Public Disclosure of Beneficial Ownership: Do the Naysayers Have a Point?

Readers are no doubt celebrating the British House of Commons approval May 1 of legislation making it harder for corrupt officials to hide money offshore. The new law requires that, starting 2021, the British Virgin Islands and the Cayman Islands along with other U.K. overseas territories must publicly disclose the actual person or persons – the “beneficial owners” – of companies organized under their laws. Some half of the companies identified in the Panama Papers were organized in the British Virgin Islands, and estimates are that between 2007 and 2016 over $90 billion surreptitiously left Russia via British overseas territories. Somewhere among the billions that mobsters, drug traffickers, and tax evaders are hiding in British overseas territory corporations are likely billions in monies stolen through corruption. Forcing the corporations to reveal who is behind them will make recovering the monies that much easier.

No reform, no matter how powerful the arguments in support, is without its doubters. Given the hefty fees banks, lawyers, accountants, and secrecy accomplices of all kinds earn helping hide money, it is no wonder the beneficial ownership legislation has attracted its share of naysayers. The most thoughtful, and certainly the one who can turn the cleverest phrase, is BVI solicitor Martin Kenney. On Monday on the FCPA blog, he castigated “the NGO ‘transparency’ brigade.” It had “once again raised its guns and placed its cross-hairs over its preferred target: the offshore service providers in the British Overseas Territories.” And thanks to the Commons vote, the brigade can now mount its most wanted “trophy,” the BVI, on its wall.

Laying aside his colorful rhetoric, Kenney has a point. Actually two.

Point one is that public disclosure is futile for, Kenney boldly asserts, criminals lie. He thus asks:

Do [transparency brigade members] honestly believe that a sophisticated global economic criminal (British or otherwise) is going to openly and freely attach their name to a dodgy company in an open company UBO [ultimate beneficial owner] register? Do they envisage simply logging onto the website, typing in the search term “Kleptocratic African Dictator X” (for example) and be faced with a list of companies he or she is using to launder illicit profits from acts of grand public corruption?

Kenney is certainly on strong ground here. Criminals do lie (I don’t recall ever representing an honest crook as defense counsel), but if experience with other forms of disclosure is any guide, we can expect a few will be dumb enough not to. Several Thai public servants have registered land or other property in their own names in the appropriate public registry and then carelessly or stupidly failed to declare it on their personal financial disclosure — making their prosecution for false declarations the easiest criminal cases Thai prosecutors have ever handled. The average corrupt official may be too smart to attach their own name to an offshore company, but that means some are below average.

Knowing their identity will become public, some “cut outs” or “straw owners,” people who put their name on a corporate ownership record to hide the true owner, may be reluctant go along with the ruse. Vladimir Putin’s second cousin may decide against claiming she owns a BVI corporation that Putin really owns. If she knows the lie will become public, she could reasonably fear that some government with a grudge against Vladimir might make the link between her and her cousin, putting her in its cross-hairs. Who knows how law enforcement authorities, or indeed someone from the “transparency brigade,” might be able to piece together bits of information from different sources to spot a straw owner. Public ownership opens the door to all kinds of opportunities once denied them.

Once a straw owner is identified, the connection back to the real owner shouldn’t be too difficult. The straw owner will have every incentive to give the real one up to avoid being punished for lying on the corporate documents.

Kenney’s second point is that making beneficial ownership records public denies legitimate businessmen and women the right to privacy. As he contends:

The argument that “if it’s legitimate then why try and keep it confidential” doesn’t fly. We are all entitled to protection of private data unless we are doing something wrong. Privacy is closely aligned to human dignity.

Kenney’s argument would be stronger if, instead of appealing to an abstract right to privacy, he were to explain how revealing beneficial ownership is harmful. Who is harmed and how great is the harm? For years I have heard opponents of corporate transparency claim there are “legitimate reasons” for keeping ownership data secret. And for years I have asked them to name one. I am still waiting.

Even if opponents can cite reasons why corporate owners are entitled to privacy, their right is not absolute. It must be balanced against other concerns. One of those is the ability of criminals to evade justice by being able to hide billions of wrongfully acquired dollars, pounds, euros, rupees, or what-have- you through secret ownership of corporations in the BVI and elsewhere.

The Commons weighed the competing concerns and struck it decidedly against making it easier to collar big-time crooks of all stripes. Hurrah!

And congratulations to those in the “transparency brigade” on snaring one of the big ones. The BVI trophy deserves a special place on your wall.

7 thoughts on “Public Disclosure of Beneficial Ownership: Do the Naysayers Have a Point?”

If I were an overseas territory leader the first thing it would cross my mind is how to support the economy and jobs without the trust businesses. Some of expats would go home, or seek labor opportunities in other jurisdictions; others would locally find another gig, but other fraction of the working population would be unemployed. Unemployment does not win elections.

As a leader of a country harmed by taxable base erosion, profit shifting, money laundering, terrorist financing and corruption using offshore entities I must estimate the harm’s size and run a cost/benefit analysis and decide what public policy should I implement.

