As Luxembourg's register of beneficial ownership enters into operation on 1 March, the Tax Justice Network's Andres Knobel explains why these records do not go far enough in preventing criminals from keeping their identity hidden.
Illicit financial flows related to corruption, money laundering, tax evasion or the financing of terrorism all depend on a common strategy: secrecy. Of all the possible flavours of secrecy, hiding a criminal’s identity represents the biggest blow to the rule of law. You cannot send a criminal to jail if you don’t know who they are.
Legal vehicles such as companies, partnerships, trusts and foundations serve very useful purposes in society: they let people engage in business, organise in social associations, protect vulnerable children and participate in charitable and other public interest endeavors. However, if there’s not enough information about who owns, controls and benefits from these entities, the vehicles could also be exploited to engage in financial crimes.
Up until recently, countries usually required companies to only register their direct owners in the commercial register, ie the shareholders. These are called “legal owners” because they directly own or hold title to the shares or interests in a company. However, this doesn’t mean that they are the real persons who ultimately control and benefit from the company, ie the “beneficial owners”. A shareholder (the legal owner) can be another company or a nominee individual who offers their name to keep the real owner, the beneficial owner, hidden.
Since 2009 the Tax Justice Network’s Financial Secrecy Index has been assessing the laws and regulations of more than 100 jurisdictions in terms of how much information about the owners of companies and other legal vehicles is made available. In 2018, the Tax Justice Network published The state of play of beneficial ownership registration report, revealing that more than 40 jurisdictions already had beneficial ownership registries, or would soon be required to establish them. Most of these countries are in Europe or are related territories of European countries. However, countries in Latin America and Africa are also beginning to require beneficial ownership registration.
The big improvement came with the European Union’s 5th Anti-Money Laundering Directive (AMLD 5). The directive not only required EU countries to establish beneficial ownership registries for companies and other legal persons, but also to grant public access to this information. This will make the information available to foreign authorities, civil society organisations and investigative journalists, which in turn will increase accountability.
Unfortunately, though, even a public beneficial ownership register isn’t enough on its own to prevent criminals from keeping their identity hidden so they can engage in illicit financial flows. For public beneficial ownership registers to be effective, there are two pieces to the puzzle that need to be in place.
First, countries must ensure that all types of legal vehicles, not just companies, are required to register their beneficial owners in public registries. Otherwise, criminals will simply use different types of legal vehicles that are less transparent. To make it comprehensive, registration of beneficial ownership should be triggered whenever a legal vehicle is incorporated or created according to the laws of a country, whenever a foreign legal vehicle operates in any form in the country (owning bank accounts or real estate, engaging in business, etc) and when any of the parties of a foreign legal vehicle (legal owners, beneficial owners, directors, trustees, etc) are resident in the country.
Andres Knobel of the Tax Justice Network. Photo: Tax Justice Network
The EU’s AMLD 5 for instance fails in this. It only requires local companies or other legal persons to register their beneficial owners in public registries. Trusts and similar structures (which are not considered “legal persons”) only have to register their beneficial owners when the trustee is resident in the EU, or when the trust owns real estate or enters into a business relationship in the EU. Information on trusts’ beneficial owners, however, will not be accessible by the public but only if a legitimate interest is proven.
The paper essentially proposes that countries should learn from the private sector and apply cutting-edge technology in the fight against corruption, similar to the anti-fraud technology credit card companies use to block online purchases that look suspicious. Here are some of the suggestions made in the report:
All relevant ownership information should be electronic or digital to allow information to be analysed by computers. Information that is publicly accessible, should be online, for free and in open data format to allow also civil society and investigative journalists to run their investigations, like Global Witness’ analysis of the UK’s beneficial ownership data.
Beneficial ownership registries should automatically validate registered information. Registered information should be consistent with government records. If John declares his tax identification number to be 111, this has to match whatever tax identification number the tax authorities hold on John. John shouldn’t be allowed to register as a beneficial owner, if the registry of persons indicates that he is dead. He shouldn’t be allowed to register an address that doesn’t exist or brings up a public park on Google Maps.
Countries should also apply advanced data analytics to find patterns and identify suspicious entries. Any outlier, or any company found to have a pattern of features similar to that of an illegitimate company, should be redflagged and reported to authorities for further investigation. For example, it may look suspicious if a company declares a very high income but has no employees, no electricity consumption and has never had a deposit made to its bank account.
Countries should also set limits on the length and quality of the ownership chain of a local company. One example would be to prevent companies that issued bearer shares from owning local companies, because this would make identifying the beneficial owners impossible.
By Andres Knobel, researcher at the Tax Justice Network