New article explores why the fight for beneficial ownership transparency isn’t over

Beneficial ownership registration has recently featured in a series of high-profile controversies, from the European Court of Justice limiting public access to EU registers, to litigation in US courts seeking to suspend the implementation of the Corporate Transparency Act. The topic has even managed to appear prominently in a tweet by the US president, who boisterously celebrated the fact that – due to the elimination of enforcement- US entities are effectively suspended from the obligation to report to FinCEN the real individuals who ultimately own them.

Loopholes in the law had already ensured that registration covered only a very limited number of entities, but the recent ongoing legal battles in the US have further increased the uncertainty regarding recent advances.

In a recent publication, my colleagues and I have examined some factors that negatively impact the effectiveness of beneficial ownership registration. We have argued that the existing transnational legal order which governs beneficial ownership registration remains fragmented, loosely institutionalised, and unable to effectively handle the misuse of legal vehicles. The paper, which we summarise below, was published in Transnational Legal Theory and is available on SSRN.

Secrecy as a global issue and the transnational responses which sought to tackle it

The impact of the lack of information on who owns or controls a company extends beyond national borders. As the Panama Papers and other leaks have shown, when a country establishes legal frameworks that obscure ownership, it creates potential spillover effects, not just for its own law enforcement but for the entire world. Moreover, the global implications of this issue were recognised long before these leaks.

In our article, we trace this concern back to the late 1990s, reconstructing how the misuse of legal vehicles became a global issue within various international organisations, including the United Nations, the Financial Action Task Force (FATF), and the Financial Stability Board.

Ever since this issue entered the international agenda, access to beneficial ownership information has been considered central to proposed responses.

Beneficial owners are the flesh and blood individuals who ultimately own, control, and benefit from a legal vehicle, whether a company, partnership, foundation, or trust. They are the individuals behind the LLC, the true owners of the house or yacht registered in the name of a trust.

Historically, organisations and countries have explored different approaches to ensure authorities can access this information, such as the existing information approach, which relies on intermediaries and service providers such as banks and lawyers knowing the identities of the beneficial owner, and the company approach, which mandates that at least the company must know who actually owns it.

As we’ve argued before, both approaches have been flawed and, in practice, have failed to guarantee that authorities can access information on legal vehicles held by their residents or registered and operating in their countries. Our paper examines the institutionalisation of the registration approach, which requires companies and other legal vehicles to register ownership information with authorities.

To analyse the level of institutionalisation of transnational responses to beneficial ownership registration, our article draws insights from the work of two academics, Gregory Schaffer and Terrence Halliday. These authors have been at the forefront of discussions on transnational legal orders, which is a body of work examining the way that “legal norms are constructed, flow, settle, and unsettle across levels of social organisation, from the transnational to the local”. For these authors, institutionalisation is the product of two key dimensions: normative settlement and issue alignment.

Normative settlement is a term for the process by which the norms become stabilised through multiple mechanisms, such as definitions in manuals or conventions, interpretations in courts, or even through the discussions and practices of professionals. Grounded in a sociological tradition, the process of settlement refers not only to how laws are written, but how the practice shapes the level of settlement, stabilising or destabilising their meaning and implementation.

In our paper, we examine how beneficial ownership registration gained prominence as a key norm to tackle the misuse of legal vehicles.  We do so by looking at the transnational, national and local levels. Our paper identifies an undeniable trend towards the adoption of beneficial ownership registration laws, with the number of jurisdictions with such laws jumping from 34 in the 2018 edition of the Financial Secrecy Index to 97 in the 2022 edition.

Interestingly, our paper finds that this movement was not unidirectional – meaning change did not solely flow in one direction from transnational standards to domestic implementation. In fact, some of the first examples of beneficial ownership registration can be traced back to mid-20th century, and some important initiatives have been pioneered at the domestic or regional level to only then gain more prominence in FATF standards or guidance. In particular, the relationship between the EU directives on Anti-Money Laundering and the FATF recommendations, something we explored in a different publication, has long shaped this specific transnational legal order.

Exploring alignment using data from domestic implementation

In our paper, we draw on insights we acquired from the data we collected for the most recent update  of the Financial Secrecy Index and for our report on the state of Beneficial ownership registration in 2022. We review certain aspects of beneficial ownership registration, such as the authorities in charge of registration, how the scope and triggers of registration are defined, who can access registered data, and how the beneficial owners are defined. We do so to analyse the level of alignment of such norms with the issue they seek to tackle, that is, the misuse of legal vehicles.

The data shows that while there is consensus that a lack of transparency of legal vehicles is an obstacle to prevent illicit financial flows and that registration with authorities is increasingly recognised as a necessary solution to tackle this issue, existing legal norms on beneficial ownership registration are poorly aligned with the issue they seek to tackle. This causes national laws to vary considerably and contributes to weak settlement at the local level.

For example, our article examines variations in the definitions of beneficial ownership and how they have been implemented in multiple jurisdictions. The FATF first formulated the concept of beneficial owners in the context of due diligence measures, under Recommendation 10. In its glossary and guidance, the FATF further sought to settle the meaning of this concept. While in its definition no threshold was proposed, a footnote note to the interpretative note indicated a 25% threshold of ownership or voting rights as indicative of beneficial ownership. Such high thresholds, which ended up being picked up by most registration laws, are deeply flawed and meant than half of companies registered in Luxembourg did not inform anyone who actually directly or indirectly benefited from or owned them, often registering a senior manager instead.

Aligning norms with their objectives: fixing the legal ordering of beneficial ownership registration

Current controversies regarding certain aspects of beneficial ownership registration – such as some of the cases we discussed in the introduction – are better understood in the context of a loosely institutionalised legal order which has so far failed to deliver on its objectives. Our paper suggests that looking at transnational legal orders could offer important insights to researchers and policymakers seeking to understand and improve a specific policy institutionalisation.

For instance, this literature recalls the importance of thinking about how a specific issue is constructed, considering that different formulations of a same topic may lead to very different policy approaches. In a related paper, one co-author has explored this topic for beneficial ownership information in detail, showing how the multiple uses of beneficial ownership information need to be considered when designing domestic laws, as they may require different responses depending how the issue is formulated.

This article additionally proposes key measures that could improve the institutionalisation of the responses towards the misuse of legal entities to hide the identities of their owners. These suggestions include improving definitions of beneficial owners, ensuring public access, and guaranteeing that the scope and triggers of registration are broad enough to cover all of the legal vehicles which might pose transparency risks. These solutions have been explored in greater detail our Roadmap to Effective Beneficial Ownership Transparency.

You can read our full paper in Transnational Legal Theory or on SSRN.