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

Guest Post: The UK Order on UBO Registries in Overseas Territories–A Reply

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?” Continue reading

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. Continue reading

The Missing Piece in UK’s Unexplained Wealth Order Mechanism

All of a sudden politicians, public figures, and oligarchs – such as Russian First Deputy Prime Minister Ignor Shuvalov and former Nigerian Oil Minister Diezani Alison-Madueke – have to explain how they are able to afford the swanky apartments in London’s posh Mayfair neighborhood on their modest official salaries. This is due to the UK’s new Criminal Finances Act (CFA), which came into force in February and is meant to crack down on the flow of dirty money into the UK—a flow that has given London in particular a reputation as a “Death Star” of global kleptocracy. Most notably, the CFA adds a new investigative tool, the Unexplained Wealth Order (UWO), into the civil recovery regime. Originally proposed by Transparency International UK a few years ago, a UWO is an order granted by the High Court in cases where there are reasonable grounds to believe (1) the respondent owns some property worth more than £50,000; (2) either the respondent is a politically exposed person (PEP), or the respondent or a person connected to the respondent has been involved in a serious crime; and (3) respondent’s lawfully earned income would not be sufficient to obtain the property in question. If there are reasonable grounds to believe that each of these three conditions is satisfied, the High Court may issue an order requiring the respondent to provide information regarding the nature of her interests in the property in question and how she was able to lawfully obtained such property. If the respondent is unable to provide a reasonable explanation, the UK Government can subsequently initiate the civil forfeiture process and seize these assets.

Lauded as “a powerful new weapon in[] the anti-corruption arsenal,” UWOs are expected to be particularly helpful when there is no conviction against the respondents in their countries of origin, or when efforts to get a corrupt foreign government to cooperate with investigations have led to naught. Moreover, even though UWOs are a civil enforcement mechanism, the information they uncover may be useful in pursuing criminal investigations, and if respondents recklessly or knowingly make false statements or mislead the enforcement body in responding to an order, they may be criminally prosecuted. There’s already some evidence that the new law will make a difference: In March, a month after the promulgation of the CFA, two UWOs were issued requiring a tycoon in Central Asia to explain how he is able to afford real properties in the UK totaling £22 million.

Yet notwithstanding the enthusiasm for UWOs in some quarters, the effectiveness of the UFO mechanism is likely to be hampered by an important missing piece in the UK’s anticorruption framework, namely an effective means for ensuring genuine transparency regarding the beneficial ownership of real and movable property. Without knowing who really owns what, the new law is unlikely to realize its full potential, and indeed may not make much difference outside of a handful of cases involving particularly careless criminals.

Continue reading

Guest Post: The Financial Secrecy Index Identifies the Countries Most Responsible for the Illicit Financial Flows that Facilitate Global Corruption

Andres Knobel, an analyst at the Tax Justice Network, contributes today’s guest post:

Illicit financial flows have dreadful consequences across the world, not least because they facilitate kleptocracy and other forms of grand corruption. A crucial step toward addressing this issue is identifying those jurisdictions that are the most significant contributors to the problem, and offering specific, concrete recommendations for how they can improve. The Tax Justice Network aims to help do this through its Financial Secrecy Index (FSI), the latest edition of which was published this last January. The 2018 FSI includes a ranking of 112 countries and territories according to their global impact of their financial secrecy, measured by balancing the level of secrecy and the country’s weight in the international financial sector.

The FSI differs from standard “tax haven” lists in that it does not purport to single out a handful of jurisdictions for special opprobrium. Such lists tend to imply that only a few jurisdictions, often small countries, are responsible for all of the world’s illicit financial flows. The 2018 FSI, by contrast, covers 112 jurisdictions, and the next assessment will analyze 130. (The objective is to eventually cover all countries and territories.) Moreover, the FSI ranks countries not solely on the degree of financial secrecy that they allow, but rather on a combination of the degree of financial secrecy (the “Secrecy Score”) and the actual use of a jurisdiction’s financial services (the “Global Scale Weight”), in order to rank countries according to their overall contribution to the problem of illicit financial flows. In other words, the FSI ranking is not necessarily ranking the most secretive countries at the top; rather, the FSI identifies the biggest “problem countries”—those that have financial systems that are both secretive (even if not the most secretive) and that are large and used frequently by non-residents. According to this measure, the ten jurisdictions that make the largest contribution to global financial secrecy are (in order starting with the worst contributors): Switzerland, the United States, the Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, the United Arab Emirates, and Guernsey. These are the jurisdictions that bear the greatest share of responsibility for enabling global illicit financial flows, including those stemming from corruption and tax evasion, and these are therefore the jurisdictions that most urgently need to become more transparent if we are to see real progress in the fight against illicit global financial flows. While all jurisdictions should act to become transparency, starting with these ten jurisdictions would have the most significant impact in the short term.

Interestingly, and perhaps unsurprisingly for those who follow these issues, a “heat map” of the worst offenders on the FSI looks like the inverse of the more familiar heat map showing the countries perceived to be most corrupt, according to Transparency International’s Corruption Perception Index (CPI). One way to interpret this is the following: public officials and their private-sector cronies in the world’s most corrupt countries according to the CPI (such as Yemen, Sudan, Afghanistan, Venezuela, Libya, etc.) very likely take advantage of financial secrecy to hide the proceeds of corruptions in the countries that most contribute to financial secrecy according to the FSI. Put differently, the worst CPI countries depend on jurisdictions like the FSI’s top ten in order to launder the proceeds of illicit activities.

And what should these (and other) jurisdictions do? On this question, it is important to emphasize that the FSI is not just a ranking system. The FSI report also includes in-depth discussions of all relevant loopholes and sources of information related to financial secrecy in each jurisdiction. This enables researchers, government authorities, activists, and financial institutions to obtain relevant information to be used for risk assessment, policy decisions, or to advocate for specific transparency measures. (All these details are available online, for free and in open data format.) And while every country is different, most jurisdictions would do well to implement what the Tax Justice Network refers to as the “ABC of Fiscal Transparency”:

  • Automatic exchange of bank account information with all other countries, especially developing countries, pursuant to the OECD’s Common Reporting Standard;
  • Beneficial ownership registration in a central public register for companies, partnerships, trusts and foundations (for more specific information, see Tax Justice Network publications here, here, here, and here, as well as this recent paper I published with the Inter-American Development Bank) ; and
  • Country-by-Country reporting, where all multinational companies publish this information online.

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