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Transparency Over Who Owns What - But Will the Adoption of Ultimate Beneficial Ownership Rules Make Asset Recovery Easier?

Gervase MacGregor, BDO

BDO’s Gervase MacGregor discusses the impact of the 2015 ultimate beneficial owner regulations on asset recovery in the commercial world. 

Gervase MacGregor

 In 2015, through an insertion into the 2006 Companies Act, the UK put in place ground-breaking rules for the public disclosure by companies of their ultimate beneficial owners (UBOs). The UK committed to make this step back in 2013. Applying to all companies (other than listed) limited liability partnerships (LLPs) and societas europaea (SEs) incorporated in the UK, it introduced the concept of persons with significant control (PSCs). Registers of PSCs were required to be kept by entities from 6 April 2016, publicly filed from 30 June 2016 and annually updated thereafter.

PSCs are those controlling 25 per cent or more of the entity, and there are provisions to catch those controlling 25 per cent or more collectively with others by way of a joint arrangement, even if that arrangement is informal. Control also includes significant influence. It also includes those who have the right to exercise control. So immediately we are in the realms of subjective assessment of PSCs – the trustee of a trust owning 25 per cent of the shares in a company will be a PSC but so may the beneficiaries.

A further concept is that of look-through: one needs to look through layers of ownership to identify those who actually have significant control.

There are also steps and sanctions provisions. Entities need to take reasonable steps to obtain details of PSCs. A failure to take reasonable steps is a criminal offence. Further PSCs have an obligation to notify the entity of the interest. Breach of this is an offence and can result in a loss of rights in the entity by the PSC.

To see just how transparent this has made UK company ownership, it takes seconds to log in to the Companies House website, choose a company and find out who are the PSCs for that company.

This is far broader than any other major economy has gone, but it is not the end of the matter. As we will see below, the adoption by other countries of similar rules, the extension to trusts as well as the further leaks of private information will all make it increasingly difficult to hide who owns what. But will they, or may they make asset recovery more difficult? These are the themes we will explore in this article on ownership transparency. First: what does the data about PSCs reveal?

The data on PSCs

As might be expected after a relatively short period of time in operation, the data is not perfect. Issues have been identified by analysts in terms of inconsistent or incomplete filings, and the same information subject to different descriptions (eg, nationality). There also seem to be some uncertainties about what needs to be reported.

But these are early days. One of the interesting features of the data at Companies House is that it can be analysed. As of the time of writing there are nine files of all the PSC data updated to the previous day. Further, on the developer hub of the Companies House site is an application programming interface, enabling bespoke programmes to search the data.

These tools enabled organisations such as Global Witness and Open Corporates to analyse the data within days of it being uploaded.

As the data gets refined and improved, we can expect more of this. However – and we will deal with this later – where this will really become interesting is when this improved dataset is searched alongside other datasets, for example, land ownership at the Land Registry in the UK.

The Fourth Anti-Money Laundering Directive

The Fourth Anti-Money Laundering Directive (4ALMD) of the European Union includes a requirement for EU states to create a register of UBOs for every company. The definition of UBO comes from the Third Anti-Money Laundering Directive: that is, the 25 per cent test we see in the UK with similar rules over trusts, etc. So far so similar to the PSC regime – but there are two big differences. The first is access by the public. In the EU states will not be obliged to make their registers public. The minimum requirement is that it be available for those with a “legitimate interest”, but this will include individuals acting in a professional capacity. What it doesn’t necessarily provide for is the massive dump of data such as we see with the PSC information.

The second big difference is the extension beyond limited companies, SEs and LLPs to “other legal entities” (such as partnerships and friendly societies in the UK) and trusts.

Going back to the issue of access, there has been substantial pressure within the EU to open up the trusts register to public access, with the opposing view of the right to privacy.

The 4AMLD is primarily designed to stop financial systems being used for money laundering and terrorist financing. We will soon know how the UK and other EU states will implement 4AMLD. However, there is the possibility that far more information about UBOs will become public.

UBOs beyond the EU

Many countries – from Norway to Afghanistan – have signalled interest or intent to set up registers of UBOs.

