INTERVIEW: Making Beneficial Ownership Public Carries Risks, Academic Warns

Tom Burroughes Group Editor May 16, 2016

INTERVIEW: Making Beneficial Ownership Public Carries Risks, Academic Warns

The idea of putting beneficial ownership in the public domain is a popular one. But such a decision should be well thought-through, warns an Australia-based academic who has examined how to track down dirty money.

(An earlier version of this article was published today on sister publication WealthBriefing but the editors hope that readers of Family Wealth Report will also find it of interest.)

A topic that is all the rage in the world of international financial centers is “beneficial ownership”. Last week’s two-day conference in London on fighting corruption saw more attempts to publish such information to weed out dirty money. The issue is complex and controversial because public registers are, so some jurisdictions such as the British Virgin Islands fear, a threat to legitimate client privacy.

It is by no means self-evident that public registers will be the silver bullet to stop flows of illicit funds, so an Australia-based academic has argued recently. That person is Jason Sharman, of Griffith University. A recent report, commissioned by Jersey Finance, questions the efficacy of public registers and urges the financial industry to consider the case for corporate service providers, or CSPs, instead. As the Panama Papers saga continues to bedevil IFCs and spread fears that the whole industry is being unfairly tainted, it is all the more important to focus on this issue. This publication recently interviewed Sharman about his report and where he thinks progress can be made.

Please explain your background and how you got to be working in this area.

I began looking at tax havens and the OECD harmful tax competition initiative in 2002, an interest that subsequently developed into looking at anti-money laundering policy, and then anti-corruption. In all three areas - tax, anti-money laundering and countering large scale corruption - beneficial ownership is key.

In broad terms, what is your opinion of how policymakers in many countries are addressing the beneficial ownership question?

This varies by country: the US is in denial about the inadequacy of its beneficial ownership regulations, whereas in the European Union and UK this issue is rightly seen as important and urgent. Less positively there is a rather uncritical faith in centralized registries of beneficial ownership as a silver bullet, and a corresponding neglect of enforcing regulations mandating that intermediaries establish beneficial ownership.

What is the main argument against public registers of beneficial ownership and why?

The main argument against centralized registries of beneficial ownership is that this solution is largely untested, and that it relies on unverified self-declarations of beneficial ownership. Public registries are also accused by some of violating privacy.

How serious are the risks that public registers can imperil legitimate financial privacy and put people at risk?

It depends what legitimate financial privacy is; standards have been shifting very quickly here. Rightly or wrongly, it is now seen that citizens have no right to keep their financial affairs private from the state. Public registries now mean that in addition there is some expectation of transparency to all and sundry as well. To me this is in striking contrast with European data protection principles, which are strongly premised on the expectation that individuals control information about them, and with narrow exceptions that these individuals choose what information about them becomes public or stays private.

Your report mentioned what you see as the potential and actual benefits of using corporate service providers. What makes them an effective tool?

If you mean the benefits of CSPs as a point of regulatory intervention, it is because CSPs have a substantive relationship with clients, and a strong incentive to accurately establish and verify beneficial ownership for fear of penalties, as long as regulators are actually enforcing standards here.

Where, in terms of jurisdictions, do you see the approaches you most favor and what are they doing right?

According to the evidence I collected with Michael Findley and Daniel Nielson for our book Global Shell Games, jurisdictions like the Cayman Islands and Jersey are best at ensuring the transparency of companies created in those jurisdictions. Again licensed and regulated CSPs seem to be the key, with actual enforcement via audits and sanctions rather than laws on the books being the name of the game.

Where, in your view of this topic, are countries making mistakes?

Countries are making mistakes by investing faith in new rules at a time when they are not enforcing old ones, e.g. the UK with the third EU AML directive.

In an age of big data and other technological advances, how do such tech trends make it easier/harder to track beneficial owners?

Big data and the ease of copying and transporting information obviously make leaks and data dumps easier, but there is a surprising lack of correlation between authorities having more information and greater policy effectiveness.

If governments want to enhance disclosure, what safeguards should they have in place to protect legitimate privacy?

The main problem here is that many governments have stigmatized any use of any offshore vehicle at the same time as they have called for greater transparency. If people are going to suffer reputational damage for any association with offshore, this will mean they are less rather than more likely to disclose. To this extent Cameron's problem with his father's Bahamian trust are poetic justice.

How in your view can jurisdictions get the balance right between privacy and secrecy? Are developments such as the Common Reporting Standard and FATCA achieving this, or not?

People and governments need to take a step back and decide what legitimate expectations of financial privacy are, if any, and then assess whether existing policies comply or not. Until recently the de facto standard was that citizens had no right to financial privacy vis a vis the state, but did have quite strong rights vis a vis everyone else. Public registries begin to weaken this.

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