Guest Post: To Be Effective, Public Company Ownership Registries Must Be Linked

Today’s guest post is from Louise Russell-Prywata, Program Manager at OpenOwnership, a global non-governmental organization that promotes greater corporate transparency by making it easier to publish and access data on company ownership.

Danske Bank’s Estonian branch appears to have enabled international money laundering on an enormous scale, with Danske Bank currently investigating  about $236 billion in suspicious transactions (including, but not limited to, the notorious “Azerbaijani Laundromat” in operation from 2012-2014). Yet while money laundering on this scale may be unusual, the mechanisms that allowed funds to flow undetected from countries such as Russia, through Danske Bank Estonia, and into jurisdictions including the UK, are quite familiar. One of the most important of these techniques is the use (and abuse) of anonymously-owned companies.

If we want to stem the tide of money laundering through corporate vehicles, then public registers of the every company’s “ultimate beneficial owners” (UBOs) are an important part of the solution. Publicly available information would decrease reliance on whistleblower allegations to uncover money laundering, and companies themselves would benefit by reducing the costs of due diligence. There has been significant progress to implement public UBO registers in some countries, including the UK and Ukraine, and several other countries have committed to adopting UBO registers in future. There is already some evidence that these registers can make a difference. For example, following the requirement for UBO disclosure for Scottish Limited Partnerships (SLPs), the number of new incorporations fell dramatically; this is encouraging, as SLPs have featured prominently in several grand corruption cases. However, the Danske Bank revelations highlight that the power of national registers in isolation is limited.

To effectively deter and detect corruption and money laundering, public UBO data from different countries needs to be linked in a manner that is useful for law enforcement, investigative journalists, and others. The data from different registers must be compatible, so that it would be possible, for example, to ascertain whether the Ms. Doe owning Doe Holdings Ltd. registered in the UK, is the same Ms. Doe owning Doe’s Ltd. in Cayman Islands. This is important because a money-laundering trail rarely leads neatly from source jurisdiction straight to a company whose UBO is listed in a public register. Criminals and their associates tend to create a complex chain of legal entities to hide the illicit origin of their funds. This was the case in the Azerbaijani Laundromat, for example. Linking together UBO information from different jurisdictions would make it far easier to “follow the money” in grand corruption and money laundering cases. While law enforcement in some cases have powers to do this now, in practice the process can be complex and expensive, and it is not easily possible to link information at scale. Continue reading

What, Besides Creating a New Court, Could the International Community Do To Fight Grand Corruption? A Partial List

Last week, Richard Goldstone and Robert Rotberg posted a response to Professor Alex Whiting’s critique of the proposal to create an International Anti-Corruption Court (IACC). Early in their response, Goldstone and Rotberg–both advocates for an IACC–remarked, a bit snarkily, that “[n]otably absent from [Professor Whiting’s] post is a description of what the other effective responses to combating grand corruption might be.”

That struck me as a bit of a cheap shot. Professor Whiting’s post offered a careful, thoughtful argument based on his experience and knowledge of the International Criminal Court (ICC) and similar tribunals, and not every such critical commentary on a given proposal must include a full-blown discussion of alternatives. Still, Goldstone and Rotberg’s implicit challenge to IACC skeptics to articulate alternative responses to grand corruption is worth taking seriously, for two reasons:

  • First, this seems to be a common rhetorical gambit by advocates for an IACC, or for other radical measures that critics deem impractical: Rather than answering and attempting to refute the critics’ specific objections directly, the move is to say, “Well, but this is a huge problem, and there’s no other way to solve it, so poking holes in this proposal is really just an excuse for inaction. This may seem like a long shot, but it’s the only option on the table.”
  • Second, and more charitably to those who make this point, grand corruption is indeed an enormous problem that needs to be addressed. And so even though not every critical commentary on a particular proposal needs to include a full-blown discussion of alternatives, those of us who (like me) are skeptical of deus-ex-machina-style responses to the grand corruption problem ought to make a more concerted effort to lay out an alternative vision for what can be done.

