Public Beneficial Ownership Registries: A Response To Recent Criticisms

Anticorruption activists and other advocates for greater corporate and financial transparency scored a big win earlier this month when the UK announced that it would require the 14 British Overseas Territories (such as the British Virgin Islands (BVI) and the Cayman Islands) to create public beneficial ownership registers for all corporations and other legal entities registered in those jurisdictions. Many in the pro-transparency community believe that such registers are critical for fighting corruption and money laundering, as they make it harder to use anonymous companies to engage in unlawful transactions and hide the proceeds of crime by requiring information on the actual human beings (the ultimate “beneficial owners”) who own or control these artificial legal entities. At the very least, beneficial ownership information should be verified and kept on file so that it will be available to law enforcement in the event of an investigation, but many in the pro-transparency community believe that public beneficial ownership registers would be even more effective, as they would provide open data that civil society groups, the media, and others could scrutinize and analyze in order to unearth shady transactions and make it harder for kleptocrats and others to hide their loot. The British Overseas Territories are not the only or even the worse offenders when it comes to corporate secrecy—the United States is still struggling to enact laws that would provide for a non-public register, which the BVI and some other Overseas Territories already have—but there’s no doubt that these jurisdictions are often a preferred destination for dirty money.

So when the UK announced that it would require the Overseas Territories to adopt public beneficial ownership registers, many cheered. But not everybody. A couple weeks back, over at the FCPA Blog, Martin Kenney, a lawyer based in the BVI, published an intemperate denunciation of the new policy, lambasting the so-called “transparency brigade” for having a “mob mentality,” for being “naïve,” “hypocritical,” and neo-imperialist (and possibly racist), and of taking advantage of the devastation that many of the Caribbean Islands suffered in Hurricanes Irma and Maria to push their agenda at a time when “they perceive their prey to be weakened.” Indeed, the ad hominem invective in the post is so thick that it’s sometimes hard to discern the serious, substantive objections underneath all the vitriol. Which is a pity, because Kenney actually does advance at least one or two arguments that, while in my view likely incorrect, are worth taking seriously.

Last week, Rick offered a thoughtful, measured response to Mr. Kenney’s piece that got at some, but perhaps not all, of the core issues. I want to pick up where Rick left off, to lay out what I think are the most sensible concerns about the new UK policy (and about public beneficial ownership registers more generally). And, following Rick’s lead, I’ll try to turn the rhetorical temperature down a few notches, as there’s little to be gained in a (virtual) shouting match on a complicated issue like this.

Let me start by first dismissing some red herrings and bracketing some distinct issues that are beyond the scope of what I want to discuss here.

  • First of all, though Mr. Kenney emphasizes at several points in his post (including in its title) that public beneficial ownership registers are not a “panacea” to financial crime, nobody is arguing otherwise. I don’t know of a single person—not the most passionate advocate for public registers—who thinks that they’re a cure-all. They are, at best, a component of a larger strategy.
  • Second, I don’t want to get into the debate here about the appropriate relationship between the UK Parliament and the Overseas Territories, which I gather is extremely complex, governed by layers of laws, customs, and conventions that a non-expert can’t hope to understand. For purposes of this post, I want to focus on the content of the policy, not the question of whether the UK Parliament can or should impose it on the BVI and others. Mr. Kenney advances objections on both fronts, but I’m not competent to engage the latter question, so I’ll focus on the former.
  • Third, for present purposes I’m not really interested in whether it’s “hypocritical” for pro-transparency advocates to push for, and celebrate, the decision to required the British Overseas Territories to adopt public registers when (1) the UK’s own company register has lots of problems, and (2) other countries, like the US, don’t even have non-public registers. The former point might be relevant to the efficacy of the policy, which I’ll get to in a moment, but the charge of “hypocrisy” is misplaced given that the civil society organizations are pushing aggressively for beneficial ownership transparency in other countries (including the US) and for improvements in those registers that already exist (such as the one in the UK).

