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Research on Open Data and Transparency

Offshore Tax Havens and Beneficial Ownership: A Quick Primer

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Given the huge leak of data on offshore tax havens from Mossack Fonseca, below is brief outline of David Cameron’s attempts since 2011 to take action on tax havens by opening up company ownership via so called Beneficial Ownership. It remains to be seen whether this is, as some claim, a political gesture or something that is causing serious concern in various territories. Perhaps the upcoming London conference will tell us more. For the time being, here is a quick primer taken from my 2015 report for the OGP

Beneficial Ownership

Beneficial ownership is a legal term referring to anyone who has property rights and who exercises ultimate effective control over a legal person or arrangement, yet does not nominally own the asset itself. The creation of a publicly accessible central registry of company beneficial ownership information stemmed from a series of international commitments on money laundering at the G8. World leaders, under the UK chair, committed to increasing action on laundering, although the commitment has a series of other purposes, from helping stop tax avoidance to fighting terrorism and alleviating poverty. The ability to create a register of company ownership, detailing who owns or has a sizable interest  (labelled ”controlling” or “person with significant control,” or PSC) , is a central part of fighting corruption or tracing numerous activities. It has been influenced by new data-driven innovations, particularly the Open Corporates site. You can see more on how the private sector is being opened up in the UK here.[1]

The  UK Commitment

The commitment was linked to a number of EU-wide and G8 agreements, as well as work with individual countries across the world on corporate transparency and tax evasion. In June 2013, an important step was made when the G8 agreed to principles on beneficial ownership openness at the Lough Erne summit under David Cameron’s chairmanship.[2]

David Cameron made the commitment the centrepiece of the UK’s second NAP during a speech to the Open Government Partnership summit in London in October 2013.[3] He argued that it is important to know who owns and controls companies, not only legally but also in terms of who benefits financially from their existence.[4] Given its cross-cutting nature, the policy is divided between Her Majesty’s Treasury and the Department for Business, Innovations and Skills (BIS).

Nationally, the publicly accessible register was consulted on in 2013. It was taken forward in primary legislation as part of the Small Business, Enterprise and Employment Bill that became law in late March 2015. The intention, according to the provisional implementation plan, is to then have a publicly accessible register up and running by April 2016 following secondary legislation. A BIS-led working group was created, and a draft set regulations for PSCs drawn up in January 2015.[5]

Internationally, the commitment has involved discussion and work around implementing the EU Fourth Money Laundering Directive, as well as a series of bilateral and multi-lateral negotiations via the G20 Anti-Corruption Working Group. These negotiations led to an agreed set of international beneficial ownership principles at Brisbane in November 2014 and strategic document looking ahead to 2015-2016, which includes concrete action on ownership and other issues recommended by Financial Action Task Force.[6]

At the EU level, the Fourth Money Laundering Directive was agreed upon following a trialogue (an informal meeting between the European Parliament, the council, and the commission) in October 2014. In December 2014, the European Parliament and Council reached political agreement on it, specifying that—

The ultimate owners of companies would have to be listed in central registers in EU countries, accessible to people with a “legitimate interest,” such as investigative journalists and other concerned citizens.[7]

This is somewhat less than the UK’s own legal provisions and was a disappointment to campaigners across the EU. The directive is now heading for formal adoption; as soon as this is done, at some point in early 2015, it will be implemented in the UK. [8]

As a side note, David Cameron was keen to push the policy with Crown Dependencies and Overseas territories linked to the UK, including the Cayman Island, Bermuda, Jersey, and Guernsey. In a letter of April 2014, he urged them to consider registers of beneficial ownership although campaigners were not hopeful.[9] In February 2015, this briefly became an election issue when the then opposition leader Ed Miliband committed a future Labour government to blacklisting any overseas territories that refused to publish a register. Since winning the General Election in May 2015, David Cameron has continued to press overseas territories on the issue, though with little effect and some resistance[10] 

Did it matter? How has it gone so far?

