The recent global economic climate has been pretty desperate. Many large, previously well-established and thriving economies found themselves with huge fiscal black holes.
The ugly fallout included a knee-jerk backlash against international financial centers (IFCs). Despite the evidence that growth is now returning, that backlash has become firmly entrenched and part of the global political landscape. For the onshore world, IFCs are politically convenient (non-voting) scapegoats on which to blame their economic woes.
Yet the objective and empirical evidence demonstrates a very different narrative. The IFCs are not centers of tax evasion and assistants to crime and money laundering. Rather, the IFCs contribute significantly to global wealth, growth and stability.
The role of the IFC Forum is to educate policymakers and the public, and to debunk the prevailing myths and fictions. It also seeks to communicate and cooperate with policymakers and the media to ensure that, as far as possible, the economic and tax policies of the onshore world do not unnecessarily damage the IFCs.
UK proposals for public registers of beneficial ownership continue
Over recent months, the U.K. has continued with its pressure for the creation of a public register of beneficial ownership.
The background is the political commitment relating to tax and transparency made by the G8 countries at the Lough Erne G8 Summit of June 2013. One of these required greater disclosure of the beneficial ownership of companies. The U.K. government, determined to be at the vanguard of the policy, further pledged in October 2013 that the U.K. register would be made publicly available.
After a lengthy process of consultation, the Small Business, Enterprise and Employment Bill was presented to Parliament in June 2014 and had its second reading in the House of Commons in July 2014. It will now go to Public Bill Committee Stage, which begins on October 14, 2014.
Simultaneously, the U.K. is urging its crown dependencies and overseas territories to institute public registers of beneficial ownership within their own regimes.
Criticisms of proposed U.K. regime
The IFC Forum has a number of serious concerns with the U.K. government’s proposals. It is not possible to do justice to them in the context of this article, but the main points can be broadly summarized as follows.
First, the system currently proposed relies on self-reporting by companies and their members, with no mechanism for systematic verification of data. This is not likely to produce an accurate register. The rationale for the register is to flush out criminal activity; it is not sensible to seek to rely on accurate self-reporting by a criminal contingent.
By contrast, Forum members have extensive experience in collecting beneficial ownership information; a licensed company service provider (CSP) system of collation of beneficial ownership information has been in place for more than a decade in many of their jurisdictions, including the Cayman Islands.
The hard data shows that this is the system that is likely to result in the most accurate information. It is sometimes referred to as the “regulated gatekeeper” approach.
Secondly, the proposed U.K. system does not apply to non-U.K. companies. Nor can it, of course, because this would raise difficult questions of jurisdiction and enforcement. As a result, the system is easily circumvented with the imposition of a non-U.K. company or branch activities. It is unlikely that the U.K. government had this in mind as an intended consequence of its policy.
Thirdly, the U.K. is the first country to put in place plans for a publicly available register. (Although France has committed to the establishment of public registers in principle, its plans are not at all advanced.) This is likely to have a negative impact on investment into the U.K., at least until other jurisdictions catch up, assuming that they do so.
The crown dependencies and overseas territories are similarly concerned about negative impact on inward investment into their jurisdictions and perhaps particularly indignant given that these jurisdictions have operated their own effective procedures for the collection of beneficial ownership for many years.
The IFC Forum has been actively engaged in meetings and discussions with policymakers in the government and civil service throughout the process, seeking to explain our position and warn of the dangers inherent in some of the policy decisions. Vince Cable MP, Secretary of State for the Department of Business Investment and Skills (the government department responsible for the Bill), with whom the IFC Forum met in June, has very recently indicated that the government will now consider the regimes already in place in other jurisdictions. We are very hopeful that such a study will reveal the pitfalls of the proposed U.K. scheme and demonstrate the advantages of other types of scheme, such as the regulated gatekeeper approach.
Plethora of international initiatives
In fact, there are currently a number of overlapping and potentially duplicative initiatives on collection and access to beneficial ownership data. As well as the U.K. proposals, these include:
- EU plans for a register of beneficial ownership of companies and trusts in the context of the 4th Anti-Money Laundering Directive.
- FATCA and the OECD Common Reporting Standard.
- U.S. proposals for data collection through the IRS.
- Financial Action Task Force (FATF) guidance regarding recommendations 24 and 25.
Crucially, none of these other initiatives have reached any settled outcomes. Alarmingly, most of the initiatives are being conducted without reference to any of the others. Obviously, the risk is that this will produce multiple conflicting outcomes, with no coherent policy in place and a significant degree of uncertainty. In these circumstances, it is clearly premature to press the IFCs to commit to any one developing standard.
The IFC Forum has had a number of meetings with the European Commission and other EU representatives in Brussels. The meetings went well and the EU institutions appeared keen to learn more about parallel initiatives in the U.K. and elsewhere. The IFC Forum will engage further in this regard.
Moving Money: International Financial Flows, Taxes and Money Laundering
It is clear from the above that the prevailing political climate is not often supportive of the IFC position. The popular press enjoys portraying the offshore jurisdictions as enabling multinationals to avoid paying the “fair” amount of tax, and to allow wealthy individuals to evade the tax laws of their home jurisdictions. However, a recent report by Professor Richard Gordon and Professor Andrew P. Morriss and published by The Alabama School of Law – Moving Money: International Financial Flows, Taxes and Money Laundering – clearly demonstrates that this is not the case.
The report explains that international financial centers play a vital role in helping money move around the global economy and in increasing international investment. The authors show that the arguments against the IFCs favored by some of the populist press are founded on mistakes and inaccurate information. The report also argues that demands for more regulation without considering cost and effectiveness rely on a belief that international financial transactions are assumed to be illegitimate unless tightly controlled, rather than primarily reflecting the normal, legitimate workings of an efficient market.
The IFC Forum was extremely fortunate that both Professors Gordon and Morris attended a recent IFC Forum meeting to discuss their findings. The result was a very informative, persuasive and entertaining session.
Many of the materials referred to above are available on the IFC Forum website at www.ifcforum.org. For further information, or if you have any questions, please contact [email protected].