With those preliminaries taken care of, we can now consider the substantive objections that Mr. Kenney advances to the policy of requiring those who register corporations or other legal entities to provide (and document) information on the beneficial owners of those entities, and to make that information generally available in some sort of public database. As far as I can tell, Mr. Kenney makes four arguments: (1) public registers are ineffective because criminals will simply lie about the true beneficial owners of their companies (perhaps using “straw owners” or other forged documents); (2) public registers are harmful because they interfere with individuals’ right to have their financial and commercial affairs kept private; (3) public registers are unnecessary because all the legitimate benefits of identifying companies’ true owners can be achieved with a confidential register with access limited to law enforcement in the context of an investigation—something that the BVI already has; (4) public registers are counterproductive because the fact that the information would be public will encourage more people to lie or provide misleading information, making a public register less useful to law enforcement than a confidential register. In his post Rick addressed objections #1 and #2, but didn’t say as much about #3 or #4, so I’ll focus more on those, but I’ll touch a bit on each one:

  • On the argument that public registers are ineffective because, as Mr. Kenney puts it, “criminals lie.” I don’t have much to add to Rick’s succinct rebuttal. I’ll just echo his points that: (1) some criminals are actually pretty foolish or careless; (2) sometimes an investigation won’t be able to prove the primary misconduct beyond a reasonable doubt, but will be able to prove a lie on a required disclosure, which means forcing the crooks to lie about beneficial ownership may make it easier for law enforcement to nail them; (3) it will be harder for crooks to find straw purchasers if the latter are worried about getting in trouble themselves; (4) public information about the identity of the straw purchaser (say, a personal or family relationship with a kleptocrat) can make it easier to identify suspicious cases. And remember, nobody is actually arguing that a public register of beneficial ownership is a panacea, any more than a public register of campaign donations will cure improper private influence over politicians. But the fact that a medicine isn’t a magical cure-all doesn’t mean it should never be prescribed as part of a broader course of treatment.
  • On the argument that public beneficial ownership registries are an undue interference with privacy, like Rick I’ll take this argument more seriously when someone explains to me why ownership of a bank account or a company or some other property is the sort of thing in which there’s a very strong privacy interest. Mr. Kenney says, broadly and generally, that “we are all entitled to protection of private data unless we are doing something wrong.” Respectfully, this is not true—or at least it’s not true of all data in all contexts. As I noted above, as an American citizen, my donations to candidates for federal office are public—anyone can look them up—even though I’m not doing anything wrong in making those donations. Investment advisors or other agents may be required by law to disclose their financial interests to potential clients. In some systems, job applicants may be required to disclose if they’ve ever been arrested (though as a matter of policy I don’t approve of such requirements). I’m open to the possibility that there might be a privacy-based objection to public beneficial ownership registers, but abstract appeals to “privacy” don’t cut it—there needs to be a clearer articulation of the legitimate interests that would be harmed. (The closest thing I’ve heard is that in some countries, knowing that somebody is wealthy makes them a more likely target for kidnapping. Maybe, but I have to say that this has always struck me as a makeweight, especially because in those countries where I this is a genuine problem, I suspect that the potential kidnappers don’t actually have that much trouble figuring out who the very wealthy folks are.)
  • Rick’s post last week already made short work of these first two arguments, and on those points I’m mostly just embellishing on his points. But Rick didn’t spend as much time on Mr. Kenney’s third and fourth arguments, which strike me as more challenging. Mr. Kenney argues that as long as a jurisdiction requires those who register a legal entity to provide the government with (appropriately documented) information on the true beneficial owners, and regulators and law enforcement agencies have access to that information if they need it, then it’s not necessary to make the ownership register public. I’ve heard this argument from others as well, including serious scholars who are strong advocates for cracking down on anonymous company ownership, and those in the pro-transparency community should resist the temptation to dismiss the argument out of hand. Instead, it’s important to articulate—and subject to critical scrutiny—the best arguments for making company ownership information public. To my mind, there are two main justifications for public registers. The first is that by making the registers public, external civil society watchdogs can help improve the quality of the registers by combing through them, identifying problems