In this post I want to (briefly and incompletely) take up the implicit challenge posed by Goldstone and Rotbert (and, in other writings, by other IACC proponents). If the international community is serious about fighting corruption, what else could it do, besides creating a new international court and compelling all countries to join it and submit to its jurisdiction? When people like Professor Whiting (and I) suggest that lavishing time and attention on the IACC proposal might be a distraction from other, more effective approaches, what do we have in mind? What else could international civil society mobilize behind, besides something like an IACC, to address the problem of grand corruption?

Here are a few items on that agenda: Continue reading

Applying Anti-Money Laundering Reporting Obligations on Lawyers: The UK Experience

Anticorruption advocates and reformers have rightly been paying increased attention to the role of “gatekeepers”—bankers, attorneys, and other corporate service providers—in enabling kleptocrats or other bad actors to hide their assets and launder their wealth through the use of anonymous companies. An encouraging development on this front are the bills currently pending in the U.S. Congress that would require corporate formation agents to verify and file the identity of a registered company’s real (or “beneficial”) owners, and also would extend certain anti-money laundering (AML) rules, particularly those requiring the filing of suspicious activity reports (SARs) with the US Treasury, to these corporate formation agents.

Not everyone is thrilled. The organization legal profession, for example, is crying foul. American Bar Association (ABA) President Hilarie Bass wrote to Congress that the proposed expansion of SAR obligations to corporate formation agents, many of whom are attorneys or law firms, would compromise traditional duties of lawyer-client confidentiality and loyalty. As Matthew pointed out in a prior post, it’s not clear that this assertion is correct, as the proposed bills contain express exemptions for lawyers. But even putting that aside, it’s worth recognizing that applying SAR obligations to attorneys wouldn’t be unprecedented. Many European countries have had similar requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports (STRs, essentially another term for SARs). As in the US right now, that aspect of the 2001 EC directive was extremely controversial. One EU Commission Staff Working Document went so far as to say it was “the most controversial element of the Directive” because it represented “a radical change to the principle of confidentiality that the legal profession has traditionally observed.” Some EU states and national bar associations launched an ultimately unsuccessful legal challenge to the requirement that attorneys file STRs, on the grounds that it violated the right of professional secrecy guaranteed by the Charter of Fundamental Rights of the European Union.

Yet in the end, the imposition of the STR obligations on lawyers does not seem to have radically altered the legal profession in Europe. Countries appear to have developed safeguards that preserve the essential aspects of attorney-client confidentiality, even while implementing the EC Directive. Consider, for example, how this all played out in the United Kingdom. Continue reading

Guest Post: Are Public UBO Registers a Good or a Bad Proposition? A Further Reply to Professor Stephenson

Today’s guest post, from Martin Kenney, the Managing Partner of Martin Kenney & Co., a law firm based in the British Virgin Islands (BVI), continues an ongoing debate/discussion we’ve been hosting here at GAB on the costs and benefits of public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. That debate was prompted by the UK’s decision to mandate that the 14 British Overseas Territories create such public registries, and Mr. Kenney’s sharp criticism of that decision in a post he published on the FCPA Blog. That post prompted reactions from Rick Messick and from me. Our pushback against Mr. Kenney’s criticisms stimulated another round of elaboration on the critique of the UK’s decision, with a new post from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). I subsequently replied, explaining why I did not find Mr. Kenney’s or Mr. Cook’s criticisms fully persuasive. Today’s post from Mr. Kenney continues that exchange:

Public [UBO] registers are rather cheap political playing to the gallery, saying “Aren’t we wonderful to have done this?” – ignoring the fact that what we have established in the UK does not work properly….  It seems to me outrageous that the UK Government, who lack a lot in the area of anti-money laundering, should thus seek to impose on their overseas territories measures – often, where they cannot be afforded economically, that go far beyond what the UK has.

Lord Flight (Conservative), Member of the House of Lords, Speech to the House of 21 May, 2018, Debate on the Sanctions and Anti-Money Laundering Bill [HL] 

The fact that Professor Stephenson welcomes a good discussion and has opened the doors to his blog once again, means it would be impolite of me to not provide a response to his latest observations.

