TI-UK Department for Business Discussion Paper on Transparency & Trust

TRANSPARENCY & TRUST: ENHANCING THE TRANSPARENCY OF UK COMPANY OWNERSHIP AND INCREASING TRUST IN UK BUSINESS UK Department for Business Discussion Paper Submission by Transparency International UK (TI-UK) Sept 2013

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Submission by Transparency International UK (TI-UK) In this submission, Transparency International UK provides a response to questions 1-27 of the “TRANSPARENCY & TRUST: ENHANCING THE TRANSPARENCY OF UK COMPANY OWNERSHIP AND INCREASING TRUST IN UK BUSINESS” UK Department for Business Discussion Paper.

The majority of cases of grand corruption involve companies as the vehicle of choice for facilitating money laundering and the proceeds of corruption. This submission builds on the major review of AntiMoney Laundering in the UK, conducted by TI-UK in 2009, which recommended the creation of a register of beneficial ownership.

In summary  We support the creation of a public register of beneficial ownership  We believe this will aid transparency and accountability, and provide a level playing field for companies that have nothing to hide.

The key points of our submission are: 

The definition of beneficial ownership must include corporate control

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Ensure broad coverage of company and legal entities that can be incorporated in the UK, for the register of beneficial ownership; including Limited Liability Partnerships (LLPs), FTSE or AIM listed companies, overseas companies that have registered a “UK establishment”, Trustees, the Settlor, and the legal beneficiaries of trusts

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TI-UK supports the ‘triple lock’ of companies being required to identify beneficial ownership, beneficial owners being required to declare ownership & control to the company, and for the information to be made public on a public register, enabling civic scrutiny.

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If a register of beneficial ownership were not made public, then - without substantial investigative capacity being provided to Companies House to ensure compliance and accuracy in reporting - the utility of the register will be dramatically reduced.

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By making the register public, scrutiny will be enabled from across civic society, the media, businesses due diligence, and financial institutions conducting KYC and AML procedures.

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As a crime where there is no immediate ‘victim report’, corruption is notoriously difficult for police to investigation and civic scrutiny of illicit finance and stolen assets through of transparent information can be essential to start investigations.

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A public register would reduce the cost of businesses’ and financial institutions’ due diligence, supporting more effective AML procedures.

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An open registry would enable cross-border investigations – often required for money laundering investigations - to progress, and progress at a much faster speed.

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With amounts of at least £15 billion of dirty money is laundered through the UK each year, and poor performance of major UK banks to mitigate the risk of money laundering, a robust public register is an urgently needed tool to fight corruption and fraud.

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Beneficial ownership and a central registry 1. The proposed definition of beneficial ownership and its application in respect of information to be held by a central registry?

TI-UK supports the definition of beneficial ownership within the Third EU Anti Money Laundering directive, such that the ultimate ownership or control is achieved through direct or indirect 25 per cent of the entity. The important inclusion is that the ultimate beneficiary may exercise control in place of ownership.

2. The types of company and legal entity that should be in scope of the registry?

TI-UK recommends that the register covers the breadth of company and legal entities that can be incorporated in the UK, in order to limit the scope for criminal evasion. Whilst the majority of cases of grand corruption involve companies as the vehicle of choice for facilitating money laundering, it is highly probable that organised crime will make greater use of other legal arrangements if company registration stops being an attractive option for concealment and money laundering.

Limited Liability Partnerships (LLPs) should be included in the register as their omission would provide a substantial loophole.

Publicly listed companies should also be covered. Listing information is produced for the benefit of investors and so information on beneficial ownership can be lacking and refer only to nominee directors. Further, FTSE and AIM markets may allow only a small proportion of overall equity to be listed. In those cases, the beneficiary information for the company would be incomplete and unavailable. All subsidiaries of listed companies should have to declare the name of their ultimate parent company to ensure that it is possible to trace who controls and owns a company.

The registry should include beneficial ownership information on all overseas companies that have registered a “UK establishment” with Companies House. These companies are already required to disclose their constitutional documents (e.g. articles of association) and their latest set of accounts to Companies House so the UK clearly has the power to require them also to disclose beneficial ownership information.

Finally, Trustees, the Settlor, and the legal beneficiaries of trusts (whether named or identified by as a class of persons) should be included in the register - See Question 9.

3. Whether there should be exemptions for certain types of company? If so, which?

4. Extending Part 22 of the Companies Act 2006 to all companies as an aide to beneficial ownership identification by the company?

5. Placing a requirement on the company to identify the beneficial ownership of blocks of shares representing more than 25% of the voting rights or shares in the company; or which would give the beneficial owner equivalent control over the company in any other way?

