Transparency is generally a good thing. Governments that are more transparent and accountable deliver more inclusive prosperity for their people. The ability to uncover misdeeds is critical for wrongdoers to be punished and injustices remedied. Making data more accessible and useable can spark insights and innovation and enables better-informed decision-making. These are the ideas behind the movement for open government and open data.
Financial transparency has been promoted as a key solution to improving governance and accountability. Some approaches are targeted such as open contracting (focused on public procurement), and regulations requiring extractive industry companies to ‘publish what they pay.’ Other proposals cast a much broader net such as calls for company owners to be listed on registers of beneficial ownership and mandatory publication of ‘country-by-country’ reports by all multinational corporations.
One does not resist this trend?
It is tempting to argue for financial transparency as a general principle, in order to avoid ceding any ground in critical areas. As Tom Steinberg notes:
The debate over how much transparency we should have often comes down to fights over ‘more’ or ‘less’… To talk about compromises or the need for balance is simply to hasten the victory of the Enemy.
But it may not always be best to opt for maximum financial transparency since it infringes on the privacy of individuals and on commercial confidentiality. Privacy is a human right, which enables us to protect ourselves from unwarranted interference in our lives. Commercial confidentiality is important to allow businesses to gather information, to make decisions and undertake negotiations and to work on ideas and innovations before they launch them.
Financial transparency is sometimes viewed as having an inevitable logic and momentum. Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, argues that public country-by-country reporting will be achieved because it “simply follows the course of history… one does not resist this trend.” Dame Margaret Hodge arguing that the UK should impose a requirement for public registers of beneficial ownership on its overseas territories and crown dependencies says, “It would be a terrible missed opportunity if we did not … I just cannot see an argument against it.”
However it is clear that a line must be drawn somewhere, between information that should be made freely downloadable and searchable, information that should be available on a limited basis, and information that should remain private. It is possible to be ‘for’ transparency in some areas but recognise a need to ‘resist this trend’ in others, and certainly we should engage seriously concerns about enforced transparency of private entities and individuals, and about which mechanisms may best meet particular objectives.
Advocates for open government including Jonathan Fox, Nathaniel Heller, Archon Fung, and Martin Tisne increasingly argue that more attention should be paid to the objectives and design of transparency policies and initiatives, moving from an evangelical build-it-and-they-will-come approach, to one that identifies particular objectives. My working paper Beneficial Openness? (published by the Chr Michelson Institute in Norway) applies this perspective to the issues of anonymous companies and multinational taxation and looks at the promise and perils of two of the most iconic ideas in financial transparency: public registers of beneficial ownership and public country by country reporting.
The primary objective of beneficial ownership transparency is to prevent the use of ‘anonymous companies’ to facilitate transnational financial crime such as grand corruption, tax evasion, sanctions-busting, terrorist finance, and money laundering. Reducing the ability to hide money across borders is a key contribution that governments can make to integrity efforts in other countries, and there have been international commitments to making adequate, accurate and timely information on the beneficial ownership and control of ‘legal persons’ available to competent authorities globally.
Public registries are an increasingly popular approach; the UK, Norway, the Netherlands, and 11 other countries are developing registers, and the European Parliament has voted in support of this measure. The Open Ownership project this week launched a Global Beneficial Ownership Register, which will draw together data from all these sources into a single linked dataset, searchable by individual and company name. But such central registers are not the only approach to meeting the beneficial ownership commitment. The other main approach is for jurisdictions to impose a duty on corporate service providers (CSPs) to verify true identity of company owners and to make this information available to law enforcement, courts and regulators.
The CSP approach has the advantage of providing a means of verification, whereas central registers are generally passive archives based on self-reported information. Crooks and kleptocrats are least likely to feel compelled to file honest information. The World Bank report ‘Puppet Masters: How the Corrupt Use Legal Structures to Hide their Stolen Assets and What to do About It’ concluded that requiring CSPs to collect and verify ownership information is more effective than relying on self reporting to a central register.
Open, self-declared public registers are relatively cheap to operate, particularly if the country already has an online company register, since it essentially involves adding a few extra fields to an existing form. They offer universal access to information and the prospect of ‘many eyes’ checking the data. Other options include combining a central register with CSP verification (as they do in Jersey), or beefing up capacity of the registrar (or tax authority) to spot check and verify the register.
