On May 1, 2018, the inevitable finally happened and the British House of Commons mandated that the British Overseas Territories, but not the Crown Dependencies, will be compelled to make public beneficial ownership details relating to their companies by the end of 2020. This predictably caused much gnashing of teeth in those self-same territories, some of it justified, and some of it possibly exaggerated. Despite some predictions to the contrary, the sun still came up the following day.

The British Overseas Territories are prickly about imperialism from London. They also feel justifiably betrayed after having reached a consensual agreement with the United Kingdom to finally resolve the issue of access to beneficial ownership information. The system implemented under that agreement is still less than a year old, but the U.K. has now torn it all up and unilaterally tried to impose new rules. The previous agreement seemed fair and reasonable: U.K. law enforcement would have access, within an hour in urgent cases, to beneficial ownership information for any offshore company. However, the public would not.

Notably, U.K. law enforcement have never been in favor of public registers of beneficial ownership, which they do not regard as helpful overall in terms of criminal investigations – a point which was made forcibly by Lord Howard Flight in the debate on the same Bill in the House of Lords.

But whether it was a sensible idea or not, the dice has now been firmly cast. So, the obvious question is what happens next?

The first thing that will probably happen will be legal challenges. The U.K.’s power to legislate for the Overseas Territories is circumscribed. As Labour MP Margaret Hodge has pointed out, crime is an area where the U.K. Parliament still has competence to pass laws directly.

However, there is a sensible question to be asked whether this is really about crime, given that U.K. law enforcement already has full access. This is really about allowing journalists and other third parties to be able to sift through the information and see if they can find anything juicy to publish – an odd position given the concerns expressed by the House of Commons about the propensity of firms to do the exact same thing with people’s electronic data, but there it is.

If there is a legal challenge, there is obviously a wide spectrum of possible outcomes. The challenge could fail. It could succeed, but the U.K. then “tries again,” using a different constitutional route, such as Crown Prerogative. But what is also entirely possible is that both sides sit down and agree a reasonable face-saving compromise that allows both sides to call it a win. Given that the U.K. government itself was not a supporter of the proposals, it should be open to finding common ground. But the U.K. government’s own hands will be tied to a great degree by the will of parliament. It could get very messy, but equally, it could all be very civilized and amenable.

After the legal challenges are over, assuming that the overseas territories remain locked into providing public registers, the next stage will be thrashing out the details. That is obviously going to be much harder if this is an acrimonious process, for all the obvious reasons. And these are not simple issues. “Beneficial ownership” is easy for politicians and journalists to say, but extremely hard for lawyers to define – as we have seen. Those difficulties are not going away. The overseas territories and the U.K. are still wrapping their arms around existing beneficial ownership and discovering the patent and latent flaws in their systems.

And then there is a timeline. As the Premier of the Cayman Islands, Alden McLaughlin, has stressed, Cayman and most of the other British Overseas Territories have already given commitments to introduce public beneficial ownership registers when they became a viable global standard. Although that probably will not happen by December 2020, it might not be too long after that it would have happened in any event. So, it is possible that what this really means is the acceleration of an existing timetable, albeit one made in a hostile and unilateral fashion.

Key with a tag tied to it with "Beneficial Owner" written on it.

But the big unknown for the British Overseas Territories is what this will mean for their offshore industries. Hysterical overreaction is to be expected in the short term. But the actual likely effects are going to be difficult to predict with accuracy. Large areas of offshore business will be unaffected by the changes. And the offshore jurisdictions have always argued, and I think they are correct to say, that their books of business are a great deal cleaner that the readers of The Guardian like to imply. This is not the 1970s. This is a world with the Common Reporting Standard, with strict anti-money laundering requirements, and with open information sharing with law enforcement. But, however clean the book of business is, public registers of beneficial ownership represent a significant intrusion into personal information privacy. The fact that this occurs during the month when the General Data Protection Regulation launches specifically to protect the privacy of sensitive personal data is deliciously ironic. No matter how clear your conscience is, that is both a cost and a burden that many clients will prefer to avoid rather than accept. It is a good bet that we will see some level of contraction.

But these things can be inherently counter-intuitive. After the British Virgin Islands introduced private registers of beneficial ownership accessible by U.K. law enforcement in July 2017, despite similar predictions of doom, the incorporation rates in the jurisdiction increased. It would be foolish to pretend that there are no rotten apples in the basket, but the stereotype of offshore companies as havens for criminal gangs represents yesterday’s thinking from a world before modern financial services regulation.

And then there are the political wildcards. It will not take long for hotheads to call for independence in some places as an appropriate response. There will be elections in most of the relevant territories between now and the end of 2020. Some political party will likely think that promising to take their people out from under the “yoke of the oppressor” is vote-winner. And they might be proved right. Who is to say what strange political twists and turns may occur during the next three years.

But, however it resolves itself, what is sad about the current situation is that it is just so unnecessary. The U.K. tax authorities are very happy with the cooperation they get from CRS. The U.K. law enforcement authorities are very happy with the cooperation they get from the private registers of beneficial ownership. The only people pressing for public access to information are journalists, an admittedly powerful lobby, who love to report on the private dealings of the rich and famous, and transparency campaigners, who are undoubtedly pure of heart, but fairly one dimensional in their view of the trade-offs involved.

Even as parliamentary select committees excoriate Facebook and Google for their use of people’s private information, the House of Commons moves to push ever more private and sensitive data out into the public domain themselves.

The end of this story has not been written but, without doubt, a new chapter has begun.

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Colin Riegels
Partner, Harneys, British Virgin Islands

Harneys

Harney Westwood & Riegels is a leading international offshore law firm. We provide the world’s top law firms, financial institutions and corporations with legal services relating to British Virgin Islands, Cayman Islands, Cyprus and Anguilla law.

At Harneys we understand the commercial environment in which our clients operate, and the firm has a long-standing reputation for providing fast, accurate and commercially astute advice. Our core philosophy is a commitment to absolute quality in the work we deliver, and unparalleled responsiveness and client service. As a result, we are consistently ranked as one of the world's top offshore legal practices by independent ranking directories.

Harneys’ associated corporate and private wealth services business, Harneys Services, delivers a full complement of company, trust, and fund formation and administration services in the British Virgin Islands and Cayman Islands. We hold a Class 1 Trust License and offer a broad range of fund, trusts, and fiduciary services. 
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