Beneficial ownership: the good, the bad, and the geeky

At a lunch presentation to Jersey Finance members this week, Professor Jason Sharman wryly observed that, for such a ‘geeky’ area of academic research, the analysis of beneficial ownership was getting an awful lot of attention.

I, for one, think it’s more great than geeky.

Beneficial ownership continues to be a subject of interest to many. The first real interest was in 2013 when the UK Government announced that the transparency of ownership and control was to be a cornerstone of its G8 presidency. Their decision was to create a public register of company beneficial ownership in order to:

  • help tackle tax evasion, money laundering and terrorist financing;
  • improve the investment climate and make doing business easier;
  • ensure that businesses, investors, employees and consumers have trust in UK companies; and
  • be good for both business and growth.

Discussions quietly began the over how Jersey might introduce a public register. Our view was that the Jersey Companies Register, and our regulation of intermediaries, worked very well in combatting financial crime, and that there were very valid reasons for not having a public registry.

The Panama Papers, and the looming anti-corruption summit on 12 May, have not only kept the issue of beneficial ownership in the media, but they have provided highly emotive examples of the uses of shell companies, and sought to present public registries as the only possible solution to financial crime.

During this fast-moving story, the solution to the problem of financial crime has been presented as public registries with unquestioning faith. For me, Professor Sharman’s work provides essential analysis of public registries.

His paper is being published today to coincide with its presentation to the Jersey Finance Private Wealth Conference. Members will receive a link to it on Industry Insight, and it will be available on this website.

But what’s wrong with a public registry? There are a number of issues:

Self-reporting

Implementing a public register of beneficial ownership which is based on the premise of self-reporting (such as the UK’s registry) is likely to be ineffective. People misusing companies for the purposes of engaging in criminal activity are unlikely to comply with the requirements on a self-reporting basis.

Criminals can be expected to conceal their interests, and we question whether a central register whose information is provided through self-reporting will meet the requirements of FATF Recommendation 24, which requires competent authorities to be able to obtain adequate, accurate and current information on beneficial ownership.

Impact on private companies

Proponents of public registries suggest that they make it easier for people to identify who really owns companies and therefore who they are transacting with. But this register is not just being put in place for trading companies, but also companies such as private investment holding companies legitimately incorporated to hold investments on a personal basis with no wider business engagement. Therefore, the argument of ‘who one is trading with’ is of less relevance.

First move disadvantage

The UK are committed to moving to a public register of beneficial ownership, yet - to date - there are only two other countries who have also committed to public registers.

This reduces the incentive for other jurisdictions to reciprocate as they would already be able to receive the information without incurring the cost of collecting and sharing their own beneficial ownership information.

As always, Jersey will adhere to international standards, and will introduce them at the same time as everyone else. Measures such as a publicly available register of beneficial ownership information should only be adopted on a coordinated widely applied multilateral basis.

Unintended criminal consequences

One of the main objectives for increasing the transparency of company ownership is to reduce tax evasion, money laundering and terrorist financing. However, there is a risk that the introduction of public registers will actually increase instances of crimes such as identity theft, cyber-crime and extortion. With public registers making personal, and, by extension, family information readily available legitimate concerns exist, particularly in certain cultures, in relation to physical safety with kidnap and ransom risks being heightened.

Therefore, not only may public registers prove ineffective in tackling the crimes they supposedly target, but they could give rise to different types of criminal activity.

Human rights impact

Article 8 of the UK’s Human Rights Act 1998 states that ‘everyone has the right to respect for his private and family life, his home and his correspondence’. Public registers could be argued to be an unnecessary and disproportionate intrusion of an individual’s right to privacy. There are other ways of meeting FATF by which the same ends can be met but without the violation of human rights.

Automatic exchange of information (AEOI)

There is a global trend towards AEOI. The automatic receipt of tax payer information by relevant authorities in a person’s home jurisdiction enables that authority to take appropriate action to ensure any tax they are due is able to be collected.

Given this AEOI via gateways such as US/UK FATCA, The Organisation for Economic Cooperation and Development (OECD) Multilateral Convention on Mutual Tax Assistance and the OECD’s Common Reporting Standard (CRS), negligible additional benefit would be obtained from a public register of beneficial ownership information. This has seemingly been supported by the recent announcement that, rather than each of them introducing public registers of company beneficial ownership, the competent authorities of UK, France, Germany, Italy and Spain will instead automatically share beneficial ownership information.

Reduced transparency and UK company fees

As noted above, the UK register only covers UK incorporated companies. This presents two risks:

  1. Criminals who had been availing themselves of UK incorporated companies may simply lie in their declaration of the company’s beneficial owner, or they may seek to undertake their activities through a non-UK company. This will result in UK law enforcement authorities having less visibility than they did under the old regime.
  2. Legitimate business persons who simply value their privacy may undertake activity through a non-UK incorporated company. This should not impact on the trade itself or the tax liability of the company, but it will decrease the number of UK incorporated companies, and therefore fee income for Companies House.

Together, these will serve to (counterintuitively) reduce the transparency of activities being undertaken in the UK and negatively impact fee revenue generated from UK incorporated companies

We have produced a series of factsheets which include information on this:

Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries, is available to read here. I would urge you to read this interesting document. It’s not geeky.

 

To watch Jason's presentation from the Jersey Finance Private Wealth Conference, please click here.

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