Public register of beneficial ownership information:

a solution in search of a problem

In June 2014, the government of Anguilla published for public consultation, a document entitled: “Enhancing the transparency of Anguillian company ownership and increasing trust in Anguillian business.” The document stated that the objectives of the consultation, which is currently ongoing until later in the summer, are to ascertain the public’s views on: 

  • Whether the commercial registry should hold enhanced information on the beneficial owners (i.e. on individuals with significant control or influence) of all entities registered in Anguilla?
  • Whether all companies should be given statutory tools to identify their beneficial ownership?
  • What additional requirements might be required to ensure beneficial ownership information on all companies is indeed obtained?
  • What information is currently provided to the registry; how frequently it should be updated; and how to ensure that it is as accurate as possible? Is it adequate?
  • The abolition of bearer shares and that existing bearer shares should be converted to ordinary registered shares.

It posed 18 questions for practitioners and those wishing to comment, to respond to covering corporate entities, trusts and bearer shares. I have set these out below for contextual purposes.

Are there any steps that the Anguilla Financial Services Commission could take to further ensure that adequate, accurate and current information on beneficial ownership is available in Anguilla?

Should Anguilla seek to establish a central register on beneficial ownership information? Please provide the reasons for your answer.

If Anguilla were to establish a central register, should beneficial ownership information held by the company be made publicly available? How?

If Anguilla were to establish a central registry on beneficial ownership information, considering Anguilla’s business model, what costs (human, financial or otherwise) do you expect would arise?

  • i.    Are the costs more likely to fall on the government or the private sector?
  • ii.    Please explain your views on, and quantify the costs for both the government and the private sector.

Do you consider there to be any security risks in establishing a central registry administered by the government or any statutory body (such as the Anguilla Financial Services Commission) and, if so,

  • i.    What are those security risks likely to be?
  • ii.    How do you think those security risks may be best dealt with?

How should ‘beneficial ownership’ be defined and how should it be applied in respect of information to be held by a central registry?

Which types of companies and legal entities should be in the scope of the registry?

Should there be any exemptions from a central register of beneficial ownership for certain types of companies; if so, what types of company should be exempted? How might this regime operate?

What level of global application of an accepted international standard should be required to ensure that Anguilla’s competitive position is not seriously adversely affected?

Do the reasons advanced by the United Kingdom for a central register open to the public apply to Anguilla or is it considered that the objectives of tackling illicit activities can be better met by an alternative approach and one that is better suited to the circumstances of Anguilla?
Are the concerns regarding a central register open to the public, identified through the U.K. consultation exercise, shared and are there any other concerns which should be highlighted?

Should there be a requirement on the company to identify the beneficial ownership of blocks of shares representing more than 25 percent of the voting rights or shares in the company; or which would give the beneficial owner equivalent control over the company in any other way?
Should there be a requirement for the trustee(s) of express trusts to be disclosed as the beneficial owner of a company?

Would it be appropriate for the beneficiary or beneficiaries of the trust to be disclosed as the beneficial owner as well? Under what circumstances?

Is there a need to introduce additional or other measures to ensure the accuracy of the beneficial ownership information that is filed with the Companies Registry and retained on the register? If so, what? To what extent would the benefits of these measures outweigh the costs and other impacts?
Should the issue of new bearer shares be prohibited? Further, should individuals be given a set period of time to convert existing bearer shares to ordinary registered shares? How long?

Are there additional or other measures that we might take?

What are the costs and benefits of this policy change?

The consultation paper was the result of Anguilla’s June 2013 commitment, made in London on the urging of the U.K. government, to greater transparency in line with Prime Minister David Cameron’s focus on tax avoidance and trade during the Group of 8 (G8) Summit hosted by the U.K. To wit, on Aug. 26, 2013, Anguilla published its Action Plan which outlined its commitment to enhancing transparency on the beneficial ownership of companies and it pledged to work with the international community to fight the scourge of tax evasion and money laundering. Anguilla’s Action Plan endorsed the international standards against money laundering, the financing of terrorism and proliferation, tax evasion, corruption and related criminal activity. In making the announcement, the government of Anguilla committed the jurisdiction to “have public consultation on the issue of corporate transparency with a focus on bearer shares and the ability of competent authorities to access information on beneficial ownership, including whether this information should be available in a central registry and whether this information should be publically available.”