Several choices would arise: complaining, as currently is done, without much more effort, and thus results; or doing something effective. How can we help this tiny nation to reconvert their economy to other industries such as technology, turism, among others? Any starting point of a serious conversation about low taxation jurisdictions regime change should include what syndicated help may the overseas territory receive from the incumbent countries in order to make the structural needed changes feasible.

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In the frantic push to compel the Overseas Territories to introduce public registers and to pressurise the Crown Dependencies to do the same, the arguments that dispute the effectiveness of such registers and the implications of the move, have been largely ignored.

In your latest comment, you claim that revealing the public details of company owners is not harmful to them or at least there is no evidence that such revelations will make any difference to the individuals concerned. It is a naïve view that fails to take into account that many citizens live in countries where there are oppressive regimes and dictatorships and who would not want their legitimate assets revealed on the internet. There will be other individuals across the world who will also have legitimate and compelling reasons for at least a limited level of confidentiality. In such circumstances, is it right that their ownership details be available for everyone to see, including by unscrupulous people who might use the data to their own advantage?

As this is a question of privacy and how far it should be invaded, it is difficult to quote examples as you ask for. But one simple illustration which has been made public serves to prove the point. At the time of the Panama Papers, leading movie actress, Emma Watson, was named as having a company in the BVI. It highlighted perfectly the risks inherent in public registers. Her spokesperson explained she sought no tax or monetary advantage from the offshore company, only privacy. The ‘Harry Potter’ star needed that anonymity to protect her personal safety which, said the spokesperson, had been jeopardised in the past owing to such information being available publically. I think the publication of her financial details was a classic example of something of interest to the public that was not in the public interest to reveal. The safety of how many other individuals would be compromised if such details are openly available?

These are the consequences of public registers that NGOs and tax campaigning lobbyists choose to ignore. In my view, it tips the balance in favour of registers with ownership data that is verifiable and available to the people that need to see it, law enforcement agencies, tax and regulatory authorities but not everyone else. Robust compliance and penalties for firms that fail to deliver, strong and consistent global regulation and increasing co-operation between countries and their law enforcement agencies is the way to catch the criminals.

The argument that ownership details are already freely available to those that need the information is too easily dismissed by campaigners with their own political agenda. Also wrongly dismissed are the opinions of all the global standard setters and bodies such as the OECD, IMF and Financial Action TaskForce. They have the access and experience to evaluate ownership registries and have acknowledged the quality of the company register system that a jurisdiction such as Jersey operates effectively. Unlike public registers, the Jersey register ensures that the licensed service providers that administer such companies must verify the ownership details provided. Once again these views do not suit the NGOs’ agenda and so are summarily ignored.

In the clamour to introduce public registers, the basic human rights of the legitimate many have been sacrificed on the altar of the pursuit of the criminal few. Individuals exposure to cyber risk , identity theft and misuse of data have been virtually forgotten, remarkable given the recent concerns over Cambridge Analytica, Facebook and the introduction of GDPR. Of course ownership data has to be available to those law enforcement organisations investigating fraud and money laundering, but that fundamental right to privacy – we call it compliant confidentiality – should not be ignored.

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Rick Messick on May 18, 2018 at 11:17 am said:

I am sorry to learn that Ms Watson’s personal safety is at risk thanks to revelations of her wealth but I have trouble linking it to the exposure in the Panama Papers of her secret ownership of a company organized under the laws of the BVI. I would think the slew of tabloid stories naming her the world’s highest paid movie actress the more likely source of her problem.

In any event, if the new U.K. law follows the EU’s Fifth Directive on Money Laundering, those in Ms Watson’s position will have an out. Honest people who fear if their wealth is known they will be at risk of kidnapping, blackmail, extortion, or what-have-you, can petition to have their ownership of a company withheld from public disclosure. The directive provides —

“In exceptional circumstances to be laid down in national law, where the access referred to in point (b) and (c) of paragraph 5 [publication of someone’s identity in a public registry] would expose the beneficial owner to disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable, Member States may provide for an exemption from such access to all or part of the information on the beneficial ownership on a case-by-case basis.”

The directive rightly provides that such exemptions are not to be freely granted:

“Member States shall ensure that these exemptions are granted upon a detailed evaluation of the exceptional nature of the circumstances. The rights to an administrative review of the exemption decision and to an effective judicial remedy shall be guaranteed.”

As a further safeguard on abuse, the directive requires that:

“A Member State that has granted exemptions shall publish annual statistical data on the amount of exemptions granted and reasons stated and report the data to the Commission.”

The full text of the Fifth Directive is here: http://data.consilium.europa.eu/doc/document/PE-72-2017-INIT/en/pdf

I would suggest critics of the new UK law focus their energies on ensuring it incorporates provisions similar to those in the EU directive. Or better (?), perhaps join the charge to reverse Brexit.

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