In the paper I set out the different options and look at the pros and cons of each approach in terms of quality of information, ease of access by authorities cost and impacts on privacy, and the risk of creating a false sense of security through encouraging due diligence based on unverified information. It seems likely that only systems which include strong CSP regulation can provide assurance of reliable information. This can be combined with closed central registers as in Jersey (and more recently being developed in the British Virgin Islands) or with open registers. But it is not clear that open registers must be the universal solution for all jurisdictions, if privacy and confidentiality preferences are taken seriously. A key question therefore is whether it is legitimate for someone who is not a public official, or engaged in sensitive areas such as public contracts or the extractive industries to prefer to keep their ownership interests as private information, so long it is available to law enforcement, banks and those they do business with.
Starting this year, large multinational companies will be required to file country-by-country (CbC) reports with information on sales, profits, number of employees, and taxes paid for their entities in each jurisdiction where they operate. These two page summaries sit alongside the 50-100 thousand pages of annual tax returns that large multinationals submit in confidence to national tax authorities. These CbC reports will be shared between tax authorities as a risk assessment tool in order to help them direct audits, but not made public. Many civil society organizations, as well as some politicians and the European Commission argue companies should be required to publish CbC reports publicly, so that citizens can see for themselves what tax multinationals pay.
A recent white paper by Alex Cobham, Johathan Gray and Richard Murphy developed as part of the Open Data for Tax Justice project set out an ambitious set of user needs to place on what will be a very limited amount of data. Many tax professionals argue that without access to confidential tax return data this would not provide adequate information to allow members of the public to second-guess the basis of calculations but would lead to a cacophony of accusations, misunderstandings, and rebuttals fueling mistrust and undermining tax morale. Certainly, it is clear that expectations of huge amounts of revenue at stake for the poorest countries that are often underpin hopes around country by country reporting have been fuelled by misunderstandings and exaggeration.
The debate on the usefulness of public CbC reporting does not have to remain purely hypothetical. Companies in the financial sector are already required to report key information on a country-by-country basis, and for multinationals that operate primarily in Europe, much of the information is in the public domain, albeit scattered among the accounts filed by subsidiaries in different jurisdictions. While this stops short of meeting full demands for public CbC reporting, it is sufficient to enable a more practical conversation about whether the information can really be used to fulfil the hopes that have been invested in it.
Several reports have been published which look at this data and which demonstrate the limitations and difficulties of using it (see reports on the bank data by European Green MEPs, French NGOs, and Oxfam, and on the clothing company Inditex by Greens/EFA group in the European parliament). The reports all take a similar approach comparing ratios of profits, turnover, employee numbers, and tax in different locations into low tax jurisdictions. Oxfam argue that “The 20 biggest European banks register around one in every four euros of their profits in tax havens” (by which they mainly mean Hong Kong, Luxembourg, Belgium, Ireland, and Singapore rather than small islands or zero-tax jurisdictions). They believe that finding out that banks make around twice as much profit to turnover—and three times as much profit per staff member in these locations—indicates that profits must be being shifted as this is “disproportionate to the probable level of real economic activity they undertake in these countries.” However, it is not at all unexpected that businesses are not homogenous and that investment banking, for example, would involve relatively higher profitability and smaller headcounts than high street banking operations. Similarly the report on Inditex case interprets the fact of having commercial functions such as store fit-out, sourcing and e-commerce centralised in the Netherlands, Ireland, and Switzerland as ‘aggressive avoidance’ (more detail on the Inditex cases here).
These early experiences of CbC analysis suggest the need for a careful, open, and analytical conversation about the hopes, fears, and early lessons from using CbC data. Otherwise tax practitioners, civil society activists, and the media will continue to talk past each other, contributing to the public growing ever-more cynical (and ever more confused).
Avoiding transparency for its own sake
Financial integrity and information sharing are a cross-border lever that rich countries can use to get their own house in order and to support governance, accountability, and revenue mobilisation in developing countries. However, transparency can become a hamster wheel; you can always ask for more detailed and widespread disclosures without moving closer to the ultimate goal of more responsive public institutions, more effective markets and a stronger social contract between governments and their people.
The case for broad financial transparency is often made on the basis that the mechanisms would be cheap and easy, and that the impacts would be huge. My paper argues that there are different options—and pros and cons—and that dialogue needs to shift beyond pro and anti transparency positions to learning and evidence on what works. There good cases for public transparency in areas such as the extractive industries, fisheries, and public contracting but it does not necessarily follow that similar transparency requirements should be imposed on all companies and asset owners. Simple, clear solutions are helpful for complex problems to gain political and public momentum. But the strategic view of transparency as a means to an end suggests that particular mechanisms should not become so iconic that they become unquestioned goals in their own right.