Earlier this month, Martin Kenney, the Managing Partner of Martin Kenney & Co. Solicitors (a specialized investigative and asset recovery practice based in the British Virgin Islands (BVI)) posted a widely-read piece on the FCPA Blog that criticized the UK Parliament’s decision to require that British Overseas Territories create public registries of the ultimate beneficial owners (UBOs) of legal entities registered in those jurisdictions. Mr. Kenney’s post provoked two critical responses here on GAB, the first from Senior Contributor Rick Messick, the second from Editor-in-Chief Matthew Stephenson. GAB is delighted that Mr. Kenney has chosen to continue the debate over this important topic by providing the following rebuttal to those criticisms:
Matthew Stephenson wrote in his recent response to my FCPA Blog, about the futility of the UK Parliament’s proposed changes to open company UBO registers in the British Overseas Territories, that: “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.”
In my piece, I had explained: “The fact is that the BVI already has its house in order. The island’s systems now include the Beneficial Ownership Secure Search system (BOSS System). A database that is searchable, with the information being available to UK law enforcement agencies within 24 hours. In addition, the BVI has signed up to no fewer than 28 Tax Information Exchange Agreements, with countries that include the UK, USA, Canada, Germany, France, Australia, Japan, Netherlands, etc. So what part of this is secret?”
Professor Stephenson takes me to task on a number of points. Firstly, he reports that I am a “lawyer in the BVI.” This is somewhat understating my professional expertise in the subject of tackling cross-border corruption and economic crime, and thus the validity of my opinions regarding the ineffectiveness of an “open” system of transparency for company UBO identification data. These opinions are based on over 30 years of experience as a lawyer acting for the victims of economic crime and in the investigation of cross-border fraud, corruption, money laundering and the recovery of concealed assets.
My firm of 20 people has first-hand experience regarding, among other things, the effectiveness of secret “Norwich Pharmacal” and “Bankers Trust” disclosure orders in the BVI and elsewhere in the Commonwealth. These special investigative orders used in civil fraud recovery and insolvency proceedings regularly uncover the identities of the beneficial owners of assets taken by fraud or corruption, and they help us right wrongs. These extraordinary pre-emptive disclosure remedies do so under the protection of ancillary anti-tip-off orders – or “super injunctions” – which help to manage the risk of an investigative target taking evasive action with his or her concealed assets. It cannot be over-emphasized that the UBO information held in “controlled” transparent systems, like the one in the BVI, is of very great investigative value.
I also see no mention by Professor Stephenson about the risk of destruction of valuable investigative data now collected and housed in “controlled” transparent systems like the BVI’s, by its inevitable migration to black regulatory holes like Delaware through the introduction in the BVI of a “wide-open” transparent system for holding that data. Also, Professor Stephenson’s dismissal of data protection and the right to privacy over personal financial information does not contend with modern European criminal data protection laws. He seems unaware of the impossibility of squaring data protection law and the push for completely “open” systems of transparency of bank accounts or private data on company UBO registers.
Professor Stephenson notes that the issue of whether the imperial Parliament at Westminster can lawfully override the laws of the territory of the Virgin Islands is not within his ken to comment on. I agree with the Professor that this is a complex cross-border constitutional legal question. We are no longer in the 19th century when “might was right” within the British Empire. The Virgin Islands Constitution Order 2007 states in its preamble that the UK, in agreeing to the terms of the BVI’s Constitution, “has articulated a desire to enter into a modern partnership with the Virgin Islands based on the principles of mutual respect and self-determination.”
Section 119 of the Constitution is where the UK reserved “to Her Majesty full power to make laws for the peace, order and good government of the Virgin Islands.” This power must be exercised in harmony with s.71, which confers the very same law-making power upon the local democratically elected legislative assembly on Tortola. Also, arguably, neither Her Majesty nor indirectly Her imperial Parliament may exercise the power conferred by s.119 of the BVI Constitution without regard for what is in the best interests of the people of the Virgin Islands.
Minimally the power to make laws conferred by s.119 on Her Majesty comes with a duty to consult with and to accommodate the advice of the Government of the Virgin Islands in advance of exercising that power. The 2007 Constitution of the BVI is premised on a modern partnership model – and not one of absolute imperial power being vested in one of the partners. Just as, in an arguably analogous setting, the Supreme Court of Canada has repeatedly held in modern times that the Government of Canada has a duty to consult with and accommodate communities of indigenous Canadians on any proposed law or action of the State affecting such people.
This is a fundamental right of social justice which invokes very solemn legal obligations. It may surprise you to know that in the case of the UK Bill which is calculated to impose an “open” transparent UBO identification model on the BVI, there was no consultation with or accommodation taken of the legitimate aspirations and interests of the people of the Virgin Islands. Rather, the Bill was rushed through the House of Commons in a matter of days pre-emptively, aggressively and therefore unattractively. And arguably unconstitutionally. The subsequent celebratory chatter and “high-fives” online and in news articles from the Bill’s proponents takes no account of its impact on the fabric of the relationship between the UK and her territories; or on how this approach of aggression sits with the people affected by it.