6. Placing a requirement on beneficial owners to disclose their beneficial ownership of the company to the company?

TI-UK supports the ‘triple lock’ of companies being required to identify beneficial ownership, beneficial owners being required to declare ownership & control to the company, and for the information to be made public on a public register, enabling civic scrutiny. To achieve this, TI-UK support the extension Part 22 authority to all companies, which would provide companies with the ability to identify their beneficial ownership, and welcomes a requirement for the beneficial owners to disclose the fact that they are the beneficial owner of the company to the company (in the model of the London Stock Exchange).

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7. Whether there are additional or other requirements we could apply to ensure that information on all companies’ beneficial ownership is obtained? If so, what?

A public registry of beneficial ownership enables civic, business and financial scrutiny which can provide quality and assurance functions to the data. See Question 19.

8. Requiring the trustee(s) of express trusts to be disclosed as the beneficial owner of a company?

9. Whether it would be appropriate for the beneficiary or beneficiaries of the trust to be disclosed as the beneficial owner as well? Under what circumstances?

Trustees, the Settlor, and the legal beneficiaries of trusts (whether named or identified by as a class of persons) should be included in the register. This information is in line with what the European Commission is proposing that trustees hold. By including that information in the register it will ensure it can be used easily for law enforcement investigations into money laundering. Corruption and money laundering risks associated with trusts are significant. TI-UK would also support trustees and individuals involved in the creation or maintenance of a trust being obliged to follow the same antimoney laundering due diligence Know Your Customer (KYC) rules that apply to other financial service providers.

Companies should also have legal powers (similar to Part 22 of the Companies Act) to request the Trustees, Settlor, and the legal beneficiaries of trust information from any trust in their corporate structure.

As the TI-UK ‘Anti-Money Laundering: Raising the UK’s Game’ Report identified in 2009, “There is a weakness when it comes to identifying the beneficiaries of a trust. Corrupt PEPs often hide behind complex structures, involving anonymous trusts and companies, including offshore trusts and shell companies. Although FATF requires this, the 2007 MLR do not require reporting institutions to identify a beneficiary of a trust as a matter of routine.” The UK should use the opportunity of the beneficial ownership register to become compliant with FATF recommendations for restricting money laundering.

The same report indicated that Land Registry was a significant money laundering opportunity for organised crime in the UK as trusts and foreign companies were often registered with land registry in place of a natural person(s). As above, a register of the ultimate beneficial owners of property in the UK should be available through the proposed register.

10. Extending the investigative powers in the Companies Act 1985 to specified law enforcement and tax authorities?

T-UK supports this proposal.

11. Using the requirements that apply in respect of a company’s legal owners as the model for beneficial ownership information to be provided to the company and the registry? 12. If not, what additional or other information we might require? How? No comment.

13. Whether there is a need to introduce additional or other measures to ensure the accuracy of the beneficial ownership information that is filed with Companies House and retained on the register?

14. If so, what? To what extent would the benefits of these measures outweigh the costs and other impacts?

If a register of beneficial ownership were not made public, then - without substantial investigative capacity being provided to Companies House to ensure compliance and accuracy in reporting - the utility of the register will be dramatically reduced. The core issue here is evidence that Companies House does not have the resource to adequately verify filed information or to follow up on those not filing accounts; or to prevent disqualified directors from running companies or is overlooking

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companies declared dormant when they are not . HMRC, the entity responsible for regulating company service providers in the UK has yet to sanction any company service provider for noncompliance with their due diligence requirements. It is already an offence to knowingly or recklessly provide false or misleading information to Companies House (section 1112 of the Companies Act 2006), but this needs to be underscored with stiff sanctions including director disqualification.

Companies House, ideally, should match the verification procedures required by AML standards, those same standards expected of regulated entities. However, a major factor in the importance of a public registry of beneficial ownership is that Companies House is not likely to be provided with the resource to enable that investigative capacity and data assurance.

15. Whether companies should be required to update beneficial ownership information at fixed intervals or as the information changes? 16. Whether beneficial owners should be required to disclose changes in beneficial ownership information proactively to the company?

17. The appropriate timeframes for notification of changes to the company or Companies House?

TI-UK agrees with the consultation that companies should be required to notify Companies House when their beneficial ownership or any of the associated information changes. Companies should have 14 days to do this in order to match the current requirements to notify the register about changes to information on directors.

18. The broad possible costs and benefits of a policy change to the annual return.

No comment.

19. Whether information in the registry should be made available publicly. Why? Why not?

20. If not, whether the information should be accessible to regulated entities? Why? Why not?

23. Whether beneficial ownership information held by the company should be made publicly available? How? 24. Should any framework of exemptions in relation to information held by the registry also apply to information held by the company?

Further to the answer to question 13, there are significant gaps in the verification, identity assurance and anti-money laundering checks carried out by Companies House. If the register of beneficial ownership were to be exposed to the same lack of assurance, then it would be of limited use in countering money laundering.