One interesting development has been the request by the UK government of its Crown dependencies (for example Jersey and Guernsey) and British overseas territories (and their accession) to keep central registers of beneficial ownership that are updated as ownership changes. Some, but not all, of these countries maintained registers, although these were often based on information as at incorporation.

There is no requirement to make these registers public – but as ever, no doubt pressure will be put on individual countries. This pressure is set to increase as more and more countries make registers public.

The Panama Papers

The Panama Papers are a dataset of over 10 million documents dealing with over 200,000 entities, taken from the files of a Panamanian law firm and published online by the International Consortium of Investigative Journalists (ICIJ). The Panama Papers have undoubtedly influenced the debate over UBOs because of the information revealing how labyrinthine some ownership of corporations and property can become, as owners try to hide their involvement.

But the Panama Papers need to be seen in the wider context of the ease of obtaining and transporting vast amounts of data and either publishing it online, or selling it to interested parties like governments for tax investigations.

There seems little doubt that the relative ease of hacking some old computer systems will result in more information becoming revealed and posted online, which itself will continue to put the pressure on more open information on UBOs.

Big data – NGOs publishing information on ownership

There are NGOs that collect ownership information from a variety of sources – public, such as the PSC register; restricted public, ie accessible with a licence; and formerly private information, such as the Panama Papers.

For example, Open Corporates is a database of over 100 million corporate entities taken from public databases that can be freely used. It also advises on its website how, for example, to use the API interface of the PSC dataset at UK Companies House.

The Offshore Leaks database is published by the ICIJ, based on the Panama Papers.

And we will all be familiar with the Thomson Reuters World Check dataset used for identifying politically exposed persons (PEPs) in client take-on.

A good example of how this vast amount of information can be used is the report issued by Transparency International and Thomson Reuters on the ownership of London property by PEPs. Using data from Open Corporates, Offshore Leaks, World Check, the Land Registry and other datasets and essentially matching across these datasets, the report found that, for example, half of the land titles connected to PEPs are owned by companies based in secrecy jurisdictions, such as Panama, the British Virgin Islands and Jersey; also that basic details such as ownership were not available for nearly half of overseas companies owning property or land in London.

Valuable tools for asset recovery

The ability to work out who is behind an asset or, conversely, to work out what an individual or a company owns, to unpick the layering of corporate ownership and understanding who is the beneficiary of a trust, to find out how individuals and entities have tried to alienate assets – these have always been key to asset recovery. All of us working in this field know that having the strongest judgment in your favour is of little use if it cannot be enforced.

Knowing this information is available and accessible without need for a court order makes for a much more efficient asset recovery process and minimises assets disappearing.

A case the author was involved in 20 years ago would probably not have led to any recoveries had local banking secrecy laws not been lifted (due to political pressure). Public registers of UBO may well have similar effects.

However, there are other likely uses of these datasets. Writing protocols to investigate datasets and crunching large amounts of data will be increasingly used to look for patterns of behaviour or inconsistencies among documents. UBO data will join the other information taken from e-mails, enterprise systems, etc, and go through our increasingly sophisticated search tools.

A contrary view

Some professionals are horrified at the growth of open-source databases of beneficial ownership. They point to the existence of registers of UBOs in many countries that are private, but which can be accessed by law enforcement or through local court proceedings. The argument is that individuals setting up entities in a tax haven have tended to be honest about beneficial ownership because of a well-founded fear of alienating themselves from ownership of the relevant assets.

The growth of public registers will lead to two things. First, individuals wishing to hide assets will use nominees and second entity incorporation will move to jurisdictions that do not subscribe to UBO registers.

That may well be the case – although as to the first point, client take-on should deal with such concerns; and as to the second, such jurisdictions will increasingly be squeezed through sanctions and other commercial penalties.

It will also be expensive and time-consuming to move vast numbers of entities from one jurisdiction to another.

***

UBO registers have not been set up for asset recovery in the commercial world. They are being developed primarily to stop money laundering and terrorist financing, but there are obviously interests that governments have in raising tax revenues.

Whether public or private but accessible, they must represent a source of more information that we can use in hunting down assets.

Despite privacy concerns, it seems unlikely that datasets such as the Panama Papers will be ignored by investigators; and that leaks will continue to occur, generating more pressure to create and open up registers.

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