Andres Knobel ■ Ending secret ownership: we assess the progress and challenges

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The richness of the Tax Justice Network’s Financial Secrecy Index is such, (conveying so much more information than just a ranking of the largest contributors to global financial secrecy), we’re now publishing a visual report describing the current state of play with legal and beneficial ownership registration available in 112 jurisdictions. Our report is based on the data contained in the most recent Financial Secrecy Index, published last January 2018. The report, available also as a PowerPoint presentation, includes maps, charts and tables that describe the best available cases now being used of registration for each type of legal vehicle (e.g. companies, partnerships, trusts and foundations).

The Panama Papers, Paradise Papers and other leaks have made the risks created by corporate secrecy clear. This type of secrecy allows individuals including tax dodgers, money launderers, terrorist financiers and corrupt officials to hide behind opaque legal vehicles such as companies and trusts to hide their money and their activities – or at least to avoid scrutiny for their alleged legal affairs.

The obvious solution underlying these leaks is for countries to identify, in public online registries, all individuals (called “beneficial owners”) who ultimately own and control these legal vehicles that operate in their territories (e.g. companies that open bank accounts, hold real estate or provide goods and services).

An unstoppable trend

While the Financial Secrecy Index has been assessing beneficial ownership registration for many years, it was only in 2015 that some countries began to introduce laws requiring beneficial ownership information, at least for companies. The Financial Secrecy Index 2018 edition showed that many more countries (not only in Europe, but also in Africa and Latin America) now have laws requiring that beneficial ownership information be registered, and online registries of beneficial ownership data are already functioning in some countries (e.g. the UK and Ukraine). In addition, recent developments that took place after the information-collecting process for the Financial Secrecy Index was completed, prove that the number of countries with beneficial ownership registration will only grow, and we really are seeing the emergence of an international global standard. In early 2018 the European Union approved the 5th Anti-Money Laundering Directive and the UK passed an amendment to the Sanctions and Anti-Money Laundering Act. Both regulations will require all EU countries and British Overseas Territories to establish public beneficial ownership registries for companies and other legal persons.

Number of countries with beneficial ownership registration laws

Figure 1 - State of play of beneficial ownership

An unequal trend

However, while many countries are approving (or will be required to approve) beneficial ownership registration laws, these laws don’t always cover all types of legal vehicles, but usually focus on companies and other legal persons, leaving trusts aside. This is a big problem, since trusts can be equally, if not more problematic than companies when it comes to abusing secrecy for illegitimate purposes.

What’s more, beneficial ownership registration laws are not always effective (there may be exceptions to registration if the beneficial owner is located abroad, or if he/she controls a company through indirect foreign companies). Even if a country has good beneficial ownership registration regulations, this doesn’t mean that legal ownership is registered effectively. Legal ownership refers to the first tier of ownership, the direct and immediate owner of an entity. Identifying both the legal owner and the beneficial owner is important: identifying the legal owner (direct owner of each tier) is vital for effectively verifying the beneficial owner (the last tier, who indirectly – but ultimately – controls an entity).

Figure 2 - State of play of beneficial ownership

Ideally, every country should register both legal and beneficial ownership information for all types of legal vehicle (for all companies, all partnerships, all trusts and all private foundations). In addition, information on both legal and beneficial owners should be available online, for free and in open data format. However, as the table below shows, no country gets a perfect score in each category (for each type of legal vehicle). In other words, no country has online legal and beneficial ownership information for every type of legal vehicle (if that perfect country existed, it would appear on each column of the first row). In fact, for partnerships, trusts and private foundations no country reaches the ideal level of registration, which means they would have legal and beneficial ownership information online. In other words, these categories have no ‘winners’ yet of the race to the top (there is no country in the first row for these types of legal vehicles).

Countries that require legal ownership (LO) and/or beneficial ownership (BO) to be properly registered and also have such information available online either after paying a fee, for free or for free and in open data format:

Figure 3 - State of play of beneficial ownership

Getting lost on the way

Only very few countries reach our ideal scenario (registration and online access to legal and beneficial ownership information) for some types of legal vehicles. And many countries get lost on the way. Effective registration involves many initial steps. For example, when considering the registration of legal ownership of companies, the first step is to ensure that bearer shares pose no risks, either because they don’t exist or because they are immobilised by a government authority. Companies offering bearer shares pose huge risks to transparency because the owner of such a company would be any person holding a paper representing that bearer share(s) at any given time. In other words, in order to know who the owner of the company is, one would have to know who currently has the physical share (the paper) in their hands.

Assuming bearer shares pose no risks (e.g. because they are not available), the next question is whether all types of companies available in a country have to register their legal owners (e.g. direct shareholders), and whether all types of shareholders are covered by such registration requirements. Then, an important fact is whether ownership information must be updated whenever the owner changes: otherwise a nominee or a ‘straw man’ could set up a company, and immediately afterwards transfer the shares to the real owner. If a jurisdiction doesn’t require ownership information to be updated, the original information will refer only to the original straw man, and the current owner will be unknown. For companies that meet all previous conditions (e.g. they have to register and update legal ownership information) the question is then whether the registered legal ownership information (e.g. the name and address of each legal owner) is available online to the general public, either after paying a fee, or ideally for free and in open data format. For example, this is what the Financial Secrecy Index describes related to legal ownership (LO)  registration of companies:
Companies legal ownership registration funnel - State of play of beneficial ownership

From theory to reality

An important point on which the report focuses is the risk created by each country in practical terms. While countries A and B may both offer secretive companies, if one million companies are created in country A while no company exists in country B, they’re not an equal threat. In theory, both countries are equally bad for offering secretive companies. But in practice however, country A is creating way more risks in the world because many of its one million secretive companies may be abused for engaging in illegitimate activities. On the other hand, if a country had perfect transparency (all companies had to register legal and beneficial ownership, and such legal and beneficial ownership information were verified and available online, for free and in open data format) then no matter how many companies are created there, the risks would be minimal because it would be possible to know who actually owns each of those companies. Owners of such transparent companies would avoid engaging in illegal activities because they would easily get caught.

The following chart proves again why we’re so concerned about ‘Tax Haven USA’. The USA doesn’t require legal ownership (LO) information to be registered in all cases (let alone beneficial ownership information). On top of this, there are approximately 30 million entities registered in the USA. This means that there are plenty of US American companies whose secrecy could be exploited for illegitimate purposes.

Figure 4 - State of play of beneficial ownership

Download the report.
Download the PowerPoint presentation.
Download the annex.

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