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

Mixed Messages from the UK’s First Contested Prosecution for Failure to Prevent Bribery

In February 2018, the UK secured its first ever contested conviction of a company for “failure to prevent bribery.” Under Section 7 of the UK Bribery Act (UKBA), a company or commercial organization faces liability for failing to prevent bribery if a person “associated with” the entity bribes another person while intending to obtain or retain business or “an advantage in the conduct of business” for that entity. Following an internal investigation, Skansen Interior Limited (SIL)—a 30-person furniture refurbishment contractor operating in southern England—discovered that an employee at its firm had agreed to pay nearly £40,000 in bribes to help the company win contracts worth £6 million. Company management fired two complicit employees and self-reported the matter to the National Crime Agency and the City of London police. The Crown Prosecution Service ultimately charged SIL with failing to prevent bribery under Section 7. Protesting its innocence, SIL argued that the company had “adequate procedures” in place at the time of the conduct to prevent bribery; SIL, in other words, sought to avail itself of the widely-discussed “compliance defense” in Section 7(2) of the UKBA, which allows a company to avoid liability for failing to prevent bribery if the company can show that it “had in place adequate procedures designed to prevent persons associated with [the company] from undertaking” the conduct in question.

The case proceeded to a jury trial. The verdict? Guilty. The sentence? None. In fact, SIL had been out of business since 2014, so the judge had no choice but to hand down an absolute discharge—wiping away the conviction.

The hollow nature of the government’s victory has led some commentators to call the prosecution “arguably unprincipled” or even a “mockery of the UK criminal process.” Indeed, the bribing employee and the bribed individual had already separately pleaded guilty to individual charges under UKBA Sections 1 and 2, respectively, and the remaining shell of a corporation had no assets or operations. Other commentators pointed out that precisely because the company was dormant it would have been unable to enter into a deferred prosecution agreement (DPA), lacking assets to pay financial penalties or compliance programs to improve. Putting aside arguments about the wisdom or fairness of pursuing a prosecution in these circumstances, the SIL case sheds light on Section 7(2)’s “adequate procedures” defense. While the UK government has secured a few DPAs for conduct under Section 7—beginning with Standard Bank Plc in 2015—SIL is the first case in which the Section 7(2) “adequate procedures” defense was tested in front of a jury.

While the government argued that it prosecuted the case primarily to send a message about the importance of anti-bribery compliance programs, the UK government’s actions in the SIL case ultimately sends mixed messages to companies and may have counterproductive effects. Continue reading

Guest Post: Just Because UBO Data Isn’t Available for Everyone to See, It Doesn’t Make It Secret

Today’s guest post comes from Geoff Cook, CEO of Jersey Finance (a non-profit organization established to promote Jersey as an international financial center of excellence). Mr. Cook’s piece continues a debate over the UK’s recent decision to require British Overseas Territories to adopt centralized public registers with information on the ultimate beneficial owners (UBOs) of legal entities registered in those jurisdictions. The discussion of this issue at GAB was prompted by Martin Kenney’s post on the FCPA Blog, which sharply criticized the UK’s decision. GAB published two replies to Mr. Kenney’s criticisms, the first from Senior Contributor Rick Messick, and the second from Editor-in-Chief Matthew Stephenson. Earlier this week, GAB published Mr. Kenney’s response, and today Mr. Cook continues the discussion by explaining why, from the perspective particularly of a jurisdiction like Jersey, public UBO registers are unnecessary and potentially dangerous.

It is claimed that jurisdictions such as the Crown Dependencies that fail to introduce public registers of company ownership are advocating secrecy and encouraging the laundering of “dirty” money through the financial system. But the call for public registers, which serves a political agenda, is proposed in isolation, ignoring other effective measures for exchanging information that have been implemented during the last few years.

The Common Reporting Standard (CRS), for instance, has been largely ignored in the debate.  Through this OECD inspired agreement, the values of all bank accounts and investments in whatever form are exchanged automatically each year to the owner’s home tax authority. Company ownership details are included in that exchange. Jersey was an early adopter of the system in 2017 and has already swapped information with the other 50 countries that participate. More countries are joining, and will be exchanging data again in September – not a measure that fits with a secrecy agenda.