The commitment has been substantial so far. Some legislative and policy work remains ongoing until the register and other parts are up and running between 2015 and 2016. However, given the potential obstacles, the policy has so far met its ambitious aims and is one of the central achievements of the UK NAP. A publicly accessible register of beneficial ownership, especially if combined with a (partially open) EU register, would be a powerful move forward in opening up the private sector. These are next steps and part of a long-term process, including international negotiations and continued implementation across several forums, including the G8, G13, and EU.

This commitment is complex, with different national and international commitments involving many hundreds of thousands of UK companies. The process also requires detailed co-ordination with a series of interested parties, including government departments and outside bodies such as law enforcement. This also involves discussions between groups with very different interests, particularly between businesses and CSOs.

So far, stakeholders and CSOs widely welcomed the achievements as an important step. Given the complexity, CSOs were said to have played a key role in moving the process forward. The personal involvement and commitment of the Prime Minister also helped push the policy forward and prioritize space in the legislative timetable. BIS was widely praised for its open and consultative way of working.

Stakeholders and experts have warned of the need for continued innovation and development. Areas such as real estate may present particular problems. Experts have argued that the new data need to be matched and linked to be truly effective, as Chris Taggart of Open Corporates explained:

…this register is going to be transformative in the fight against money laundering, fraud, and other criminal activity. But much of this will only be revealed when the beneficial ownership data is combined with other datasets, including government procurement, licenses, environmental citations, and other public data.[11]

Next Steps

As both the government and stakeholders have pointed out, the policy and implementation are untested, as the few registers that exist around the world are in relatively small countries. Given its newness and uniqueness in the UK, there is a strong need for robust evidence and analysis of both implementation and compliance with the register and the exact effects, use, and consequences of having a publicly accessible register. This could include post-legislative scrutiny by a parliamentary select committee or international group of academics and experts.

The register will be available in June 2016. There is a consensus amongst all involved that a review of its operation and use will be of great interest, given the lack of precedent on which to draw. The beneficial ownership register has a three-year review built into it, and such analysis should form part of any future action plan. However, given the register’s high profile, the IRM researcher would recommend analysis before then. Transparency International has highlighted the need for monitoring to ensure that data are regularly published and that any legal or administrative loopholes are closed. Attention should also be paid to new innovations to facilitate use, such as the new (prototype) site Who Controls It, which allows searching of the register and linking with other data.[12]The register requires the co-operation of countries across the world to work effectively, so there is a need for continued movement at international level.

 

[1] See the Open Corporates application at at http://bit.ly/1IssoSm and an explanation by its designer on why Benefical Ownership is important at http://bit.ly/1zh65Nf

[2] See the 2013 G8 Lough Erne communique at http://bit.ly/1Isoett; see also http://bit.ly/1EUwovh and his OGP speech at http://bit.ly/1Q3qc5V

[3] See David Cameron’s 2013 speech at the OGP Summit at http://bit.ly/1Q3qc5V

[4] See David Cameron’s 2013 speech at the OGP Summit at http://bit.ly/1Q3qc5V

[5] As of this writing, the bill is at the report stage of the House of Lords (3/3/2015) http://bit.ly/1ivHb4y

See this discussion paper from the 2013-2014 consultation at http://bit.ly/1nD5QSo, the proviosional implementation plan at http://bit.ly/187XbW1, and the register at http://bit.ly/1GJogv4

[6] See some background on the G20 at http://bit.ly/1EUwqmX

[7] See the press release on the agreement at http://bit.ly/1J1dDp2 and on the compromise at EU level at http://bit.ly/1wB61UZ

[8] See the press release on the agreement at http://bit.ly/1J1dDp2 and on the compromise at EU level at http://bit.ly/1wB61UZ

[9] The Prime Minister’s letter at http://bit.ly/1GKQbgT and further information at http://bit.ly/1Q3pCVL See the beneficial ownership scorecard from Christian Aid at http://bit.ly/1KxLmWB

[10] See the letter at http://bit.ly/1I1c8si

[11] There may also be potential side effects and difficulties in particular areas. See this blog on real estate at http://bit.ly/1EGgYZz and this article by Open Corporate designer, Chris Taggart, at http://bit.ly/1zh65Nf

[12] See the alpha site at http://bit.ly/1bGP4kK and this briefing from Transparency International at http://bit.ly/1DF4k7U

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