The UK’s statute in-being which seeks to compel the use of an “open” transparency model for UBO identification data in the UK’s overseas territories will be a statute from the imperial Parliament. Despite Professor Stephenson’s admonition to the contrary, it is not intemperate on my part to point that fact out. When Parliament at Westminster unilaterally imposes a law on a British territory, it displaces the constitutionally guaranteed right of people to have their own democratically elected legislative assembly representatives enact laws for the territory. I did not imply that the UK decision was racist, given the only mention of the word in my piece came from the quote attributed to the Turks & Caicos Islands’ former Premier, Michael Misick. So, imperialistic yes: racist no.
The real world of fighting fraud and its reality is a different place from the venerable Harvard Law School. Trying to identify and prove the UBO of any one of 800,000 Delaware companies in a fraud case is exceptionally difficult and expensive. Unlike the BVI or other well-regulated offshore financial centers, as specialist stolen asset tracers dealing with Delaware, we are left with one or two leads to discover. Usually these are the identity of the person who pays $500 to a formation agent in Wilmington to incorporate a company; $100 each year to have that formation agent act as an agent to receive service of process; and $300 per year to the State of Delaware in franchise taxes. Also we can sometimes discover the bank account details of the account used to make these small payments, through 28 U.S.C. §1782 [Discovery in Aid of Foreign Proceedings] orders of the USDC (Delaware); U.S. Bankruptcy Rule 2004 discovery; or local Delaware Chancery Court pre-action discovery.
In many of my large-scale fraud and asset recovery cases, this extremely limited Delaware UBO identification fact-discovery takes us to the door of a Manhattan law firm, which pays for the upkeep of a Delaware company apparently caught up in a fraud. The law firm does this for what to the outside world is an anonymous client. This is an invitation to a fight in the New York Courts over the scope of the attorney-client privilege – and whether a law firm can be compelled to reveal the identities of its clients standing behind a Delaware company as its UBO. We usually win that debate after several months have been wasted and a lot of money spent. What can cost $15,000 to get to the same point in the BVI can cost $150,000. That’s what it takes to crack open barriers to information regarding the concealed ownership of a Delaware company used to conceal the proceeds of a fraud – or a company that Justice Russell in Jones v. Lipman  1 WLR 832 would be heard to say is but a “device and a sham, a mask which [a fraudster] holds before his face in an attempt to avoid recognition by the eye of equity.”
The other major problem with tracing assets in and through Delaware or Nevada companies is that it is very difficult to do so under the protection of ancillary court imposed “super injunctions” or anti-tip-off orders (sometimes called “seals and gags”). These orders can be crucial to ensuring the effectiveness of a cross-border fraud or corruption asset recovery inquiry and litigation. Because without them, the underlying UBO targets will almost inevitably take further evasive action with their concealed assets. As a general rule, these sealed-and-gagged orders are unavailable in most American courts, which place a heavy emphasis on the need for open justice. (One exception to this principle was articulated in one of our cases by US Bankruptcy Court Judge Robert Mark (SDFL), in his 2015 judgment in In Re Petroforte Brasilerio, where we were told that it was permissible to use secret ex parte discovery to trace assets in a fraud setting, if we could show that we were in hot pursuit of a particular asset.)
In contrast, in the BVI and in like-kind English law-based locales such as Gibraltar, the Isle of Man, the Channel Islands, the Cayman Islands, Hong Kong, Singapore, and elsewhere in the Commonwealth, we regularly obtain these extraordinarily powerful secret tools ancillary to Norwich Pharmacal/Bankers Trust document disclosure orders, revealing illicit money flows and the ownership of what can sometimes be billions of dollars of concealed assets – without a wealthy and powerful fraudster or kleptocrat knowing it. We seek to (figuratively speaking) “undress” a fraudster in their sleep using this strategy, accumulating sometimes hundreds of thousands of confidential bank account and company ownership records, all under the protection of utmost secrecy. A “fully open” UBO registry system will not help us in our work – it will make it much more challenging. It is a real shame that the proponents of “open” transparent UBO identification models do not consider what it actually takes to win big anti-corruption and anti-fraud and asset recovery cases. Speed. Stealth. Cross-border judicial cooperation. And a pool of valuable and undisturbed confidential data and evidence that can right wrongs.
Campaigners for fully “open” transparency models mean well. Their heart is in the right place. But they do not – in so far as I can tell – have sufficient situational awareness regarding how difficult it is to win a major fraud and asset recovery case. In this environment, litigation is fought at a ferocious pace; daggers are drawn and defendants will cheat, lie, and dissipate their assets wheresoever they can. Making lots of noise and using fully open systems of transparency is a poor strategy for success against the world’s leading economic criminals and kleptocrats. It may sell good copy and raise lots of money for NGOs. But how many cases does it win?
The central point I am making is that before we rush to change “controlled” transparency models into fully open ones, we need to thoughtfully consider the extent, and the costs, of the application of the law of unintended consequences.