In examining both the objectives of the consultation and the questions that are being asked, one cannot help but be struck by the extent to which the entire debate surrounding the central registry of beneficial ownership information has been distorted and is misguided. It is also clear that the U.K. government, which has been the main driver behind this project, has not given sufficient thought to the practical ramifications that a central registry would have, especially if its content is publicly available.

The consultation questions are earnest and thoughtful in trying to solicit the views of the public in order to ascertain insights into their thinking given the context of the entire exercise which Anguilla faces as a result of U.K. pressure. However, at the same time, they show a level of capitulation to the pressures from the civil law jurisdictions, especially with regards to the issues surrounding trusts. It is clear that the lack of understanding by the civil law attorneys who come from the continental European countries of the Anglo-Saxon trust and how it functions in practice is leading jurisdictions like Anguilla to concede on crucial points in an effort to comply with ever shifting international standards.

In this article, I will lay out my thoughts on this issue and argue that, frankly speaking, the concept of a central public registry of beneficial ownership is itself a solution in search of a problem. 

The law as it stands in Anguilla provides for stringent Know-Your-Customer (KYC) provisions both in the individual statues, which create specific corporate entities, and in the Anti-Money Laundering and Terrorist Financing Regulations RRA P98-1 and the Anti-Money Laundering and Terrorist Financing Code issued under it. It therefore seems superfluous to raise the issue again in the context of a consultation document. The Financial Services Commission Act RSA c.F28 and the Proceeds of Crime Act c.P98 make extensive provisions for securing the necessary beneficial ownership information for corporate entities not formed under the Companies Act RSA c.C65, for regulatory purposes and as a result of criminal investigations which allow for the sharing of such information to appropriate regulatory and crime-fighting organizations outside of the jurisdictions.

These are the so called “gateway provisions” which facilitate the exchange of information between regulatory and crime-fighting bodies. This, along with the numerous tax information exchange agreements which have been signed, Anguilla’s agreement to sign the Model 1B Intergovernmental Agreement with the United States (U.S.), its commitment to join the pilot automatic exchange program with five European Union (EU) member states and its decision to adopt the Organization for Economic Cooperation and Development’s (OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters, mean that the necessary legislative provisions for securing beneficial ownership information are already in place. On top of this, Anguilla has signed a Foreign Account Tax Compliance Act (FATCA) like agreement with the U.K. and will likely adhere to further directives from the U.K. whether voluntarily or under duress.

This then begs the question: If there are already in place legislative provisions to facilitate the exchange of beneficial ownership information, why is there a need for, first of all, a central registry of this information and secondly, why should it be public?

In examining the issues, I must confess that my thinking has been bifurcated by the arguments on either side. Let me say upfront that the jurisdictions and financial institutions which allowed and actively encouraged known tax evasion, money laundering and corruption which would include several OECD member countries, including the U.S., U.K., Switzerland, Luxembourg and Austria, amongst others, do not receive any sympathy from me.

What happened in the pre-2014 era where despots like Zaire’s Mobutu Sese Seko, Nigeria’s Sani Abacha, and the Philippines’ Ferdinand Marcos, amongst many others, were able to loot the treasuries of the countries which they ruled, often with an iron fist, park the money in bank accounts in Europe and the U.S. while purchasing villas and other real estate on the French Riviera cannot be justified by anyone of decent moral character. However, none of this could have happened were it not for the complicit actions of banks in the same aforementioned jurisdictions, some of which are pushing for a public register.

