This morning at the Open Government Partnership summit in London, David Cameron announced the result of the UK’s consultation on the beneficial ownership of companies: the information will not only be collected but be put online, for free, in a public register.
“Beneficial ownership” is a term of art for who really owns a company. Hiding this information makes possible all sorts of undesirable things. Revealing it is a global public good: knowing who owns a company is the key to international agreements on information exchange and administrative assistance for fair tax collection, anti-money laundering and a range of other anti-corruption mechanisms. It’s especially important for developing countries trying to prevent or uncover grand corruption. But it’s valuable, too, for US law enforcement agencies facing anonymously owned companies in Delaware or Nevada. The UK decision means one less major jurisdiction that can be used for anonymous company activity that gives rise to corruption, tax abuse and other criminality, in developing countries and elsewhere.
In announcing this, Cameron made the argument for openness directly:
Surely we could get the same effect just by compiling the information and using it within government? Now, of course we in government will use this data to pursue those who break the rules. And we’re going to do it relentlessly. But there are so many wider benefits to making this information available to everyone.
It’s better for businesses here – who will be able to better identify who really owns the companies they’re trading with. It’s better for developing countries – who will have easy access to all this data, without submitting endless requests for each line of enquiry. And it’s better for us all to have an open system which everyone has access to – the more eyes that look at this information, the more accurate it will be.
This is a complete world first on transparency and I’m proud Britain is leading the way. And today I call on the rest of the world to join us in this journey.
This is undoubtedly good news, and the UK should be commended for starting a journey towards greater transparency. There are many reasons why this journey is welcome.
The immediate benefit of publishing this register is that open data is better quality data. The explosion of big data brings a risk that stakeholders will drown under the sheer volume of information that has become recently available as communications channels become more rapid. Surely people cannot expect only one player, say the revenue authority, to have the capacity to pore through gigabytes of data to identify inconsistencies? Transparency helps to guard against that risk because it opens data to a much wider scrutiny, which in turn encourages granularity, data accuracy and correction of errors.
But there are longer term benefits to this momentous step taken by the UK government, which can set the stage for better corporate governance, a more competitive business landscape, a better management of risk and sounder macroeconomic conditions.
First, financial markets are information markets. More transparency is good for business. It allows investors to make more efficient decisions about where to allocate their capital, based on a shared and accurate assessment of companies’ positions. Knowing who the ultimate beneficial owner of a company is will allow consumers and investors to determine whether a company is solvent and they can trust it to enter into a contract. Put simply, as Raymond Baker has pointed out, there are simply no good economic reasons for not knowing who you are doing business with. More efficient capital-allocation decisions will boost competitiveness and will allow better access to domestic and foreign credit markets as creditors will be more willing to lend money to well-managed companies, which in turn will reduce the cost of capital.
Second, greater transparency allows investors to better hedge their risk, as they will be able to reconcile data on the beneficial owners of companies with, in the case of listed companies, publicly available data on financial performance. In turn, the earlier recognition and management of risk will allow smoother responses to changing economic conditions. Better and more widely diffused knowledge of risk can help guard against “herd mentality” by investors and runs on banks as investors lose confidence in the assets which they own.
Third, transparency will encourage good corporate governance, which in turn can have important implications for macroeconomic conditions. Take the chaebol, the big South Korean conglomerates. In the run-up to the Asian Financial Crisis which kicked off in 1997, the lack of transparency in the inside dealings of the chaebol made it difficult to assess their financial health, and a complex web of debt guarantees and cross-equity holdings obscured the real nature of the chaebol’s financial prospects. What happened after was not pretty: rapidly declining currency, downgraded credit rating, major failures and takeovers, and depletion of foreign exchange reserves. Even transparent and well-governed economies are not immune from crises. But obscuring the real nature of the debt to equity ratios of the Korean chaebol meant that poorly performing affiliates were allowed to continue operating – beyond the life expectancy that would have been determined in a competitive market with full information. And more recently, the same combination of financial liberalisation and a lack of transparency gave rise to the global financial crisis.
The argument that public registries of beneficial ownership are bad for business are, at best, economically illiterate; at worst, sloppy lobbying excuses. It’s no surprise that the UK’s Institute of Directors has enthusiastically supported Cameron’s announcement. Most SMEs know who their beneficial owners are – so it’s hard to argue that ticking a box will require Herculean efforts that will stifle their competitiveness. Now, it is probably bad for the business of those companies who go out of their way to hide their true owner (and the true purpose behind the operations of the company) by using and abusing shell companies and other legal vehicles. But on balance, chances are it will allow those companies who have sound financial positions, good and transparent corporate governance to come out on top. What’s not to like?
Finally, and most importantly, the establishment of a global norm of open registers of beneficial ownership would go a long way to tackling the illicit financial flows suffered by developing countries.
Now, the enthusiastic response is inevitably tempered by concerns that there has – as yet – been no matching announcement that the UK’s generally less transparent jurisdictions (the Crown Dependencies and Overseas Territories) will be first to join the journey. Support for Cameron’s leadership on these issues at the G8 had been weakened last month when he stated in parliament that there are no longer any UK tax havens. Ensuring these jurisdictions’ inclusion in this inspiring commitment, perhaps at the OTs’ summit in November, would go a long way to making this claim true.
What else? Well, first there are technical challenges to overcome as the UK pioneers such an open register – OpenCorporates, who have been there and got the t-shirt, raise a set of important points.
And second? There is, of course, much more to do. In writing the chapter on ‘Tax and Illicit Flows’ for the Open Government Guide, it was striking that many of what seem like familiar, even basic transparency steps must be classified as ‘advanced’ or ‘innovative’ because few if any countries are yet delivering them in full. The UK has now announced a breakthrough in one area. Who will follow here? Will the Obama administration take steps to ensure that US states no longer compete on their ability to provide effective company ownership anonymity?
And who will be first in other areas – for example, to publish combined and country-by-country for each multinational company operating in their jurisdiction? As we said at the G8, this year may mark the beginning of the end for financial secrecy.