, we did manage to get a pledge for Member States to set up a public register for companies. There was no appetite in the Council for having a strict approach on trusts. But now, there is a change of attitude. After the Panama Papers the Commission proposed a targeted revision of the directive and saw the light: public registers are necessary for both companies and trusts to stop the corrupt from hiding money. Currently, I am negotiating with the Council and the Commission where we see positive movement. The judgment of the Court of Justice, indicating that in certain circumstances trusts can be considered similar to companies, is a step forward. However, we cannot just have transparency for EU companies and trusts. We also need them for foreign entities that are incorporated outside the EU and operate on our continent. This will help prevent criminals from circumventing the rules by setting up companies and trusts in third country jurisdictions. This topic becomes more important when we face the consequences of the UK leaving the EU and have their companies and trusts conducting business in other Member States. I, therefore, call upon the Member States to be ambitious in the fight against money-laundering, terrorism financing, tax evasion and avoidance.   

Paolo Panico, Solicitor (Scotland) and Avocat (Tableau IV), Luxembourg

The creation of central registers of beneficial owners of companies and trusts has been championed in some political quarters and in the press in the wake of the ‘Panama Papers’. It is an easy political ‘sale’ but it is wrong and potentially dangerous.

Central registers of beneficial ownership cannot be an end by themselves. They may be a means to prevent the abuse of corporate vehicles and other legal entities from criminal activities. In order to achieve this purpose, the information on beneficial ownership must be accurate and up-to-date. This condition can be met only if the information is obtained, verified, recorded, and updated by professionals subject to anti-money laundering obligations such as lawyers, accountants, notaries, bankers, and other financial advisors. In many jurisdictions the formation of a company or of another legal entity requires the involvement of one or more such professionals. It is therefore sufficient to ensure that the existing anti-money laundering laws and regulations are strictly complied with and that the competent authorities can access the relevant information held by the professionals in a timely and effective manner. The creation of a central register may be an unnecessary additional administrative burden.

However, some offshore jurisdictions, such as Jersey, have maintained a central register of beneficial owners of companies for more than 20 years. Other financial centres have created central registers this year. In all these cases the information is filed by qualified professionals and is kept in a closed platform with no external connectivity, which is accessible only to a restricted number of designated officials for specified purposes. These extreme measures are intended to mitigate the risk of hacking and other forms of unauthorized or abusive access.

Central registers of beneficial owners must not be open to the public. Unrestricted public access to such registers is a breach of the fundamental right to privacy and, far from preventing criminal activity, can significantly increase its incidence. The respect of private and family life and of private personal data is a fundamental human right, protected under the EU Charter on Human Rights as well as in the UN Convention.

On these grounds, a public register of trusts was quashed as contrary to the Declaration of the Rights of Man and of the Citizen of 1789 by a decision of the French Constitutional Court on 21 October 2016. Similarly, the European Data Protection Supervisor has expressed serious concerns about a proposal to amend the 4th EU Anti Money Laundering Directive with a view to allowing unrestricted public access to beneficial ownership information of trusts and companies. The current version of the Directive, which has not yet been transposed by all EU member states, makes the registers available only to persons with a ‘legitimate interest’.

An instrument such as the register of Persons with Significant Control (PSC) in the UK is useless for the prevention of corporate abuse but raises concerns for other serious crimes. The entries of the PSC Register are not subject to any verification. Criminals can file incorrect information or just fail to submit it. On the other hand, the details of the beneficial owners of UK companies and partnerships are readily available to curious neighbours and voyeurs, as well as (more worryingly) gangsters and blackmailers. Incidentally, just a few weeks ago, the English Court of Appeal ruled that the access to a company’s register of members (which may include nominees) can be denied when it is sought for an improper purpose . Why shouldn’t it apply also to the PSC register?

At a time when the Western way of life is threatened by repeated terrorist attacks, it is irresponsible to sacrifice privacy, one of the fundamental values of the Western civilization, for the sake of a misconceived idea of transparency.

Zosia Sztykowsi, Project Coordinator, Open Ownership

The Panama Papers have conclusively shown that anonymous corporate structures are the favourite vehicle of those looking to escape accountability for criminal or unethical behaviour. Several subsequent money-laundering scandals have reinforced this – and given the word ‘laundromat’ a new meaning.

The costs of these illicit activities are borne by society in the form of stilted economies and markets, underfunded public services, and the shoddy results of corrupt procurement processes. And of course, what hits the press is only the tip of the iceberg. The real question is not whether we should have central registers of beneficial ownership, but why the global community hasn’t yet taken this assertive step toward ending the abuse of anonymous company ownership.

Critically, these registers must be available to public scrutiny in open data format, allowing the information to be freely used and combined with other relevant public or proprietary datasets. While this may seem inaccessibly techie, the concept is actually quite simple: a single computer reading data can do much more to compare related pieces of information than can a team of people reviewing one record at a time.

Ultimately, this will greatly increase the likelihood that anomalies and red flags will be found, thus making it more difficult, risky and expensive for criminals to hide behind corporate structures.