Jersey has been examined by independent standard setters such as the OECD as recently as 2017, and found to be in the top drawer for the quality of its standards and response to transparency. Jersey is one of only two jurisdictions to have the top rating so far, yet the standards attained by global organizations that truly understand the financial system are rarely quoted in the debate. Instead we are accused by detractors of obstruction and secrecy, with no regard for what is actually taking place. 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

Lessons from Moldova’s “Theft of the Century”

One year ago today, on April 20th, 2017, a Moldovan businessman named Veaceslav Platon was sentenced to 18 years in prison. His crime? Helping to steal a billion dollars. Between 2012 and 2014, businessmen and politicians siphoned off money from Moldova’s three largest banks in a crime now known as the “Theft of the Century.” While corruption is endemic in many parts of Eastern Europe, the theft in Moldova was spectacular in its size and in the severity of its consequences.

This theft was an economic, social, and political catastrophe for Moldova. The amount of money that disappeared was similar to the amount implicated in the 1MDB scandal in Malaysia–but Malaysia’s GPD is 2.3 times the size of Moldova’s. The Moldovan government’s secret bailout of the banks cost $870 million, one-eighth of Moldova’s GDP. As a result of the theft, three of Moldova’s main banks went bankrupt and were liquidated; more banks are still under the supervision of the National Bank of Moldova, and there is persistent instability in the financial sector. And then there’s the human cost. For example, the misuse of money in the State Health Insurance Company’s accounts led to a medicine shortage in 2014-2015. During street demonstrations that ensued after the theft became public, two dozen people were injured. The political fallout from the theft has also been substantial: Confidence in the government was shattered, as every government branch and every major political party seemed implicated. Furthermore, because the party seen as most heavily involved in the theft was a pro-EU party, Moldovan support for joining the EU plummeted. Pro-Russian sympathizers capitalized on the public reaction, and the pro-Kremlin Igor Dodon was elected president in 2016. Dodon has talked about joining the Russia-controlled Eurasian Economic Union, halted participation in NATO exercises, and opposes the opening of a NATO office in Chisinau, Moldova’s capitol.

The investigation into the theft has dragged. More than 40 people have been implicated, and more prosecutions are supposedly in the pipeline, but only a few people have been convicted so far. With Moldova’s 2018 elections looming, now is a good time to look back at the fallout and lessons from the Theft of the Century.

Continue reading

What Chinese Cuisine and Deferred Prosecution Agreements Have in Common

As Kees noted Monday, the use of American-style deferred prosecution agreements (DPAs) to resolve corporate corruption cases short of trial is on the rise.  The United Kingdom, France, Argentina, and most recently Singapore now permit prosecutors to suspend or even drop altogether the prosecution of a firm for a corruption offense in return for the accused firm paying a fine, adopting measures to prevent future offenses, and cooperating with ongoing investigations.  Australia and Canada are on the verge of approving DPAs, and influential voices in India and Indonesia are urging their adoption too.

Apostles say DPAs allow governments to realize the benefits of a criminal conviction without the need for a lengthy, expensive, arduous trial against a well-funded corporate defendant where defeat is always a risk.  Former U.K. Attorney General Lord Peter Goldsmith told a New Delhi audience last October that once India begins using DPAS, companies would start coming forward and admit wrongdoing.  During the recent debate in Singapore one commentator observed that DPAs “provide an incentive to corporate entities to confront criminal conduct within their ranks,” and a group of Indonesian professors claim DPAs will be particularly valuable in their country.   In Indonesia, conviction of a corporation provides no assurance the defendant will not commit the same offense again while, they write, a DPA does.

DPA evangelists are about to learn what DPAs have in common with Chinese cuisine.  The first-time visitor to China soon discovers that Chinese food in China is unlike Chinese food at home.  Beef broccoli tastes much different outside China than in. Connoisseurs of DPAs will shortly find that what American prosecutors are able to cook up looks much different when prepared abroad.     Continue reading