Financial Transparency Coalition

The summit between leaders of the world’s wealthiest economies will get underway next week in Northern Ireland.[1] British Prime Minister David Cameron, leading the summit, has put three things at the top of his agenda: trade, tax, and transparency. There are a lot of issues directly relevant to the Financial Transparency Coalition in there, and I don’t have time to address them all, but one of the most promising, and interesting, is Cameron’s commitment to improving information on beneficial ownership of companies via public registries.

Anonymity is prevalent under the world’s status quo. It is exceptionally easy (and relatively cheap) to set up a company, trust, or foundation anonymously. By that I mean that the process obscures the “beneficial owner” of the entity, that is, the flesh and blood person who has control over or benefits from the corporation. Companies, trusts, and foundations accomplish this by incorporating subsidiaries in a secrecy jurisdiction or by using nominees in place of the true directors.

The injustices that result from secrecy are numerous. Given that other people and organizations have outlined some of these injustices in beautiful detail, I won’t name them all (see, for example, this excellent report by Global Witness). Anonymous companies facilitate corruption and bribery by allowing government officials to transfer money undetected; they ease crime by allowing criminals to launder the proceeds of criminal activity and avoid detection by law enforcement; they facilitate tax evasion, costing American taxpayers alone an estimated $150 billion annually; and they facilitate global illicit financial flows that bleed developing countries of billions of dollars every year.

It is impossible to overstate the role secrecy in corporate structures places in development issues.

The G8 itself is not blameless. Secrecy jurisdictions and countries with inadequate laws on beneficial ownership are not just remote islands and peninsulas. According to the Financial Action Task Force (FATF), the inter-governmental body that sets global anti-money laundering standards, six of the eight G8 nations are either “not compliant” or are only “partially compliant” with FATF’s recommendation on beneficial ownership. If change on beneficial ownership is going to happen worldwide, the G8 is the logical place to begin.

Ahead of his G8 summit, on the front of beneficial ownership, David Cameron is leading the charge. Fitting with his goal of transparency, Cameron has promised to make information on the beneficial ownership of companies available on public registries.

Public registries—as opposed to reporting to law enforcement alone—are frankly a stroke of genius on this front.[2]

The idea of public registries is simple. Countries would require companies, trusts, and foundations, to not only gather information about their beneficial owners, but also to publish it in the public domain.[3] The information would be free, widely available (perhaps using existing corporate registries), and in open data format. Citizens, journalists, and members of civil society would be able to access this information and hold companies accountable for their actions.

By encouraging this kind of open discussion and collaboration, public registries would increase effectiveness of law enforcement efforts and reduce their costs. Global Witness estimates a public registry of beneficial ownership would save law enforcement officials in the UK $47.1 million USD per year. It would also have unquantifiable benefits, such as improvements in asset recovery and reductions in illicit financial flows and corruption. According to two separate cost-benefit analyses of this procedure, the quantifiable benefits alone significantly outweigh the costs.

In the realm of corruption, another benefit to a public registry would be citizens’ increased awareness and understanding of the corporate influence on the democratic process. In the United States, for example, we can directly attribute shell corporations with corrupting U.S. participatory democracy in the wake of Citizens United. A public registry would make it easier for journalists and citizens to accurately report on and understand exactly who is exerting what influence on the votes. As the Citizens United decision reads: “transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.” Unlimited spending on political messaging may corrupt, but unlimited anonymous corporate spending on those messages almost certainly will. On both the identification and prevention of corruption—transparency in these donations is indispensable.

The global momentum on this issue in general—and Cameron’s comments in particular—are encouraging. More encouraging still will be action coming out of the G8 next week. Fingers crossed.