Taking a step back: Why do we care so much about public registers of beneficial ownership?

You might have seen us cel­e­brat­ing the UK government’s deci­sion last week to require British over­seas ter­ri­to­ries to intro­duce pub­lic reg­is­ters of ben­e­fi­cial own­er­ship. This means that com­pa­nies based in places like Bermuda, the Cayman Islands, Turks and Caicos and the British Virgin Islands will soon have to reveal the iden­ti­ty of the real indi­vid­u­als behind com­pa­nies — the ben­e­fi­cial owners.

We’ve called this “a major vic­to­ry in the fight against cross-bor­der corruption”.

You might be won­der­ing: why do we care so much about reg­is­ters of ben­e­fi­cial ownership?

Information is all

Well, in order to effec­tive­ly fight mon­ey laun­der­ing, cor­rup­tion and tax eva­sion, author­i­ties need to be able to trace mon­ey. This means hav­ing time­ly access to suf­fi­cient, accu­rate and up-to-date infor­ma­tion about com­pa­nies and the peo­ple who ulti­mate­ly own and ben­e­fit from them.

Obstacles to access­ing this infor­ma­tion or delays in trans­fer­ring it to author­i­ties make it hard­er to fol­low the mon­ey back to its source. This increas­es the like­li­hood that peo­ple who have engaged in cor­rupt or ille­gal acts will get away with their crimes.

Public reg­is­ters of ben­e­fi­cial own­er­ship make get­ting this infor­ma­tion a lot easier.

Here’s why.

Company registers and bank records often aren’t enough

When con­duct­ing inves­ti­ga­tions into com­pa­ny own­er­ship, author­i­ties often rely on com­pa­ny reg­is­ters and infor­ma­tion record­ed by finan­cial insti­tu­tions. Our new research into ben­e­fi­cial own­er­ship trans­paren­cy in G20 mem­ber coun­tries and guest coun­tries found that in 15 of the 23 coun­tries assessed, inves­ti­ga­tors rely almost sole­ly on the infor­ma­tion col­lect­ed by finan­cial insti­tu­tions and so-called “des­ig­nat­ed non-finan­cial busi­ness­es and pro­fes­sions” (or DNFPBs), such as lawyers and accoun­tants, to iden­ti­fy the ben­e­fi­cial own­er of companies.

But these sources often aren’t enough, and inves­ti­ga­tors that depend on them alone face sig­nif­i­cant obsta­cles when it comes to iden­ti­fy­ing, track­ing and trac­ing illic­it activities.

Complex webs of ownership

Company reg­is­ters around the world record a range of infor­ma­tion, but most do not actu­al­ly include ben­e­fi­cial own­er­ship infor­ma­tion. Some of them (such as those in the state of Delaware in the United States) do not even include infor­ma­tion on shareholders.

Even with infor­ma­tion on share­hold­ers, author­i­ties will not nec­es­sar­i­ly be able to ful­ly under­stand the con­trol and own­er­ship struc­ture of a com­pa­ny and iden­ti­fy the indi­vid­u­als prof­it­ing from it. For exam­ple, the share­hold­ers might be anoth­er domes­tic legal enti­ty, a for­eign com­pa­ny, or even a nom­i­nee — that it, some­one who “rents” their name but acts accord­ing to instruc­tions of the real own­er, who choos­es to remain hidden.

If the share­hold­er of a com­pa­ny is a for­eign com­pa­ny reg­is­tered off­shore, it might take inves­ti­ga­tors years to find out who the the real ben­e­fi­cial own­er is. In that case, they would need to for­mal­ly request infor­ma­tion and depend on the coop­er­a­tion of offi­cials in the juris­dic­tion where the com­pa­ny is reg­is­tered. Worse, while all this is going on, the com­pa­ny might be tipped off that is under inves­ti­ga­tion and have time to move its assets elsewhere.

Banks can complicate things further

Relying on infor­ma­tion col­lect­ed by finan­cial insti­tu­tions and DNFBPs brings its own set of challenges.

In some coun­tries, author­i­ties can only access an online data­base that shows who holds an account at a par­tic­u­lar finan­cial insti­tu­tion after receiv­ing a court order. In oth­er coun­tries, author­i­ties need to know the name of the bank hold­ing a company’s accounts in order to request infor­ma­tion — and find­ing the bank’s name is not always straightforward.

A fur­ther issue is that finan­cial insti­tu­tions and DNFBPs often record the ben­e­fi­cial own­er­ship infor­ma­tion exact­ly as their cus­tomers pro­vide it. This infor­ma­tion might not nec­es­sar­i­ly be accu­rate, or the bank could be com­plic­it in record­ing false infor­ma­tion, as many recent cor­rup­tion cas­es have demonstrated.

A com­pa­ny might also be incor­po­rat­ed in one place and have bank accounts in anoth­er, which makes it hard­er for the author­i­ties to access information.

Research by Transparency International UK shows that 90 per cent of UK firms involved in a scheme that moved £63 bil­lion of illic­it wealth out of Russia had bank accounts in Latvia or Estonia. In the Azerbaijani Laundromat scheme, shell com­pa­nies incor­po­rat­ed in the United Kingdom but owned by oth­er off­shore com­pa­nies used bank accounts at the Estonian branch of the Danske Bank to dis­guise pay­ments alleged­ly made by Azerbaijani offi­cials to laun­der the country’s rep­u­ta­tion in Europe.

Registers could solve these problems — but verification remains an issue

A pub­lic, cen­tral reg­is­ter is the most effec­tive and prac­ti­cal way to record infor­ma­tion on ben­e­fi­cial own­er­ship and facil­i­tate access for the author­i­ties. A cen­tral reg­is­ter also sup­ports the har­mon­i­sa­tion of the country’s legal frame­work, avoid­ing dou­ble stan­dards, and facil­i­tates cross-bor­der inves­ti­ga­tions and inter­na­tion­al cooperation.

Even with the adop­tion of ben­e­fi­cial own­er­ship reg­is­ters, how­ev­er, the reli­a­bil­i­ty of infor­ma­tion is like­ly to remain an issue. The author­i­ties respon­si­ble for main­tain­ing such reg­is­ters often do not have the capac­i­ty or the man­date to ver­i­fy the infor­ma­tion pro­vid­ed. Registers should be ade­quate­ly resourced so they can ver­i­fy the accu­ra­cy of infor­ma­tion pro­vid­ed by com­pa­nies. Making the reg­is­ter pub­licly avail­able can help min­imise the risk of false infor­ma­tion, as exter­nal watch­dogs and even oblig­ed enti­ties (finan­cial insti­tu­tions and DNFBPs) could help mon­i­tor the infor­ma­tion provided.

Progress on the horizon

The 5th EU Anti-Money Laundering Directive has already made a pub­lic reg­is­ter a require­ment for EU coun­tries. Ghana, Nigeria and Ukraine have also adopt­ed pub­lic cen­tral ben­e­fi­cial own­er­ship reg­is­ters. The UK decid­ed to intro­duce one in 2015. This will soon also be the new real­i­ty in the UK Overseas Territories.

Now, it is time for all oth­er coun­tries to fol­low suit.

By Transparency 

Taking a step back: Why do we care so much about pub­lic reg­is­ters of ben­e­fi­cial ownership?