Transparency of Beneficial Ownership: Realistic or a Pipe Dream?
By Lowtax Editorial
13 January, 2015
This month's Lowtax special feature focusses on the rapidly unravelling plans for public registries of corporate beneficial ownership, which form part of the global campaign for greater corporate and tax transparency, especially in the world of offshore.
The idea for publicly accessible registries of beneficial ownership was one of the main points agreed by the G8 at the Lough Erne Summit in Northern Ireland, in June 2013, at which the issue of tax avoidance by companies and wealthy individuals was placed at the top of the agenda by the United Kingdom.
Included in the "Lough Erne Declaration" endorsed by the Summit's participants was a recommendation that "companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily." The G8 also adopted an Action Plan, which sets out "core principles that are fundamental to the transparency of ownership and control of companies and legal arrangements." It argues that companies should obtain and hold information on their beneficial ownership, and that central registries containing these details should be set up at national or state levels. Likewise, trustees of express trusts ought to acquire such data, and financial institutions and designated non-financial businesses and professions, placed under effective obligations to identify and verify the beneficial ownership of their customers.
The United Kingdom
The United Kingdom Government has taken a surprising lead on this issue, and is taking the Lough Erne Declaration a step further by insisting that beneficial ownership registries shouldn't just be accessible by law enforcement authorities, but by the public at large. This is surprising because it is a policy strangely incongruous with the claims of the Conservative-led coalition to be firmly pro-business, with few things likely to result in companies deserting Britain faster than putting company ownership details into the public domain for anybody to see.
In a speech delivered to an Open Government Partnership Event in October 2013, Prime Minister David Cameron confirmed that not only will plans for a register go ahead, but the register will indeed be open to the public. Cameron claimed that "for too long a small minority have hidden their business dealings behind a complicated web of shell companies and this cloak of secrecy has fuelled all manners of questionable practice."
In June 2014, a proposal for an open register of beneficial ownership was included in that year's Queen's Speech, which sets out the Government's legislative agenda for the coming year. So far however, no legislation has been forthcoming from the Government, and with a general election due to be contested in May 2015, the likelihood that parliament will see a beneficial ownership bill is reducing all the time.
The Rest of the World
At the conclusion of the Lough Erne Summit, the G8 countries published their own "action plans" on beneficial ownership, which outline the legislative changes they intend to make to bring beneficial ownership registries into operation. Few Governments seem to be pushing this issue to the same degree as the UK, however.
Ongoing inaction from the G8 with regards the beneficial ownership issue could be interpreted as a sign that most Governments think that the UK plans are a bad idea. Putting aside the major concerns about individual privacy, touched upon later in this feature, achieving a level playing field internationally looks a fanciful notion, as no country really wants to act as a guinea pig in this experiment in corporate transparency.
Why the UK is pursuing its beneficial ownership registry with such vigour remains something of a mystery; perhaps the Government thinks there will be votes in a multinational-bashing agenda, and the proposals will be quietly shelved in the hub-bub of the general election campaign in the knowledge that the idea is probably never going to catch on internationally anyway. But even if the G8 did start to advance the issue again, there are legal and constitutional barriers to be overcome in certain jurisdictions, especially those with a federal structure of government. And the most obvious of these is the United States.
The White House's action plan on beneficial ownership commits the Government to pursuing the implementation of legislation which will require the identification and verification of beneficial ownership information at the time a company is formed. But unlike the UK, the US action plan calls for such registries to be available only to relevant enforcement authorities, not the public. There is also another problem as far as the US is concerned, and that is company laws are a state affair, rather than a federal one. In particular, because of their minimal disclosure requirements, Delaware and Nevada remain two of the most popular places in the world to form a company, and their respective governments aren't going to give these up without a fight. Moreover, it is difficult to envisage a Republican Congress approving legislation that effectively attacks individual liberties. And without the world's largest economy on board, a huge chasm opens up in the level playing field.
The offshore world has largely fallen into line with each new transparency initiative thrown at it by the OECD and the major industrialised countries over the last 10 to 15 years. But on the beneficial ownership issue, the major international offshore financial jurisdictions seem to have drawn a line.
Following the Lough Erne Summit, the IOFCs with constitutional links with the UK (and at the behest of the UK) also published action plans on beneficial ownership, including Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Jersey, the Isle of Man and the Turks and Caicos Islands. In the past year or so, these jurisdictions have also conducted public consultations on plans for beneficial ownership registries, and whether these should be open to the public. And these exercises came to the unsurprising conclusion that the sort of public beneficial ownership registries being advocated by the UK were at best unnecessary and at worst dangerous.
