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.    Continue reading

A New BOSS in Town: Changes to BVI Beneficial Owner Information Regime

As the British Virgin Islands (BVI) continue to recover from the devastation of Hurricane Irma, attention is properly focused on humanitarian relief and the repair of the BVI’s physical infrastructure. But there have also been important recent developments associated with the BVI’s legal infrastructure—changes designed to address the BVI’s reputation as one of the world’s premier tax havens, and as a popular destination for money laundered by corrupt public officials, organized crime networks, and others.

Thanks in part by a campaign by former UK Prime Minister David Cameron to remove the “cloak of secrecy” from Britain’s offshore territories, and in part to the embarrassing publication of the Panama Papers, the BVI recently enacted a new Beneficial Ownership Secure Search System (BOSS) Act, which went into effect last June.

The BOSS Act is the latest in a series of steps designed to clean up the BVI’s image. Previous moves have included signing an intergovernmental agreement with the United States on Foreign Account Tax Compliance and becoming a signatory to the OECD’s Common Reporting Standard for the automatic exchange of tax and financial information. In 2016, the BVI changed the law to make it mandatory – for the first time – for companies to report their lists of directors to the government. Overall, it’s not yet clear whether these moves have had any effect on the island’s offshore economy. Indeed, the BVI’s interest in preserving its status as a center of the world’s offshore economy has prevented more drastic steps and weakened those that have been taken. (The 2016 law changes, for instance, did not require the reporting of ownership stakes.) Half-measures are unsurprising given the centrality of secrecy to the BVI’s economic success – after all, you can’t expect turkeys to vote for Thanksgiving. While the BVI points out in its defense that its level of transparency is no worse than that of other UK offshore territories, and is in fact better than that of some US states, the fact remains that most of the BVI’s legal reforms have weighed business interests in secrecy more heavily than public interests in transparency.

The BOSS Act unfortunately seems to suffer from the same problem, though it is a step in the right direction. Continue reading

Exposing Secret Offshore Bank Accounts: American Law

Kleptocrats, drug traffickers, and other big-time crooks face a common problem: How to hide their money from the authorities while retaining easy access to it.  Yesterday former Senate staffer Elise Bean described one common, low-cost, easy solution and how a recent U.S. law has made it far more difficult for American criminals to turn to it. The solution, create a corporation in another country and then open a bank account in that country in the corporation’s name, is now widely known thanks to the Panama Papers.  What Bean offered in her April 26 testimony before a Congressional committee was a step-by-step explanation of how the scheme works and the U.S. law’s success in making it far harder for Americans to take advantage of it.

Committee members peppered her with questions about the law, its effect, and ways to improve its operation.  About the only question they didn’t ask is why more countries don’t have a similar law.  That would be one for anticorruption advocates to put to legislators in countries lacking one.

Continue reading

Guest Post: Beneficial Ownership Secrecy–Not All Offshore Financial Centers Are Part of the Problem, and Public Registries Are Not the Solution

Geoff Cook, Chief Executive Officer of Jersey Finance, contributes the following guest post:

The so-called “Panama Papers”—the documents leaked from the Mossack Fonseca law firm by an anonymous whistleblower—have highlighted how certain corporate service providers (CSPs) are able to set up, in offshore international financial centers (IFCs), shell companies for their clients, with bank accounts and other assets then owned by the shell company, so that the identity of the ultimate beneficial owner is hidden. That secrecy enables corruption, tax evasion, money laundering, and other nefarious activity.

While the Panama Papers revelations may have done some good in calling more attention to abuses of the legal and financial system – abuses that can and should be fought – much of the prevailing discussion in the wake of the Panama Papers revelations – much of it driven by moral outrage and salacious headlines about dubious deals – has produced two significant analytical errors, one concerning the diagnosis of the problem, and the other concerning the appropriate prescription. Continue reading

Not the “Panama Papers” But the “BVI Papers” or Better Still the “EI” Papers

The immense public service performed by the consortia of journalists who exposed the inner-workings of the Panamanian law firm Mossack Fonseca is plain to all.  The thousands of stories in multiple languages revealing how M/F works with law firms and banks around the globe to help individuals hide their wealth has provided law enforcement a cornucopia of leads — as the investigations launched in France, Switzerland, South Africa, Pakistan, the United Kingdom, El Salvador, Argentina, and India attest to.  Far more important than nailing a few tax cheats or crooked politicians, though, are the revelations showing how easily firms like M/F can dodge laws that supposedly bar them from helping individuals keep their wealth a secret and what changes are needed to end this legal dodge ball.

But there is a risk that, because the revelations have been dubbed the “Panama Papers,” reformers will be thrown off the scent.  Panama is a small part of the story at best.  The real problem lies in jurisdictions like the British Virgin Islands where, as an April 4 Guardian story shows, an obscure provision in its antimoney laundering law allows M/F and other firms like it to establish a BVI corporation without having to verify who the true, or beneficial, owner of the corporation will be.  This creates an opportunity to introduce a layer of secrecy between the owner and his or her money and law enforcement authorities.  A name better calculated to lead reformers in the right direction would have been the “BVI Papers” since most of the corporations M/F establishes for clients are created under the law of BVI.

An even better name still might be the “EI Papers” as it is the “EI” provision of BVI law that allows M/F to duck verifying the identity of the beneficial owners of the corporations it creates.  “EI” stands for “eligible introducer,” and the best way to see how the EI provision in BVI law makes hiding money so easy is through an example.  Suppose, just for the sake of illustration, Russian President Vladimir Putin was about to come into a large amount of rubles that he would rather Russian citizens and his critics abroad not know about.  How would the EI provision in BVI law help him keep his wealth secret? Continue reading