The Level of Transparency Necessary

Prem Sikka writes:

From the rhetoric we heard, history was made on Wednesday as the government backed moves to require the fourteen UK Overseas Territories to publish a register of ‘beneficial ownership’ of companies.

The pressure for transparency – with ministers accepting a joint legislative amendment put forward by Conservative and Labour backbenchers – has been ramped up by revelations from the Panama Papers, and Paradise Papers, on top of a stream of news that anonymous companies located in tax havens have facilitated tax avoidance, tax evasion, money laundering and varieties of criminal practices. 

Awareness of the identity of the beneficial owners is a key requirement for any regulatory action, and public registers will push up the cost of hiding in tax havens. 

But here’s the context. International pressure for tackling illicit financial flows through tax havens has been mounting, and the requirement to publish the register of beneficial ownership of companies would have been imposed by the European Union’s 5th Anti-Money Laundering Directive – as well as benchmarks developed by the Financial Action Task Force. 

Back in 2014, the then Prime Minister David Cameron committed the UK to persuade its Overseas Territories to introduce a public register. The UK is responsible for their “good governance” and Westminster has “unlimited power to legislate for the territories”. 

The most positive outcome from Wednesday’s parliamentary debate is the principle that the UK will intervene to require its Overseas Territories to erode the secrecy that facilitates illicit financial flows. Yet the proposals do not apply to trusts, whose role has also been exposed by various leaks. 

The proposals also do not apply to UK Crown Dependencies. These are the Bailiwick of Jersey, the Bailiwick of Guernsey and the Isle of Man. The Bailiwick of Guernsey comprises three separate jurisdictions. 

A public register is welcome – but how authentic will its contents be? Not very, if the UK’s own poor practices are any guide. It can hardly ask its Overseas Territories and Crown Dependencies to aspire to higher standards.

The first port of call for company formation on mainland UK is Companies House. Anyone can form a company, and they don’t have to be UK/EU citizens or residents, though the company must have a registered address in the UK, which can be a post box. There are no checks on entries’ authenticity. 

The Business Secretary informed parliament that “Companies House does not have powers to verify the authenticity of company directors, secretaries and registered office addresses.” Unsurprisingly, it has been possible to form companies with the address “10 Downing Street” and Cabinet members as directors. 

The failure to use domestic and international databases to verify authenticity of directors and shareholders means that criminals can form companies and also file false information. Companies House acts more as a filing box – and does not check the documents to verify the reasonableness of the documents. 

When pressed on a specific case involving a company directed by self-confessed “fraudster” from Italy, the Business Secretary said that no action has been taken against the officers of the company for “filing inappropriate information”. 

There are plenty of opportunities for individuals to conceal their identities. The UK company law permits ‘nominee shareholdings’. The owner of shares can ask a nominee, usually banks, accountants, lawyers, to hold shares on his/her behalf. When this happens, the share register shows the name of the nominee and not the real owner. When asked to check this practice the Business Secretary said: “The Government has no plans to introduce legislative proposals to prohibit nominee shareholdings”. 

UK company law, under certain circumstances, also permits the appointment of nominee directors – which enables the real controllers and decision makers to remain anonymous. There are plenty of company formation agents offering this service, for a fee. 

The UK requires companies to file information about people with significant control (PSC). In a nutshell, this is anyone holding more than 25% of the shares or voting rights in the company, or the right to appoint or remove the majority of the board of directors. So not all shareholders need to be publicly identified and it is not difficult for anyone to manipulate the 25% criteria, using nominee shareholders and directors to retain anonymity. 

UK company law requires public limited companies (PLCs) to have at least two directors, but only one of these needs to be a ‘natural person’. The other can be an anonymous company registered anywhere in the world. 

To begin the process of a meaningful register of beneficial ownership of companies, Companies House and its role needs to be fundamentally reformed. Identity checks need to be made on all directors and shareholders. Nominee shareholders, nominee directors and allowing anonymous companies to be directors of other companies will all need to be prohibited. 

Only ‘natural persons’ – not companies – should be allowed to be directors. Foreign residents may only be allowed to form companies if their identity can be verified and the treaties with their respective countries permit legal action against the person for fraudulent practices. 

We need to reform UK practices – and become a model for Overseas Territories and Crown Dependencies. Without reforms, the register of beneficial ownership of companies is unlikely to achieve the level of transparency necessary to combat illicit financial flows.