A cynic might say that this collection of jurisdictions, having built their financial centres on the foundation of confidentiality laws, was always going to object to putting company ownership information into the public domain. But from the offshore perspective, the issue isn't all about maintaining secrecy. Many jurisdictions contend that they actually already collect information about the beneficial owners of registered companies and that such information is readily available to law enforcement authorities on request. While these systems don't match the level of transparency being advocated by the UK, for the most part they are well within current international standards set by the Financial Action Task Force (FATF), and exceed equivalent rules in many onshore countries, including the UK. Why, IOFCs are asking, should we be pushed into going even further when there is very little likelihood of a level playing field on accessibility of beneficial ownership information ever being achieved?
So, in the past few months, there has been a succession of announcements from IOFCs that, while certain improvements will be made to the way beneficial ownership information is collected, stored and accessed, they will largely maintain the status quo.
As Bermuda's Minister of Finance, Bob Richards, observed in November 2014: "Despite having no hand in creating the Organisation for Economic Co-operation and Development tax system, Bermuda has for the last 75 years led the way in terms of transparency, having established a legislative framework requiring that persons wishing to incorporate in Bermuda provide central authorities with information on the proposed beneficial owners of the business."
"If we agree to a public register, while our competitors around the world do not, we will put ourselves at a distinct disadvantage, severely damaging our economy."
Earlier in the year, Chief Executive of Guernsey Finance, Fiona Le Poidevin, said Guernsey continues to seek a level playing field on the publication of beneficial ownership information, pointing out that Guernsey already requires corporate service providers to keep records on beneficial ownership.
She said: "Guernsey already regulates its corporate service providers (CSPs) who are required to keep records on beneficial ownership, and so we believe that we are in many ways ahead of the curve. We welcome the moves of other jurisdictions to enhance their regimes, but we and other like-minded territories believe that the most effective route forward is for the development of a truly global level playing field on beneficial ownership."
The latest rejection of the UK position came from the Cayman Islands Government which published a report, at the end of 2014, stating that it will not introduce a central registry of information on the beneficial ownership of companies, although it will tighten up its beneficial ownership regime in other areas.
The report follows industry consultation between November 2013 and February 2014 and broadly concludes that the territory's existing regime is adequate and already complies with international standards and, in particular, the recommendations of the FATF.
Under the current system in operation in Cayman, CSPs have been required to maintain details of the beneficial owners of companies since 2000. The report notes that this information is already available to law enforcement and tax and regulatory authorities upon request. This fact was recognised during the consultation process, with more than 70 percent of the respondents noting that Cayman's measures are "quite robust" and are at a level of compliance beyond those of other jurisdictions - including key onshore jurisdictions where, in some cases, beneficial ownership information is not collected or maintained at all.
Overwhelmingly, respondents to the Cayman consultation, which included local and foreign NGOs, individuals, local companies, and a small number of foreign companies, rejected the idea of a central registry of beneficial ownership, with 81 percent against the proposals.
According to the report, all of the 81 percent said a central registry would "create a significant, financial burden for the Cayman Islands Government, and raise issues such as violation of privacy; and that information security, accuracy and integrity that would need to be addressed prior to any possible implementation of such a registry."
"Furthermore," continues the report, "by implementing a central registry of beneficial ownership information that is publicly accessible, prior to it becoming the required method of meeting the global standard, respondents said the resultant costs to clients of doing business in Cayman would lead many companies to shift to more cost-friendly jurisdictions (which presumably would not have introduced a public central register), to the detriment of the Cayman Islands financial services industry. This would have a material adverse impact on the economy of the Cayman Islands."
The Cayman Islands will, however, ban bearer shares and introduce a new requirement for CSPs to designate a natural person resident in the Cayman Islands to be responsible for responding to requests for beneficial ownership information and the monitoring and testing of information held at specified intervals.
In actual fact, it became apparent by December 2014 that the world of offshore was more or less united against the proposals espoused by the UK for largely the same reasons, as evidenced by the UK overseas territories' joint rejection of them at a December meeting of the Joint Ministerial Council - the highest forum that brings together senior officials from the UK Government with the elected leaders and representatives of the Overseas Territories to discuss matters of mutual interest.
Cayman Premier Alden McLaughlin said after the meeting: "Unless such registers become the new global standard and are being used by all major players - including the UK - then neither we nor any other Overseas Territory or Crown Dependency intend to go first and have our economies experimented with and potentially damaged. We see no need for a central registry that would increase cost to business and the country and also create a potential single data source, which motivated and skilled individuals could hack into for gain."
The territories are to resume discussions on the collection of information on beneficial ownership with the UK in February. However, given the problems and flaws highlighted in this feature, imagining a world where beneficial ownership information can be readily viewed by the public is looking increasingly far-fetched.
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