Of course, this rests on an assumption that there is a demand for this data and that, when it is released, it will be used. But it is not difficult to prove this demand as potential users in the public sector, private sector and civil society clamour for access to this data. EY’s 2016 Global Fraud Survey found that 91 per cent of senior executives believe it is important to know the ultimate beneficial ownership of the entities with which they do business.

The experience of the UK’s Companies House is an excellent case study. Use of their database has grown exponentially, to 10 million searches a day, since it was made free and open. And, they have been receiving tip-offs from users about beneficial ownership information that is incorrect or incomplete since they started publishing it.

Publishing beneficial ownership as open data will also allow that data to be linked globally with other datasets. As the World Bank has noted, when corporate structures are used to launder money, this often involves adding layers of ‘legal distance’ between the beneficial owner and their assets. These layers are placed strategically across a number of jurisdictions to deliberately frustrate the efforts of investigators trying to get a true picture of the structure.

The ability to link beneficial ownership information from around the world is essential to realizing beneficial ownership data’s potential to expose transnational networks of illicit financial flows. We must be sure not to leave this information languishing in national siloes.

Some sceptics raise concerns about whether the statements about beneficial ownership made to central registers can be guaranteed to be accurate. Typically, the alternative offered is to collect beneficial ownership data via company service providers (CSPs).

But there is no reason to expect that the statements made to CSPs are any more accurate. Though some CSPs check the identity of someone opening a company against official documents such as a passport, this does not guarantee that that person is the true beneficial owner.

It’s worth saying that the expectation that anyone can guarantee the accuracy of beneficial ownership information may be misplaced. People who are laundering millions in illicit money will hardly hesitate when it comes to lying on a form, regardless of whether a corporate register or a CSP is collecting the information.

That’s exactly why we need to focus on making it easier, and more likely, for people consuming the data to raise red flags that a lie has been told, either by finding an inconsistency when compared to another data set, or by applying their own local knowledge of certain registered addresses or individuals to verify the data.

Until we do this, policymakers will struggle to meaningfully stem corruption and rebalance markets. We must see – and soon – a global regulatory push on beneficial ownership transparency that takes into account the critical role of data users in meeting these policy goals. The cost of inaction is just too steep to bear.


Jason Allison, Partner, and Lucy Frew, Partner, Walkers Global

The Cayman Islands approaches this question from the perspective of a jurisdiction with its own brand new mandatory beneficial ownership regime.

Legislation, which came into force on 1 July 2017, requires certain Cayman Islands’ companies and limited liability companies to identify their individual beneficial owners and relevant legal entities, maintain beneficial ownership registers at their registered offices and for the information on the registers to be stored in encrypted form on a secure offline search platform established by the Minister of Financial Services as the competent authority. The platform is ‘air-gapped’, or in other words not connected to the internet or any other network, for security purposes. 

The purpose of the legislation is to expedite access to beneficial ownership information in response to proper and lawful requests from specified law enforcement agencies and not to materially expand the scope of such requests or the required responses. During negotiations with the UK in the run-up to the introduction of the new beneficial ownership regime, the Cayman Islands government successfully maintained that beneficial ownership information should be non-public until such time as public registers became the accepted international standard. The platform is searchable only by the competent authority and is not publicly accessible. Partnerships, trusts and foreign companies are out of scope.

The introduction of the beneficial ownership regime is less significant for the Cayman Islands than it might be for other jurisdictions because the Cayman Islands’ largely institutional, regulated business model is accustomed to providing beneficial ownership information to meet a variety of international requirements. The Cayman Islands has for many years required licensed service providers to verify the identity of beneficial owners of Cayman Islands companies at a 10 per cent threshold, which is more onerous than the 25 per cent threshold seen in other jurisdictions. Beneficial ownership information is also collected by the Cayman Islands’ financial regulator in relation to licensees and, in addition, by the Cayman Islands’ tax information authority for tax transparency purposes. Exemptions to the new beneficial ownership legislation are designed to prevent duplication.

The Cayman Islands is recognised internationally for its strategy of adherence to global standards on transparency and international cooperation and, true to form, has delivered on its commitment to the UK, while doing so in a manner which is appropriate for the Cayman Islands. However, few with experience of the Cayman Islands financial services industry considered there to be a need for a beneficial ownership regime. 

 While business continues as usual in the Cayman Islands following the introduction of the new beneficial ownership regime, the regime does create a need for legal entities to determine whether they are in scope or exempt. Also, while the obligations of the beneficial ownership regime are applicable primarily to in scope companies, their beneficial owners, relevant legal entities and shareholders are also subject to proactive obligations of which they need to be aware in order to avoid inadvertent breaches.

Participants in the financial marketplace have perfectly legitimate reasons for wanting to preserve a degree of privacy.  The non-public beneficial ownership regime, coupled with the existing anti-money laundering regime is an effective system which helps guard against illicit activity.  Unlike other regimes (which may be public), the Cayman Islands overall regime includes a verification requirement and is not reliant purely on self-reporting (which is clearly vulnerable to abuse).  The view from the Cayman Islands is that, although transparency regimes need not be public to be effective, they should apply to all jurisdictions.