or inconsistencies, providing data on compliance that can be used to help hold governments and others accountable, etc. In his post, Mr. Kenney makes much of the fact that the existing UK public register has all sorts of problems—but of course the only reason we know about those problems is because the register is public, which has allowed civil society groups like Global Witness to identify the problems, call attention to them, and work with the UK government to try to fix them. If the UK register were confidential, as the BVI’s is, it might have exactly the same compliance and accuracy problems, but we wouldn’t know about them. Second, media and civil society groups—armed with new technology that allows for computerized “big data” analysis, and perhaps also country-specific knowledge about identities and relationships—can analyze the public registries to identify potential wrongdoing that government investigators might well miss. That is, instead of just having the register available for law enforcement and regulators in case they decide to investigate a particular company or individual, analysis of the public register (combined with other data) might prompt investigations that would not otherwise have taken place.
  • Before proceeding, it may be worth pointing out here that there’s a bit of a tension between Mr. Kenney’s argument that the adoption of a public register in a place like the BVI would be ineffective (because criminals lie) and his argument that adoption of such a register would be unnecessary (because the BVI “already has its house in order” in light of its database available to BVI, UK, and other law enforcement agencies). If criminals can lie about beneficial ownership information (at little or no cost), and if a government-access-only registry is just as good as a public registry (for law enforcement purposes), then wouldn’t criminals also lie when registering companies in a place like BVI, which has its government-only registry? I confess I’m a little puzzled.
  • Now, Mr. Kenney’s fourth argument might seem to provide an answer to that apparent tension. In the end I don’t think it does, but the argument is nonetheless worth taking seriously. The argument goes like this: Many people want to keep their ownership of certain assets secret from the general public, but don’t mind as much if the government has the information. So, if beneficial ownership information is collected but access is restricted, people will tend to provide accurate information. But if people know that the information will be public, and they really don’t want nosy media organizations and others snooping around and seeing what they own, then more people will lie or find other ways to circumvent the disclosure requirement. This will make things worse, from a law enforcement perspective, because when law enforcement actually does need to “follow the money” in the context of a legitimate investigation, it will turn out that it’s harder to figure out who really owns what. That’s a clever and cogent argument, and one that does have some parallels with other debates over transparency: As a general matter, when the government relies on private parties to provide it with information, there’s a worry that making that information public will degrade the quality of the information the government receives because the providers of the information will be less forthcoming. But in this context, I’m not persuaded that the objection is very powerful, for a couple of reasons. First, to channel Mr. Kenney himself, those who really are engaging in dodgy or criminal activity also have a very strong incentive to conceal true ownership from the government. Second, those who are not actually criminals may be very reluctant to provide false information. I do think that there’s a risk that a public register may strengthen incentives of certain individuals to try harder to find creative ways to avoid disclosure, and those who advocate public registries should keep this in mind. But my gut instinct (and I admit it’s not much more than that at this point) is that this potential cost is relatively small and substantially outweighed by the benefits of publicity outlined above.

So, that’s my take on the current debate over the value of public beneficial ownership registries, prompted by Mr. Kenney’s piece and Rick’s response. These are important issues and the deserve more extensive consideration and vigorous debate—without, I hope, unnecessary and distracting vitriol.

One thought on “Public Beneficial Ownership Registries: A Response To Recent Criticisms

  1. Matthew elaborates on the two points I made in my May 9 post* responding to Mr. Kenney’s arguments against public registries of beneficial ownership and adds two additional, persuasive ones. Thanks Matthew.

    On May 14, after both posts appeared, the Council of the European Union gave final approval to the EU’s Fifth Directive on Money Laundering.** In a reply to geoffcookceo’s comment on my May 9 post, I explain that the EU directive addresses directly one of Kenney and Cooke’s main arguments against public registries. Now there are five points in rebuttal to their claims.

    *https://globalanticorruptionblog.com/2018/05/09/public-disclosure-of-beneficial-ownership-do-the-naysayers-have-a-point/
    ** http://www.consilium.europa.eu/en/press/press-releases/2018/05/14/money-laundering-and-terrorist-financing-new-rules-adopted/

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