From the outset, I will stress that I will not seek to address every point Professor Stephenson makes. However, having addressed those below, if there are others he wishes me to respond to, I will endeavor to do so. Continue reading

The Debate Over Public UBO Registries Continues: A Response to Kenney and Cook

As our regular readers know, over the past few weeks GAB has had the opportunity to host on what is shaping up to be a lively and interesting debate over the advantages and disadvantages of creating public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. A UBO, for those not familiar with the lingo, is the real-live flesh-and-blood human being who has a sufficiently strong direct or indirect ownership interest in a company to be considered the “true” owner. Increasing UBO transparency is a top priority for many civil society activists, who argue that anonymous company ownership facilitates grand corruption, as well as money laundering, tax evasion, and other harmful activities. In many jurisdictions, UBO information is not available, and even law enforcement may have difficulty determining a company’s true owners. In other jurisdictions, companies must submit and update validated UBO information to the authorities, but that information is confidential, available only to law enforcement or other regulatory agencies in the context of an investigation, or perhaps to others in a limited set of circumstances (for example, banks performing customer due diligence). Most anticorruption advocates, as well as law enforcement agencies and most experts, agree that a confidential UBO registry is far superior to having no registry at all. The harder question, and the one we’ve been debating here at GAB, concerns whether the UBO registry should be public, so that anyone—not just law enforcement agencies acting pursuant to an investigation—can examine the registry to see who owns what.

The most recent round of discussion and debate was triggered when the UK—one of the few major economies that has implemented a public UBO registry—decided to require the 14 British Overseas Territories, such as the British Virgin Islands (BVI)—to create and maintain public UBO registries. Many in the civil society community celebrated this as a huge triumph, but others denounced the UK’s decision. The denunciation that got the debate going over here at GAB was a provocative piece by Martin Kenney, a BVI asset recovery lawyer, on the FCPA Blog. Mr. Kenney’s piece prompted replies from GAB Senior Contributor Rick Messick (here) and from me (here). Then last week, we were able to publish two more pieces, one from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). Both Mr. Kenney and Mr. Cook took issue with some or all of the arguments that Rick and I advanced, and pressed the claim that the UK’s imposition of public UBO registries on the Overseas Territories was a bad mistake.

Both of their pieces raise important points that deserve a reply. For that reason, and because I think that this issue is important enough that continuing this exchange on GAB for another round or two may be worthwhile for our readership, in this post I’m going to offer a response to Mr. Kenney’s and Mr. Cook’s posts. To lead with the conclusion: While I respect their experience and expertise in these matters, I found most of their arguments unconvincing, or at the very least in need of further explanation before I’m ready to reconsider my (admittedly tentative) view that public UBO registries have sufficient advantages over confidential UBO registries that moving from the latter to the former is desirable. Continue reading

The Flawed and Flimsy Basis for the American Bar Association’s Opposition to Anonymous Company Reform

In last week’s post, I raised the question of why the American Bar Association (ABA), which represents the U.S. legal profession, so strenuously opposes even relatively modest measures to crack down on the use of anonymous companies for money laundering and other illicit purposes. In particular, the ABA has staked out a strong, uncompromising opposition to the bills on this topic currently under consideration in the U.S. House (the Counter Terrorism and Illicit Finance Act) and in the Senate (the TITLE Act). As I noted in my last post, the substance of the ABA’s objections (summarized in its letters here and here) appear, at least on their surface, unpersuasive as a matter of logic, unsupported by evidence, or both. This, coupled with the fact that many ABA members strongly disagree with the ABA’s official position on this issue, made me wonder how the ABA’s President and Government Affairs Office had come to take the position that they had.

After doing a bit more digging, and talking to several knowledgeable people, I have a tentative answer: The ABA’s opposition to the currently-pending anonymous company bills is based on an aggressive over-reading of a 15-year-old policy—a policy that many ABA members and ABA committees oppose but have not yet been able to change, due to the ABA’s cumbersome procedures and the resistance of a few influential factions within the organization.

Why does this matter? It matters because the ABA’s letters to Congress deliberately give the impression that the ABA speaks for its 400,000 members when it objects to these bills as against the interests of the legal profession and contrary to important values. But that impression is misleading. There may be people out there—including, perhaps, members of Congress and their aides—who are instinctively sympathetic to the anonymous company reforms in the pending bills, but who might waver, for substantive or political reasons, if they think that the American legal profession has made a considered, collective judgment that these sorts of reforms are undesirable. The ABA’s lobbying documents deliberately try to create that impression. But it’s not really true. The key document setting the policy—the one on which the ABA’s House of Delegates actually voted—was promulgated in 2003, hasn’t been reconsidered or updated by the House of Delegates since then, and doesn’t really apply to the currently-pending bills if one reads the document or the bills carefully.

