Scratch the surface of any of the big cross-border corruption scandals of the last decade — the Russian, Azerbaijani and Troika laundromats, Lava Jato— and it won’t take too long to discover the critical role of shell companies, and the anonymous individuals behind them, in facilitating corruption on a vast scale.
Making the anonymous individuals behind companies identifiable is critical to preventing the criminal and corrupt from laundering their dirty money and hiding it overseas. This is achievable through mandatory disclosure of company ownership data, which is then verified and made available in public beneficial ownership registers.
This week, when governments, businesses and civil society meet in Ottawa for the Open Government Partnership (OGP) Global Summit 2019, they will have the opportunity to take a stand against corruption by improving beneficial ownership transparency.
At this year’s Summit, with technical support from the OGP, Open Ownership and Transparency International, the UK government will be leading the launch of a new coalition to advance beneficial ownership transparency. Countries will have the opportunity to sign a declaration and commit to the beneficial ownership transparency disclosure principles. Among other things, these aim to promote open registers and improve verification of ownership data.
This is a much needed development. For years, Transparency International and other civil society organisations have been highlighting the importance of mandatory disclosure of company ownership data and the benefits of public beneficial ownership registers.
What do country evaluation reports tell us?
Unfortunately, the reality today is that, in most countries, authorities still rely on beneficial ownership information recorded by banks, lawyers, accounts and real estate agents.
Our 2018 study into beneficial ownership transparency in G20 member and guest countries found that in 15 out of 23 countries assessed, investigators rely almost solely on the information collected by banks.
This is a flawed approach and does not guarantee that authorities will have access to accurate, reliable and timely beneficial ownership information.
These challenges are also obvious when looking at the Financial Action Task Force (FATF) mutual evaluation reports. Implementation of the beneficial ownership standard has been weak across the global network of countries assessed by FATF. The vast majority of countries receive low ratings.
Individual country evaluations highlight the challenges authorities face when the only information they can access is held by legal entities — financial institutions, lawyers or corporate services providers — or basic information in company registers.
In the case of the United States, for example, the 2016 FATF assessment shows how difficult it is for law enforcement to collect information on who owns companies:
“LEAs [law enforcement agencies] advised the assessors that they must often resort to gathering this information through time-consuming, resource-intensive, and lengthy investigations, which may involve: detailed analysis of bank accounts and transaction records; physical around-the-clock surveillance; collection of emails; conducting searches; interviewing potential witnesses, etc. As a result, the competent authorities are not always able to access such information in a timely manner, and thus it cannot be said that there are no impediments to their collection of such information.”
Challenges were also found in Canada:
“While the legal powers available to LEAs are comprehensive and sufficient, the instances in which LEAs were able to identify the beneficial owners of Canadian legal entities and legal arrangements appear to have been very limited and investigations do not sufficiently focus on international and complex ML [money laundering] cases involving corporate elements. Some LEAs are therefore less familiar with ML typologies involving corporate structures. Also, in a number of cases that have been investigated and where Canadian companies were owned by foreign entities or foreign trusts, it was not possible for LEAs to identify the beneficial owners.”
“[T]he powers of law enforcement authorities to get timely access to this information are limited, as this can be done only in the context of a criminal investigation. Moreover, financial institutions and professional intermediaries may use the right of appeal against such requests for information, and, in fact, routinely do so. In practice that means that competent authorities do not have timely access to the BO information.”
In fact, according to FATF, no country has high levels of effectiveness when it comes to beneficial ownership transparency. However, countries with better ratings all have beneficial ownership information recorded in at least one register, in addition to information available upon request from financial institutions and other professionals with anti-money laundering obligations as well as companies themselves.
The United Kingdom offers a good example of how this can work,
“UK authorities are able to access basic and BO information on legal persons and arrangements via one of three sources: from financial institutions and DNFBPs [designated non-financial businesses and professions], from registers, or from the legal entity itself. The variety of sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources.”
But, this doesn’t mean that authorities are always successful in identifying the beneficial owner of companies. Two main issues remain: (1) accuracy and reliability of the data authorities are able to access; and (2) inability to access company information that is held outside of the country.
“[M]ore often than not, foreign trusts are deliberately established in jurisdictions that do not collaborate, thus making the identification of the ultimate beneficial owner particularly arduous.” (Italy, FATF Mutual Evaluation Report 2016) “Information on beneficial owners may not be as timely or even available when owned by foreign legal persons or legal arrangements.” (Macao-China, FATF Mutual Evaluation Report 2017)
We see the same patterns emerging when we analyse recent cross-border corruption cases. For example, in the Brazilian Car Wash (Lava Jato) investigations, Brazilian prosecutors faced challenges in getting information to prove that certain business executives and public officials were behind offshore companies used in the scheme. In one instance, a mutual legal assistance request to access account records took a very long time to process. Worse than this though, the request was leaked, threatening the whole investigation.
Let the sunshine in
We believe that a public beneficial ownership register has an enormous potential to solve these problems.
A public register can guarantee timely access to information and help improve the accuracy of the data provided in several ways:
· Authorities no longer have to request information from the entity, corporate service provider or bank — although if they want to cross-check information, they can still do so.
· Foreign authorities do not need to go through lengthy and complex mutual legal assistance requests.
· Banks, corporate service providers, lawyers and real estate agents, wherever they are located, can easily check information when conducting due diligence.
· The private sector can access information on business partners.
· Civil society and journalists can uncover illicit activity as well as monitor the accuracy of the information registered.
The power of public registers can be seen in the Czechia, TI Česká republika, where TI’s national chapter was able to uncover a conflict of interest of Prime Minister Andrej Babiš thanks primarily to the public beneficial ownership register of a neighbouring country, Slovakia.
Czechia does not have a public beneficial ownership register, but Slovakia requires all companies that have a contract with the public administration to disclose their beneficial owners and this information is publicly available.
TI Česká republika was able to expose that Prime Minister Babiš was the main beneficiary of a company that received significant EU subsidies. The discovery led the European Commission to suspend the payment of any EU subsidies until the Prime Minister’s conflicts of interest have been resolved.
If that was a reason enough, we also expect that public registers would serve as a deterrent to criminals and the corrupt seeking to hide behind anonymous companies.
The time for OGP countries to send a strong message that dirty money is not welcome within their borders by shining a light on corporate ownership is long overdue.
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