New report on how to fix beneficial ownership frameworks, so they actually work

A measure should not be automatically considered “disproportionate” just because it applies to “all” people or companies rather than to specific ones. Collecting information about all individuals with a link to an entity (rather than only of those with more than 25 per cent of the shares) is not necessarily disproportionate.

The goal of beneficial ownership frameworks is to tackle illicit financial flows such as corruption, money laundering, the financing of terrorism, tax evasion, sanctions evasion, etc. Collecting beneficial ownership information for all owners regardless of the value of their shares does not impose a burden on an individual that is excessive in relation to the objective sought to be achieved. In fact, a no-threshold approach already applies in the case of legal owners of companies (all persons must disclose their direct shareholdings to a commercial register) and to beneficial owners of trusts (all parties to the trust must be identified as beneficial owners regardless of their interest or rights to the trust assets and income). In fact, for most companies with simple structures where the beneficial owner directly holds the shares, beneficial owners are already identified with a no threshold approach – eg in the UK more than 80 per cent of companies have simple structures.

The only ones who would be affected by a no-threshold approach are those who intentionally create complex offshore structures to remain below thresholds, as a way of avoiding transparency of their financial affairs.

In addition, most administrative processes involve an “all” approach. In many countries, all individuals must obtain a national ID, which may include providing their date of birth, address, signature and fingerprints. This does not mean that all individuals are regarded as potential criminals. This is simply information that the state needs to fulfil its obligations, including the prevention of crime, ensuring economic fairness, planning and budgeting for social services, identifying missing persons, etc.

In many jurisdictions, all taxpayers must file tax returns, not because they are all considered tax evaders, but because it is how tax authorities ensure and verify compliance. In addition, having information on all taxpayers, both honest and not, allows authorities to compare them, to find patterns or red flags to ensure a level playing field where everyone pays their fair share. All customers must provide a financial institution with information for the know-your-customer due diligence procedures, not because they are would-be money launderers but in order to apply proper checks.

A risk-based approach allows for additional measures to be taken, but for it to be effective in detecting anomalies and outliers it does require obtaining a minimum amount of information from all.

Criminals exploit loopholes, especially thresholds, to remain hidden from authorities. 

Beneficial ownership transparency is about identifying the real owners and controllers of legal vehicles to prevent them from engaging in illicit financial flows such as corruption, money laundering, tax evasion, etc. Thresholds are deliberately exploited by criminals and those who want to remain hidden from authorities, undermining the whole purpose of beneficial ownership transparency. Thresholds allow individuals to remain hidden, either by distributing their interests so they are slightly below the threshold, or directly by not having any ownership interest but rather holding control through a power of attorney, financial instruments, etc. As visually illustrated in a publication on beneficial ownership and investment funds , a 0.01 per cent interest in Apple would give no control whatsoever over the design of the iPhone. However, that tiny percentage would be worth more than US$200 million. Identifying the beneficial owner of that 0.01 per cent would be relevant to determine whether taxes have been paid and how the beneficial owner afforded that interest to begin with, to dispose of cases of corruption or money laundering.

A no-threshold approach is the only way to ensure all relevant individuals are covered, no matter their circumvention attempts.

All drivers need to obtain a licence to prove they know how to drive, where their sight and hearing is also tested. Seatbelts are compulsory. Drinking alcohol and the use of cell phones while driving is prohibited. Cars have licence plates so they can be identified. None of these rules can be interpreted as an infringement on the presumption of innocence. At the same time, all of this information could be relevant in case of a car accident. In the same way, obtaining information on all beneficial owners related to an entity, checking that they are not related to any criminal or that there aren’t other red-flags (similar to checking a driver’s sight and hearing) cannot be considered an infringement of the presumption of their innocence, or as impugning their good faith or honesty. 

This is somewhat similar to how airport security helps to prevent acts of terrorism, except in this case by preventing the economic and human cost of financial crimes. Both airport security and beneficial ownership transparency apply to individuals who are not viewed as either criminals or terrorists. One of the arguments against public access and collection of beneficial ownership information on all individuals related to an entity is that it affects compliant and honest citizens who have done nothing wrong. A simple counterargument is that the vast majority of airplane passengers are not terrorists, but everyone is still required to go through airport security. This comes at some cost in terms of the additional time spent by passengers as well as the staff and infrastructure required – but the cost is offset by the prevention of greater, even more costly harms.

One of the likely reasons why millions of people agree to or at least accept the discomfort of airport security (which includes affecting their privacy as every item of their luggage can be checked) is the immediate relationship between terrorism and the loss of life. By contrast, beneficial ownership transparency is perhaps perceived as a less important, urgent or worthy “privacy-affecting” measure because it has a more indirect link to the violation of human rights. However, the fact that the link to beneficial ownership transparency is more indirect does not mean that it is irrelevant.