One has to wonder what the thinking of the banks in Switzerland and elsewhere was which accepted funds from dictators like Haiti’s Papa Doc Duvalier. Did they not know that the funds which he was depositing belonged to the Haitian people? And if he used a corporate entity in whose name the funds was kept, would a central register of beneficial information have been able to prevent his kleptocratic behavior when the banks which accepted the money knew or ought to have known that these funds were stolen and knowingly, willingly and willfully accepted them? While indeed the world was different then, a corporate entity, foundation or trust would not have prevented any of this, were they used in the looting of the government by a leader determined to do so.

In every act of money laundering, terrorist financing and corruption, a bank must be involved. However, a corporate entity is not necessary. Corruption, money laundering and terrorist financing cannot function or exist outside of the banking system unless the large sums of money that are usually involved are held in cash in private vaults for safe storage. The latter is a scenario that is highly unlikely in today’s world but would cause suspicion by many if it exists outside of known jurisdictions where criminal activity is widespread and well-known.

The disclosure of the ownership of the corporate entity or trust/foundation structure on a central register which is publicly available will in no way prevent the owners from proceeding with their criminal activity if the bank is complicit in allowing it. The emphasis rightfully needs to be placed on the banking sector where it is now focused and not on corporate service providers who will be responsible for providing the information for the central register.

In an era where Swiss bank secrecy is over for all practical purposes – a development hastened by the imprudent practices of its private bankers in actively encouraging and facilitating tax evasion by U.S. taxpayers – and at a time when FATCA is moving to become a global standard, is there a need for such a register?

I submit that the answer is clearly no. One can support, and I certainly don’t, a requirement for international business companies, limited liability companies and other structures to register their shareholder/member and other beneficial ownership information in the jurisdiction where they are domiciled in the public registry as now exists in the case of domestically incorporated companies.

However, as is, even this won’t be 100 percent accurate. This is because even though there are mandatory requirements on the part of companies to inform the registered agent of changes in directors and shareholders and penalties are prescribed in the legislation, this is often ignored by those in control of the company. Often, registered agents only know that directors and shareholders are changed when the company needs a certified copy of the shareholder/director register for some purpose or when a certificate of incumbency is needed. 

Unless laws are amended to indicate that title to shares only passes when registered in the company’s register of shareholders by the shareholder, as occurs in the situation whereby title to land only passes when registered with the registry in jurisdictions which have a registered land title, as opposed to a transfer by deed system, this problem will not be solved. A registered agent would then have to be placed under a more stringent legal mandate to have to register the new shareholder once he/she presents the necessary documentation which the law requires.

It could also become a practice of banks to annually verify the owners of corporate entities by requesting a certificate of incumbency and, in fact, a certificate of good standing to ensure that the company is still in existence. This would serve to force shareholders and beneficial owners to reveal themselves to registered agents in the event that they are indeed hiding.

There will always be cases whereby a company is sold to someone else or a director is changed, and the directors do not advise the registered agent of these changes. While the legislation imposes penalties, if the new directors are ones who are determined to commit fraud, then they are unlikely to comply with the legal requirements. Thus, the registered agent would have no ability to ascertain the new owners, or directors, or conduct the necessary obligatory KYC customer checks and prevent the criminal activity which is intended.

This scenario would not change even were there a registry if the necessary legal changes in the underlying legislation are not made. Regulators are often surprised when registered agents advise them that after the initial incorporation of a company when KYC is done, often changes are made without the registered agents being informed. These discussions usually occur during onsite inspections where compliance with anti-money laundering rules are assessed and this supports my contention that the proposal for a central registry of beneficial ownership information is not well thought out since I am confident that those who are pushing it do not understand the practical implications of what they are suggesting.

Even if these issues of beneficial ownership information are resolved, should such a central register be made public? Again, to this question I must state emphatically, that the correct answer is no. I do have sympathy for organizations such as Transparency International and the Tax Justice Network who argue, with some right, that these corporate structures are used to commit crimes inclusive of those mentioned earlier but especially corruption in developing countries where extraction industries such as mining proliferate.