I realize that’s a strong claim – one could read it as disputing the ABA President’s assertion, in her letters to Congress, that she speaks “on behalf of” the ABA and its membership in opposing these bills. And I could well be wrong, and remain open to correction and criticism. But here’s why I don’t think the ABA’s current lobbying position should be read as reflecting the collective judgment of the American legal profession on the TITLE Act or its House counterpart: Continue reading

Why Does the American Bar Association Oppose Beneficial Ownership Transparency Reform?

Right around the same time that this post appears on the blog, the U.S. Senate Judiciary Committee will be holding a hearing on “Beneficial Ownership: Fighting Illicit International Financial Networks Through Transparency.” The main focus of the hearing will be on a pending bill, the True Incorporation for Transparency for Law Enforcement Act (TITLE Act). That bill’s major provisions do two main things:

  • First, subject to certain limited exceptions, the Act would require that every applicant wishing to form a corporation or limited liability company (LLC) in a U.S. State must provide that State with information on the true or “beneficial” owners of the company—that is, the live human beings who actually exercise control over, and/or receive substantial economic benefits from, these entities—and to keep this information updated. This information could then be requested by a law enforcement or other government agency, or by a financial institution conducting due diligence on a customer. Those applicants who don’t have a U.S. passport or driver’s license who want to form a corporation or LLC would have to apply through a U.S.-based “formation agent”; this agent would be responsible for verifying, maintaining, and updating information on the identity of the legal entity’s beneficial owners.
  • Second, the bill would also subject these “formation agents” to certain anti-money laundering (AML) rules applicable to financial institutions, including the requirements for establishing AML programs and filing suspicious activity reports (SARs) with the Treasury Department. However, the TITLE Act expressly exempts attorneys and law firms from this provision—provided that the attorney or law firm uses a separate formation agent in the U.S. when helping a client form a corporation or LLC. (The idea, as I understand it, is that the bill would avoid putting attorneys in the position of potentially having to file SARs on their own clients—but in order to avail themselves of this exemption, an attorney helping a client form a corporation would have to retain a separate formation agent, and it would be this latter agent that would be subject to the AML rules. More on this in a moment.)

Compared to the more aggressive beneficial ownership transparency reforms touted by anticorruption/AML advocates, and adopted in some other countries, the proposed U.S. legislation is fairly mild—but it is still, as prior commentators on this blog have emphasized (here and here), a welcome step in the right direction. After all, while the U.S. record on fighting global corruption and international money laundering is good in some respects (Foreign Corrupt Practices Act enforcement and the Kleptocracy Asset Recovery Initiative come to mind), when it comes to addressing the facilitators of corruption, such as corporate secrecy, the U.S. is a laggard (as illustrated by poor U.S. score on the Tax Justice Network’s 2018 “Financial Secrecy Index,” released last month). So it’s indeed encouraging that the TITLE Act, and its counterpart in the U.S House of Representatives (the less-cleverly-named “Counter Terrorism and Illicit Finance Act”) have received both bipartisan support and the endorsement of a wide range of interest groups—including not just anticorruption, AML, and tax justice advocacy groups, but also representatives of law enforcement, the finance industry and other business interests (here and here). Many are cautiously optimistic that some version of these bills might actually become law this year.

But some opposition remains. The sources of that opposition are, in some cases, predictable: the Chamber of Commerce, for example, opposes these reforms, as does FreedomWorks, the lobbying group sponsored by the libertarian billionaire Koch brothers. One of the major opponents of the legislation, though, was more surprising, at least to me: the American Bar Association (ABA), which represents the U.S. legal profession. The ABA has come strongly against this legislation, sending letters to the responsible committees in both the House and Senate expressing strong opposition to even these relatively mild reforms.

What’s the explanation for this uncompromising opposition? Do the objections make sense on the merits? How did the ABA decide to take such a strong stand, despite the fact that I’m sure many ABA members support greater beneficial ownership transparency? I don’t know the answers to any of these questions yet, and I may try to do a few more posts over this month as I try to work through these issues. But for now, let me offer some preliminary thoughts: Continue reading