Although the link between beneficial ownership transparency and human rights violations is indirect, the consequences and effects can be much broader, when considering all the financial crimes and unfair situations caused by secrecy. In economic costs, the State of Tax Justice in 2023 estimated that countries will lose US$4.8 trillion in tax to tax havens over the next 10 years. The UN estimated in 2018 that the global cost of corruption was at least US$2.6 trillion, or 5 per cent of the global gross domestic product. All of these resources are critical to pay for fundamental human rights – health food, education, housing, a fair trial, and many others.

Although harder to quantify, financial crimes such as corruption also have a human cost. Corruption led to the deaths of 52 people in 2012 in a factory fire in Bangladesh, just as it did for almost 200 young people who were trapped at an illegally held music concert called “Cromañon” in Argentina in 2004. More than 40,000 people died in the 2023 earthquake in Turkey due to poor construction regulation and corruption, and Lebanon’s port explosion killed more than 200 people due to illegally stored chemicals.

Criminal law, constitutions or human rights conventions are a way to limit state power. In the past, an absolute monarch could dispose of anyone’s life or property. Criminal law, or human rights law, limits absolute power. The former-king-now-democratic-state must now comply with a fair trial, equality before the law, prohibition of torture, access to information, etc.

From a historical perspective, the ruler had absolute power, while individuals who were vulnerable and powerless organised themselves to limit the King’s or state’s power.

The 21st century is complicated by the fact that there are high net worth individuals, oligarchs and multinational companies that have far more power than countries: they have more capital, more media power, armies of enablers to escape paying taxes, can bankroll violent actors and bankrupt journalists investigating their affairs, and lobby or bribe legislatures to engage in rent-seeking.

Complete beneficial ownership information is about obtaining information about these powerful individuals who set up complex structures to escape the rule of law. It is a way to give more tools to authorities and to everyone else with access to beneficial ownership information, in the process helping to protect minorities and vulnerable individuals.

Even if there is mistrust on how authorities will use the collected beneficial ownership information, the beneficial ownership data will mostly refer to the (more powerful) individuals who are able to afford setting up companies and trusts, not vulnerable and discriminated populations on low incomes.

Some argue that some states are corrupt, or are dictatorships or autocracies, and that a beneficial ownership definition without thresholds would give them even more power to be abused. Unfortunately, those states are most likely already (legally) allowed to collect beneficial ownership information without applying thresholds, or to use other ways to obtain confidential information or coerce their citizens. 

Major financial centres where the rule of law is respected and where democracies do work, should start collecting complete beneficial ownership information. This way, democracies will be able to prevent oligarchs and dictators from creating entities and holding assets in these democratic financial centres, or will at least be aware of their interests and control, in case sanctions are to be enforced.

For instance, the OECD report “Emerging Privacy Enhancing Technologies: Current regulatory and policy approaches” describes the use of:

• Data obfuscation tools such as zero-knowledge proofs, differential privacy, synthetic data, and anonymisation and pseudonymisation tools which alter, create noise or remove identifying details.
• Encrypted data processing tools, such as homomorphic encryption, multi-party computation, private set intersection and trusted execution environments, which allow data to remain encrypted while being used.
• Federated and distributed analytics, which allow data to be pre-processed at the data source so that only the summary statistics or results are transferred.
• Data accountability tools such as threshold secret sharing, and personal data stores.

The Bank for International Settlements Innovation Hub’s Nordic Centre in 2023 published a report on Project Aurora, a proof of concept that explored new ways of combating money laundering with a combination of payments data, privacy-enhancing technologies, artificial intelligence and enhanced cooperation across institutions and borders.

The potential availability of complete data on all foreign bank accounts led to more tax revenues in many countries through voluntary disclosure programs (taxpayers voluntarily declared their foreign accounts and paid reduced fines, before the information was exchanged). Apart from the deterrent effect, even if data isn’t processed immediately, it could also be used in the future – many financial crimes have a statute of limitations of 5 or perhaps even 10 years, giving enough time for authorities to make use of it. 

At the same time, there is an exponential growth in technological capabilities around data storage, data matching and mining, and the processing of big data – all the while often becoming more cost-efficient. Just because an authority cannot afford data management functionalities today, does not mean they won’t be able to do it tomorrow. The prevalence of under-resourced authorities is not necessarily an argument against the collection of beneficial ownership information without thresholds, but rather an argument in favour of giving public access to information so that other stakeholders, including financial institutions, journalists, civil society organisations, researchers and foreign authorities can also use and process the data.