The issue of ‘beneficial ownership’ has attracted unprecedented interest over the last year, including actions by the G8, topic of an earlier StAR blog: ‘Tearing down the walls of corporate secrecy’. The launch on March 18 of an international campaign by Global Witness at the TEDTalk of its co-founder Charmian Gooch serves as yet another compelling reminder of why there is an urgent need for global action. StAR welcomes elevating the challenge of anonymous companies to an international campaign, as addressing it requires political momentum and pressure. How we do that is open to debate.
Recent moves in the US and in Europe are encouraging. They are also testimony to the very different philosophies between these two major players – and of the many practical hurdles still ahead.
Recently, the European Parliament voted on the draft 4th ‘Directive on Money Laundering’, and took a strong stance in favor of requiring member countries to establish public registries of beneficial ownership for companies (largely following the UK lead) but also, notably, on trusts. The vote in Brussels will now be considered by the new Parliament to be elected in May. At more or less the same time, the White House put forward budget proposal measures calling for the enhancement of transparency of companies established in the United States.
Ensuring timely access to accurate beneficial ownership information is critical in fighting corruption. This was the central recommendation of StAR’s 2011 study, ‘Puppet Masters‘, which documented in detail the misuse of legal entities and trusts in grand corruption cases. The challenge goes beyond the transparency of legal entities and arrangements themselves; the quality of the due diligence to be undertaken by service providers such as financial institutions, company agents and lawyers is critical to the availability and quality of beneficial ownership information. Preliminary information on stolen assets in Ukraine is a powerful reminder of how much more still needs to be done – and with what relative ease proceeds of corruption are still finding their way into the financial systems.
The primary yardstick to assess the credibility and ambition of any proposal on anonymous companies is whether it only focuses on legal ownership or whether it seeks to determine the natural person who ultimately, in fact, exercises control. Formalistic approaches solely based on percentage or threshold level of legal ownership (e.g. a 25 %shareholder) may provide clues to beneficial ownership, but in the cases of interest are likely to miss the target. It is far too easy to devise a construction enabling full control below such thresholds (or even with no ownership at all). Nelson’s Rockefeller’s dictum on success in business holds equally true in crime: “The secret to success is to own nothing, but control everything”.
The European Parliament proposal would establish a public register of beneficial ownership in every country in the Union that would be interconnected to include trusts, companies, foundations and holdings and would for the first time be publicly available – upon request. Considering registers of beneficial owners for trusts is even more ambitious than aiming to such level of publicity for companies. The proposal has stirred considerable debate – on its feasibility and, more fundamentally, on legitimate privacy grounds. Many believe that trusts are entitled to a greater degree of privacy than companies since they are private arrangements - rather than public entities such as legal persons. It would be the equivalent of considering public registries of private contracts.
From StAR’s perspective, the use of trusts in financial crime illustrates their vulnerability to abuse and therefore the necessity for greater transparency. Solely focusing on companies would therefore not close the loopholes. However, most cases of abuse of trusts include companies (usually companies shares held in trust), thus tackling companies’ transparency would also allow one to see through the trust structure to the natural persons who ultimately settled and benefit from the trust. The European Parliament also inserted several provisions to protect legitimate data protection and privacy of trusts and to ensure that only the minimum information necessary is put in the register.
Across the Atlantic, the White House’s most recent budget proposal seeks to establish a refined definition of beneficial ownership and updated requirements. In addition to the substance of the proposal, what is revealing is that the Administration, through this legislative proposal, takes a clear stance on how it wants to tackle corporate anonymity. The proposal importantly notes that it is not just about what percentage of a company an individual may own or legally control but about establishing exactly who exercises de facto control and benefits from a company.
At its core, the US Administration proposal builds on tax related information. It would extend the requirement to obtain an Employer Identification Number (EIN) and to provide beneficial ownership information to the tax authorities to all companies formed in the US. Tax authorities would then be authorized to share relevant information with law enforcement, without a court order. Furthermore, the proposal would also ‘establish standards for States to improve their regulation and oversight of the incorporation process’ which has come under scrutiny for their lack of collection of beneficial ownership information. These measures taken together would provide more information on, and greater access to, companies’ beneficial ownership.
Instrumental to these more practical proposals have been last year’s G8 Action Plan Principles to Combat Misuse of Companies and Legal Arrangements and subsequent G8 country action plans - clear evidence of the need for political buy-in and commitment. (To find out more, see the newly created online StAR Transparency and Beneficial Ownership Resource Center.)
In conclusion, the EU and US proposals are clear progress, because the focus is now on how to do it. Still, both are in too early stages to judge whether they are sufficient to effectively address the dependence of corrupt officials on these relatively cheap and easily established legal entities and trusts to conceal the proceeds of their crimes. StAR’s analysis is that in any event it would not be possible to achieve impact on beneficial ownership without also ensuring that service providers – financial institutions, trust and company service providers, lawyers and accountants – are subject to clear due diligence requirements and anti-money laundering regulations, and that these be rigorously enforced. A key question still open in that respect is that given that beneficial ownership is not static, whether public availability of beneficial ownership information gathered by governmental authorities would bolster or, on the contrary, lead to complacency and weaken the independent due diligence to be undertaken by these service providers.
Until there are comprehensive and global requirements, the ‘puppet masters’ - be they corrupt public officials, heads of criminal organizations or tax dodging individuals – will remain safely behind the curtains, pulling the strings of legal entities and trusts to enjoy their criminal wealth.