Eva Danzi ■ Beneficial ownership transparency in Africa and Latin America: advances, but more to be done
Secrecy surrounding ownership of companies, trusts, partnerships and foundations is a major driver of illicit financial flows. The negative consequences of this secrecy are felt across economies and societies worldwide and result in greater financial instability, increased inequality, and erosion of public trust in institutions, the rule of law and democracy. In collaboration with Tax Justice Network Africa and Fundación SES, the Tax Justice Network today publishes two reports on the state of play of beneficial ownership transparency in Africa and Latin America. Beneficial ownership transparency requires the disclosure of the individuals who ultimately own, control or benefit from a legal vehicle, such as a company. This data should be publicly available, free of charge. Our two reports draw on data from the Tax Justice Network’s Financial Secrecy Index 2022, cover some of the latest developments and progress, and dig deeper into the situation in specific countries through case studies. Here is a brief summary:
Beneficial ownership transparency in Africa and Latin America
African and Latin American governments know that beneficial ownership transparency is a powerful tool to combat money laundering and tax abuse. Our research shows that progress is being made on both continents.
In Africa, 23 out of 54 jurisdictions now have laws that require beneficial owners of companies to be declared or registered with a government authority. Our report Beneficial ownership transparency in Africa in 2022 includes real life cases of the damage financial secrecy causes. In Cameroon, for example, the misappropriation of public funds meant for responding to Covid 19 sparked debate among civil society, the media, and public authorities. One of the cases of fraud involved family members of the governmental committee responsible for procurement. Since then, the country has recognised the need for beneficial ownership in its Finance Act of 2023, requiring legal entities to register their beneficial owners with a public authority.
In Latin America, 10 out of the 16 jurisdictions analysed require beneficial ownership information to be registered with a government authority, a significant increase since 2018 when only four jurisdictions mandated this requirement. The report on the State of Play of Beneficial Ownership in Latin America includes a section explaining how national institutional frameworks can be strengthened further through case studies.
Despite progress, significant loopholes remain. Bearer shares, which are shares represented by physical certificates that grant ownership to whoever holds them, pose a significant risk to transparency. We strongly recommend that countries prohibit the use of bearer shares and phase out the remaining ones. The lack of public access to registries is also a major weakness.
The studies also reveal governments’ commitments to beneficial ownership transparency in specific sectors. Some countries have committed to disclosing beneficial ownership information for companies in the extractive industries as part of the Extractive Industry Transparency Initiative. Similar commitments have also been made to increase transparency and accountability in the procurement of goods and services during the pandemic, when several countries pledged to publish beneficial owners of companies awarded government contracts as part of accessing financing from the International Monetary Fund.
The way forward
Progress on beneficial ownership transparency varies widely across different countries and regions. Even in countries that have implemented strong frameworks, loopholes remain that can be exploited. For example, legislation should cover all legal entities (not just companies, but also partnerships, trusts and foundations). A clear and comprehensive definition of who qualifies as a beneficial owner and efficient methods for keeping this information up to date are also crucial components of establishing a strong system for transparency of beneficial ownership. In addition, consequences and enforcement of sanctions for noncompliance with these requirements are necessary to deter abuse.
Any transparency progress a country makes is always at risk of being undermined by secrecy in another country. It’s important to highlight here the great responsibilities on the part of some of the world’s major economies to do better. Given the help that these major international players provide in enabling elites in other countries to escape the rule of law in their home countries, the global south is faced with huge challenges in holding them all accountable. They are the primary victims of the global offshore system, suffering disproportionately from illicit financial flows. While they are largely not responsible for enabling these flows, recent developments show that lower income countries need major international players to deliver transparency but certainly cannot rely on them doing so. The US only very recently brought forward a law regulating beneficial ownership transparency, and even then, the progress made through the Corporate Transparency Act in 2021 is very weak. Meanwhile, the European Union, which previously had a relatively advanced transparency regime, has taken a major step back with a court ruling late last year that accepted the argument that beneficial ownership transparency violates personal privacy. This ruling led to countries restricting access to their registries within hours. This setback highlights the need for countries in the global south to implement their own transparency measures unilaterally to protect themselves as far as they can from the harms of financial secrecy.
To support countries in achieving optimal transparency, the Tax Justice Network has published a roadmap that outlines steps towards best practice for the implementation of publicly accessible beneficial ownership registers.