March 16 2015

by Ivana Rossi & Laura Pop

What do two former governors from Latin America; two children of public officials from East Asia and a former MP from an Eastern European country have in common?

Firstly and most obviously, they all were high level public officials or closely related to them. Secondly, according to a recent investigation in the New York Times they all possess luxury real estate in New York and took several steps to hide their identity as the real owners of the properties.

Some of these steps involved buying condos through trusts, limited liability companies or other entities that shielded their names. Such tactics made it very hard to identify the ‘beneficial owner’; to figure out who owned what, or who was the ultimate controller of a company (or other legal entities) since the names were not shown in the company records. 

This timely and interesting investigation from the New York Times highlights some key issues on which the Financial Market Integrity Unit of the World Bank and the Stolen Asset Recovery Initiative (StAR) have focused. We work intensively to support countries implement sound anti-money laundering practices, recover stolen assets, and prevent corruption.

Inadvertently, the New York Times report also highlighted the fundamental, but often disregarded issue, of declaring beneficial ownership in a public official’s financial disclosures.

Financial disclosure laws usually require high-level public officials to periodically declare their assets, income, and liabilities. In more than 90 percent of declaration forms, officials are required to declare their real estate holdings and those of their spouse and dependents. However, in most countries, if the public officials – like those described in the New York Times article submit a declaration, they are not lying if they exclude their apartments. Financial disclosures do not require them to declare assets owned through legal entities. In addition, while over 80 percent of disclosure systems demand that  officials must declare the shares they hold, they do not have to declare them if they are held in the name of a lawyer who has them for the official’s benefit.

Most high-level public officials are not corrupt. However, as the StAR publication ‘Puppet Masters’ demonstrated, those that do engage in corrupt activities are likely to use entities such as companies, foundations and trusts to hide their ill-gotten wealth.  These conclusions are also confirmed by a recent Transparency International UK report. It showed that 75 percent of UK properties in the UK , under criminal investigation since 2004 - as the suspected proceeds of corruption -  made use of offshore corporate secrecy to hide the owner’s identities. This in turn demands a lot of creativity, resources and international cooperation from those prosecutors and investigators trying to detect and uncover some of these assets.

This explains why, The New York Times took, ‘more than a year to unravel the ownership of shell companies with condos in the Time Warner Center, by searching business and court records from more than twenty countries’. Journalists also interviewed dozens of people, examined hundreds of property records, and investigated the connections between lawyers or relatives named on deeds and the actual buyers. This was just to figure out the owners of apartments in one luxury building in Manhattan.  Unfortunately, the expertise and resources available to practitioners in developing countries trying to trace these types of assets are very meager relative to the challenge they are facing.

Financial disclosures by public officials could be a useful tool in these kind of investigations. This is why in recent years, when providing technical assistance to countries on this topic, we have suggested that beneficial ownership should be included in declaration forms. How? Not only requesting the public official declare the assets he/she owns in his/her name, but also those which they benefit from, even if there is no direct ownership, or additionally assets over which they exercise control.

So far in our work, we have encountered only a few countries such as Moldova and Costa Rica, that request their public officials declare the assets they own and those that they ‘use’ on a regular basis. For example, those cases in which “my good friend allows me to stay in his mansion for free; I could not afford it with my salary but I get to live in it”.  While it is an important step forward that officials are required declare the use of assets, it does not go far enough.  

Financial disclosures are not the magic bullet to catch a corrupt official, especially those using sophisticated methods to hide their wealth. However, once there is an on-going investigation, the information declared can be very helpful as evidence, both in what has been included as well as omitted.  In many countries intentionally leaving out information on a house or a bank account carries serious penalties. Furthermore, financial disclosures can help catch a dishonest public official whose lavish lifestyle, including real estate in a prized location, could not be supported by the resources, such as public sector salary, indicated in the declaration.  

Incorporating the concept of beneficial ownership can increase the value of asset declarations in the field of disclosure and beyond. It can help corruption investigations, assist the financial sector undertaking due diligence of Politically Exposed Persons (PEPs) (see Using Asset Disclosure for Identifying PEPs), and support civil society involved in ensuring the integrity of public officials.

Corrupt officials are increasingly using complex methods to try to hide their ill-gotten wealth. Disclosures, as a tool in the prevention and fight against corruption, need to keep up and make it harder for corrupt officials to distance themselves from the assets they truly own.

Ivana Rossi, is a Senior Financial Sector Specialist, in the Financial Market Integrity Unit and the Stolen Asset Recovery Initiative. Laura Pop, is a Financial Sector Specialist in the Financial Market Integrity Unit and the Stolen Asset Recovery Initiative

 

Comments

US must make a law for all property owning companies viz. trusts, limited liability companies or other entities to declares names of owners and also to ask proof of country tax clearance of funds. This will enable clean money and not corruption money investment in US properties.

Very good paper which can increase our knowledge in in anti corruption fight. To be implement widely.

Good paper which can improve knowledge in anti corruption fight. To be implemnted absolutely and widely

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