Financial Transparency Coalition

Anonymous companies are entities that are used to disguise the identity of their true beneficial owner (BO) —the person (or people) who ultimately control or profit from a company. Right now, there are only a handful of countries where you have to register BO information of a company, and even fewer where this information is publicly available.

The FTC promotes public BO registers as a key tool to peel back some of the layers of secrecy anonymous companies create and it looks like there is a great number of countries who share this view (see Anti-Corruption Summit declarations and most recently the European Commission proposal for public BO registers). However, not everyone thinks that centralized public BO registers are the best way forward; some are of the opinion that these registers would be a step in the wrong direction and even counterproductive for the efforts against financial crime. Jason Sharman offered some arguments for this in a recent piece written for Jersey Finance, an incorporation industry association.

So, should we follow the “Jersey Model” and forget the public registers altogether?

If you have followed the work of the FTC, you know that our answer is a resounding ‘no’. We don’t claim that public BO registers are the panacea for all tax dodging and corruption issues, but we still think they are of tremendous value for curbing financial crime. Let us explain how they could be a cornerstone of the “Transparent Jersey Model”.

Jersey’s Model: Fox Guarding the Henhouse?

Professor Sharman’s main concern is the quality of data in public BO registers. When the registration depends on self-reporting, what prevents criminals from filing wrong information? Indeed, inaccurate BO information would not change the current level of secrecy. Instead of having a system of self-reporting, the Jersey Model depends on Corporate Service Providers (CSPs are businesses or law firms dedicated to helping clients with incorporation, which often involves selling shell companies) to verify the identity of their customers. So instead of individuals filing information to a public register, CSPs file ‘verified’ BO information to a private register.

But this system embodies the very same weakness that Jersey Finance claims is inherent in public registers. The ‘Jersey Model’ still depends on self-reporting, even if CSPs have a duty to verify the data. CSPs are, of course, businesses first and foremost, and are therefore self-interested organisations that may find themselves having to choose between rigorous customer due diligence and doing business.

There’s ample evidence that in many cases doing business has the upper hand.

Just think of one Panamanian law firm and more than 200,000 offshore entities it helped to create. For more detail, this New York Times article showcases the efforts of Mossack Fonseca to conceal the real owners of assets for tax purposes, whereas this piece points out that the law firm was seemingly oblivious to the fact that their customers included industrial scale drug traffickers and infamous mobsters. It’s true that it’s easier for authorities to monitor any number of CSPs but it doesn’t mean it would be fail proof. Especially not when the jurisdiction in question is relatively small, with a relatively high dependency on its financial industry, and where regulators and the CSPs they regulate are closely associated.  

How To Make Public Registers Strong

We promote fully public registers as they – if well-designed – would be the #1 tool for public scrutiny around the activities of legal entities. Currently, most business registers only gather information on legal ownership, which can refer to another legal entity. This has enabled criminals to set up complex corporate structures that can span any number of jurisdictions in order to hide their actions from law enforcement and tax collectors. Requiring those that ultimately own or control a corporate vehicle to disclose this publicly would help address the problem.

“It’s better for businesses here, who’ll be better able to identify who really owns the companies they’re trading with. It’s better for developing countries, who’ll have easy access to all this data without having to submit endless requests for each line of inquiry. And it’s better for us all to have an open system which everyone has access to, because the more eyes that look at this information the more accurate it will be.”

These are the words of former UK Prime Minister David Cameron, and he really hits the nail on the head here. The business leaders echo his call in whopping numbers: 91% of respondents to an EY survey “believe it is important to know the ultimate beneficial ownership of the entities with which they do business”.

The reason why we promote public BO registers is the concern about accuracy we share with Professor Sharman. Even though it’s possible to file false information in a public register, the fact that it is filed in the public domain means there is a bigger chance its veracity will be checked. This is the logic that many business registers follow – even if self-declaration does not guarantee perfect accuracy, their wide application by businesses and law enforcement bodies means frequent monitoring of the information. Additionally, governments could conduct spot checks and should make sure there are proportional and sufficient penalties in place if beneficial ownership information appears to be incorrect. At the very least, egregious cases should be prosecuted as fraud. This would put the onus of verification on the beneficial owners instead of profit-seeking middlemen, and, in turn, might be more effective. Surely, public BO registers would not stop financial crime all at once – it would, however, become more difficult, more expensive and more risky to conduct.

Furthermore, when the registers are compiled according to open data standards, the data can be monitored by anyone with a personal computer, instead of one sole authority whose resources are limited. An open dataset can be cross-referenced with, for example, lists of politically exposed persons, government procurement contractors, barred directors or wanted criminals. But why see these policy options as either-or?

Best of both worlds

Public BO registers allow for widespread monitoring of the data in the register by law enforcement, watchdog organisations and the public at large. But the monitoring is even stronger when CSPs are required to check whether the information in the BO register is accurate before conducting business with an individual or company. This would bring the strength of a professional due diligence process into a public BO register. The Netherlands is currently moving in this direction. The Dutch Central Bank regulates CSPs and has in recent years ruled that a number of them were performing sub-optimally, which resulted in fines and even the withdrawal of business licences. Strong sanctioning regimes for CSPs would make the system more robust everywhere.

Now that the EU is seriously considering public BO registers for both companies and trusts, it would be in everyone’s interest to combine the strengths of both approaches. Not least for Jersey as it strives to maintain its current relationship with the EU: The implementation of the new EU rules on anti-money laundering is required for Jersey to preserve its so-called equivalent standards to retain its access to EU financial markets.

Currently, we are also seeing increased interest for automatic exchange of information (AEoI) between jurisdictions. More intergovernmental cooperation is indeed sorely needed, but this is not an alternative for public registers. None of the public BO registers have as detailed an information set as what would ideally be shared between authorities. This means that with public BO registers, authorities in a foreign country can access the same part of the information that is available to the public. In many cases this could be enough to help in their investigations.

However, it is probable that there are cases where more detailed information is needed to advance an investigation. For this reason, jurisdictions could put in place AEoI regimes to ensure they can access all the necessary data. But it is important not to rely solely on AEoI, since it can be difficult to implement broad and inclusive regimes that would ensure access for law enforcement in developing countries as well. There are already examples of AEoI regimes for other types of information where certain countries have refused to share data with others since they don’t think it’s in their national interests. This refusal hurts the functionality of the system as a whole.
Jersey Finance (though not Professor Sharman in his latest study) goes as far as stating that public BO registers could violate human rights since they jeopardize individual privacy. But is it really a human right to allow the rampant use of anonymous companies that can facilitate crime and corruption? In fact, a recent study produced for the UN Human Rights Council found that illicit flows, and the vehicles used to perpetuate them, are actually detrimental to human rights. The report states that, “curbing illicit financial flows will be essential for realizing human rights and achieving sustainable development.”  Financial secrecy enables these flows via corruption, tax abuse, money laundering and a whole host of other financial crimes. These crimes are definitely not victimless, as the video from ICIJ below illustrates.