The IMF’s paper on opaque bank ownership is fully aligned with our beneficial ownership policies

Beneficial ownership transparency is a crucial tool to fight illicit financial flows. It involves identifying the real individuals who ultimately own, control or benefit from legal vehicles such as companies and trusts. Although this sounds rather simple, getting it right is a whole different story. Standards by international organisations (watered down by powerful countries) tend to be quite weak and unambitious. Even then, countries fail to meet these low standards as they lack understanding, resources or interest (or all of the above).

Against this gloomy context, a technical note published by the IMF in January 2024 on “Resolving Opaque Bank Ownership and Related-Party Exposures” is a much welcomed breath of fresh air. It is also an encouraging sign of what the IMF’s new AML strategy is capable of. The technical note deals with an issue very dear to the Tax Justice Network on who “controls the controllers”. Financial institutions are frequently bestowed with obligations to prevent money laundering, determine the tax residence of account holders, withhold account holders’ taxes or report their banking information for automatic exchange purposes. However, this system which relies on the private sector to self-supervise and to assist competent authorities often results in awful consequences (as can be expected of any system with the wrong incentives). For instance, there have been several cases of banks turning out to be complicit, or even initiators, of the wrongdoing they are meant to guard against. The Swiss leaks is one prominent example.

The IMF technical note is not just interesting for its subject matter. It also made us here at the Tax Justice Network realise that we need to update our paper on uses and purposes of beneficial ownership data to include another very important reason to provide public access to beneficial ownership information: bank stability and bank failure. Lack of beneficial ownership transparency can have an impact on the (illegal) transactions carried out by the bank’s owners, which in turn can have serious financial stability and macroeconomics effects for a country. As the technical note describes:

“If not managed properly, related-party transactions can quickly become a source of bank weakness and a threat to financial stability…Most of these [bank] failures (16 out of 22) were largely attributed to extensive abuses by beneficial owners of bank resources in a manner affecting viability….In Indonesia, excessive related-party exposures were one of the key contributors to the country’s banking crisis in the late 1990s… the channeling of funds to finance beneficial owners was a common practice” (pp. 22 and 34).

Some could argue that if public access to beneficial ownership information is needed to prevent bank failures, then it should only apply to the banking sector rather than generally. However, the same counter-argument (that we’ve repeated many times) applies: if you don’t cover absolutely all companies, then secrecy (for corruption, fraud or bank failure) will move up the chain, to the contractor or supplier. Indeed, the same happens with banks where secrecy is not present in the bank itself, but in the secretive entities engaging in (undisclosed) related-party transactions:

“[…] the experience of some jurisdictions with material related-party problems shows that although the banks’ immediate related parties, such as managers or controlling shareholders, were mostly known to the authorities, numerous borrowing entities that were de facto connected to these related parties were not reported as such.” (P. 26)

Apart from offering us a new purpose and case for public access to beneficial ownership, the technical note offers several recommendations that are completely aligned with the Tax Justice Network’s position on beneficial ownership transparency. The following table presents a summary of our papers and proposals compared to extracts from the technical note pointing to the same ideas.

Conclusion

This technical note is an excellent example of the role that the IMF can and should take to bring about real progress on beneficial ownership transparency. For instance, the IMF could start requesting major financial centres to publish beneficial ownership information of their banking sector. This would allow beneficial ownership transparency to move beyond the weak international standard set by the Financial Action Task Force.  We hope to see more of this ambitious approach when the IMF engages with countries on capacity building and financing, and when the IMF give feedback on current international standards. In this regard, a protocol on beneficial ownership transparency to the UN Framework Convention on International Tax Cooperation (the UN Tax Convention) would also ensure more transparency for all countries.