However, what these organizations seek to do is to use such a register for a clear political agenda to embarrass, perhaps even harass private citizens and corporations who have a right to be able to organize their affairs as they see fit without interference from such non-governmental organizations.

A central public register would expose citizens in jurisdictions where private confidential information is used to target them for murder and in many cases kidnapping. A balance has to be struck between the goals of tax authorities who seek to ensure compliance with their laws, the fight against tax evasion, money laundering and corruption and citizens’ right to privacy, confidentiality and their personal security. Corporations should also be allowed to maintain sensitive information which benefits their needs and goals in pursuing their mandate to maximize shareholder value. In this balancing act, I argue that the scale should tip in the favor of privacy and confidentially and thus a public central registry is not appropriate.

Privacy and confidentiality should still remain sacrosanct in this age of transparency, except in cases of criminality and there are sufficient legal means to address this issue while protecting those principles.

A central register, should it come into existence, should only be made available to revenue authorities who have a legal mandate to enforce the tax laws of their respective jurisdictions. I see no need for anyone else, especially politically motivated organizations, to use a public registry to advance their agendas. Transparency International and the Tax Justice Network should leave the fight against corruption to tax authorities and regulatory bodies who have the legal authority and resources to do so.

In my opinion, all a central public registry would do is to force criminals and the criminally minded to stop using corporate entities and dissuade law abiding citizens from using them, also due to the loss of privacy. The criminals will not, however, be dissuaded from committing crimes. They will simply find other ways to do so. While the latter is a fact of life, we should not damage a perfectly legal industry, that of company formation and trust domiciliation, in the process.

Even the definition of beneficial ownership which is used by the Financial Action Task Force (FATF) underscores how difficult pinning down this concept and identifying and verifying who the owner(s) is, is in practice. In its explanatory notes to its recommendation on the issue of beneficial ownership, the FATF states the following:

“For legal persons: The identity of the natural persons (if any – as ownership interests can be so diversified that there are no natural persons (whether acting alone or together) exercising control of the legal person or arrangement through ownership) who ultimately have a controlling ownership interest in a legal person; and to the extent that there is doubt under [this heading] as to whether the person(s) with the controlling ownership interest are the beneficial owner(s) or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person or arrangement through other means [should be identified].

Where no natural person is identified under either [of these two aforementioned provisions] above, financial institutions should identify and take reasonable measures to verify the identity of the relevant natural person who holds the position of senior managing official.

A controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25 percent).

For legal arrangements [the FATF requires the following identification procedures to be adhered to]:
Trusts – the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust (including through a chain of control/ownership) [should be identified].
Other types of legal arrangements – the identity of persons in equivalent or similar positions [should be identified].”

This explanation from the FATF itself shows the difficulties attached to identifying the beneficial owner as opposed to the shareholder of a legal identity and in the context of a trust, a class of beneficiaries. It is worth pointing out that even if a registered agent is able to successfully identify the beneficial owners, there is no guarantee that said owners are not being controlled by some unforeseen hand who may be the criminal mastermind behind the structure. A central public register with the name of the beneficial owner prominently displayed would not be able to prevent criminal activity from taking place if the persons involved are determined as in this aforementioned scenario.

Granted that sufficient legislative provisions are already in place to provide for the identification of beneficial owners, I cannot accept that a central register is needed nor can I accept the proposition that even if it is needed, it should be publicly available.

The focus of the fight against tax evasion, money laundering and terrorist financing must, always should have been and always should be on banks. With the death of bank secrecy and the move towards automatic exchange of information, there are enough transparency mechanisms already in existence to address the situation.

Thus, there is no need for a central public register, which I submit, appears to this writer to indeed be a solution to a problem which is being solved through other, more practical means which protect privacy and confidentiality. In other words, the proposal for a central public register is a solution in search of a problem.

 

Book-Chained_sm