Horse or Beef? Why We Should Know Who Owns Companies, and What the G-8 Can Do

Last week saw a series of news stories break around the world, in what may have been the largest ever cross-border journalistic collaboration. The stories, coordinated by the International Consortium of Investigative Journalists (ICIJ), are based on a major leak of files from company formation agents operating primarily in the British Virgin Islands and the Cook Islands.

The BVI is a major secrecy jurisdiction, and ranks 11^th in the most recent Financial Secrecy Index published by the Tax Justice Network, so it is perhaps unsurprising that so many newsworthy uses have already come to light. As the ICIJ note, their findings show already that “Government officials and their families and associates in Azerbaijan, Russia, Canada, Pakistan, the Philippines, Thailand, Mongolia and other countries have embraced the use of covert companies and bank accounts.” Investigations have been announced in India and the Philippines, there is pressure for the same in Greece and France, along with, respectively, presidential and ex-presidential denials of impropriety around family ownership in Azerbaijan and Colombia.

A separate investigation by Global Witness with clear parallels captured remarkable footage of multiple family members of a senior Malaysian politician not only negotiating corrupt asset sales with a requirement for the main payments to be offshore (‘Singapore? It’s the new Switzerland!’), but also providing advice on how to structure the deal illegally to evade all manner of taxes, local ownership requirements and more. Each element of criminality discussed had in common the use of offshore anonymity. This (16 minute) video shows a series of casual discussions with key players, suggesting just how commonplace such behavior has become.

It’s easy to take for granted that we know who owns a company. How else could we trust the company to enter into a business relationship? How would we reassure ourselves that it wouldn’t go bust before fulfilling a contract or making payment? How could  customers  know that the company is owned by reputable people – not the sort, for example, who might register in Cyprus and use horsemeat to make beef burgers? How would regulators know that company deals are truly competitive, rather than being manipulated by a monopolist with multiple front companies? How would anybody know if taxes are being paid appropriately, rather than shifted offshore through hidden related-party transactions? Or that the proceeds of crime are not funneled through the company—or used to finance terrorism?  

Without public information on company ownership, how can anybody know if company owners are honest or crooked?  Solvent or failing? Investing properly or running a Ponzi scheme? In short, how can people know if they are dealing with real beef or merely horse meat dressed up as beef?

In a great many cases, in far too many jurisdictions, this information is hidden from sight. But pressure is building for a change – including at the G8. And this recent rash of investigative reports from journalists and NGOs has shown in painful detail just how badly change is needed. But what change in particular?

A lack of transparency about corporate ownership arises (or is deliberately engineered) in two main ways. One is the creation of structures that are, by definition, opaque. These range from the relatively complex to the eminently simple. Towards the complex end are protected cell companies, where multiples ‘cells’ with their own assets and so on exist within a single company; and as this Jersey-based agent puts it, 

‘the key point of note is that a person is not a shareholder in the cell company merely by virtue of being a shareholder in a cell created by that cell company. When considering “ownership”, there is no link between the cell company and each of the cells it creates’ (p.6).

At the simple end are bearer shares, which allow the transfer of ownership (from one bearer to another) in complete secrecy. This effectively allows the creation of financial instruments which are a sheet of paper that can be arranged to have any given value – needless to say, a great hit with drug traffickers, money launderers and all those interested in ways to anonymously transfer significant sums. When a US Senate report found the bank HSBC to have committed multiple breaches of US anti-money-laundering regulations, involving hundreds of millions of dollars of Mexican drug money as well as regimes such as Iran and Syria, the skullduggery had been achieved mostly through the abuse of bearer share accounts opened in the Miami branch. Bearer share companies continue to be legal in many countries, including the UK and (of course) the British Virgin Islands (BVI).

The other, less direct but perhaps more pervasive way of hiding ownership is through faulty process:   jurisdictions require that ownership information is collected but only by an intermediary, such as a company formation agent. This prevents the information being centrally held or accessed, or indeed published at all. It is thus unavailable to a wide range of potentially interested parties, be they business partners, customers, regulators, law enforcement agencies, or civil society organizations.

This practice creates additional steps in any attempt at international information acquisition:  a request from the authorities in another jurisdiction, if deemed valid, can be followed by a request to the appropriate intermediary, who may then provide the information to be passed back up the chain. Or, indeed, they may not. Or they may first notify their client, who may flee. Or they may provide inaccurate information. And so on. Any testing of the system can only occur in the (inevitably few) cases where information requests are accepted and the chain is followed, and even then the success or otherwise of the request will typically not become public information, so even this limited data on the performance of the system tends to be hidden.

The investigative work of Norwegian newspaper Dagens Næringsliv in Cyprus gives a laughable example of how even a system with a public registry can be run so as to prevent meaningful transparency. Treasures Islands author Nick Shaxson has covered the story in English here, but the paper’s photo sums up the position of a ten year backlog.

If you want to know who owned a Cyprus company before 2000 or so, and you can be patient, you may be in luck…

It is most welcome that the G8, and the UK in particular, has committed to addressing the transparency of company ownership. The G8 may not be a representative global body, but its members are estimated to account for more than half of the global total of cross-border financial services; and in addition, have enormous influence, direct and indirect, on other jurisdictions. If the G8 ‘gets its own house in order’, as the UK has put it, it can confirm the new norm of effective ownership transparency.

Three elements would be involved:

• First, a commitment to collect all the necessary information – meaning, for example, an end to bearer shares and other potentially harmful structures;
• Second, to agree to exchange such information on an automatic basis (as recognised as the international standard for information exchange by the OECD, which had long supported the much less effective ‘on request’ exchange); and
• Third, to publish such information. In different ways the BVI and Cyprus examples confirm the opacity that can follow from private or public intermediaries holding the information until it is needed. The Open Government Partnership embodies the new consensus of a presumption in favour of publication of big data, and the associated benefits – ‘to promote transparency, fight corruption, empower citizens, and harness the power of new technologies to make government more effective and accountable’ – arguments  which Prime Minister David Cameron has made clear apply to companies also.

If the G8 take these steps, and encourage others to follow suit promptly – starting with the UK’s own network of Crown Dependencies and Overseas Territories like the British Virgin Islands – then who knows? This time next year we may all be able to spot the difference between horse and beef.