By having the register public, scrutiny will be enabled from across civic society, the media, businesses due diligence, and financial institutions conducting KYC and AML procedures. Such scrutiny drives accountability, accuracy of the information and a start point for investigations.

Civic scrutiny, particularly for corruption cases is hugely important. Combined with robust Asset Declarations and a thorough database of Politically Exposed Persons, civic society can match up the information and track irregularities – providing law enforcement with a start point for investigations. As a crime where there is no immediate ‘victim report’, corruption it is notoriously difficult for police investigate. Civic scrutiny of illicit finance and stolen assets can be strengthened in an environment of transparent information about companies and ownership.

A public register would reduce the cost of businesses’ and financial institutions’ due diligence, supporting more effective AML procedures. The Know Your Customer principle requires clients to be identified and to verify the source of funds for accounts. It refers to due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information from their clients for the purpose of doing business with them. These policies need to be enacted when a high-risk client, such as a politically important person or high-net worth person, is looking to become a client of a financial institution. “Know your customer” is becoming an increasingly important global issue to prevent money laundering, terrorist financing and financial fraud.

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However, there are very few reliable sources for this information. Even large financial institutions find identification of beneficial owners are the most challenging elements of the Customer Due Diligence (CDD). It can be particularly difficult for small firms that cannot afford access to expensive compliance databases. Legitimate businesses are often victims of shell companies established purely for the purposes of defrauding other businesses and citizens. Public beneficial ownership registers would provide a very good starting point for due diligence, although TI-UK agrees with the consultation document that firms should not be allowed to legally rely on the information in the register. If a financial institution came across information that suggested that the beneficial ownership information listed at Companies House was inaccurate, they should have an obligation to report this information – either to SOCA as a suspicious activity report or to Companies House directly.

Internationally, law enforcement struggle to access existing registers of business. A major cross-EU study showed that access foreign business registers was the single biggest impediment to investigating the ownership of companies. An open registry would enable cross-border investigations – often required for money laundering investigations - to progress, and progress at a much faster speed. The current process of mutual legal assistance is slow, complicated and cumbersome and can make it very difficult for investigators to track down suspects, particularly in a short time-frame.

Law enforcement, business and civic society need harmonised, reliable, transparent, public registries across the major economies, published as open data. A UK public registry of beneficial ownership will be a major step forward to achieving that aspiration.

For registries of beneficial ownership to have maximum impact, we think it is essential that they are published as machine readable open databases. Users of the data must be able to analyse the data and to easily cross reference and combine datasets from different sources. Hence it is essential that they are machine readable, and available for downloading in bulk (as per the Open Definition), rather than published as non-machine-readable documents or through a search interface which limits querying. Further, the data should be openly licensed to enable people to use it, republish it, and combine it with other datasets. We think is essential if we are to gradually piece together a shared, collaborative ecosystem of data about companies and their activity around the world.

Any public registry system for beneficial ownership should be established in close dialogue with business to ensure that the registration system is as simple and user friendly as possible.

21. Whether a framework of exemptions should be put in place? If yes, which categories of beneficial owners might be included? How might this framework operate?

TI-UK supports the consultation paper in that there could be a very narrowly defined set of circumstances where beneficial ownership information is not disclosed to the public. This should be limited to cases where the safety of the beneficial owner(s) is at risk and where a case can be made for privacy of family trusts. Beneficial owners should have to apply to Companies House or the business department to get such an exemption, providing a plausible justification. If an exemption from publication is granted, the company should still have to submit the full beneficial ownership information to Companies House so that law enforcement or the tax authorities can have access to it if required. The register should also indicate the reason for granting the exemption.

22. The broad possible costs and benefits of a policy change to the registers of members?

Requiring beneficial ownership information to be put in the public domain is cheap. There have been two cost/benefit analyses carried out looking at the costs of a beneficial ownership registry: one done by the UK in 2002 and one done by the European Commission in 2007. Both concluded that public registries of beneficial ownership would be more cost effective than the status quo. For the UK, it was estimated that including beneficial ownership information in a register that is searchable and updated as ownership changes would cost the UK £2.8m to set up and £8.2m per year to run. The benefits were estimated to be significantly higher than the costs. For example, it would save police time in their investigations, which is estimated to be £30.3m a year.

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25. The costs and benefits of this policy change for companies, beneficial owners, regulated entities and other organisations.

26. In particular: • The link between the proposals and crime reduction • The link between the proposals and the incentives to invest • The numbers of companies affected • The amount of time it would take to obtain, collate and report data on beneficial ownership – for both simple and more complex ownership structures • Costs to the regulated entities • The changes which regulated entities might make to their actions • The number of beneficial owners • The degree of publicity and guidance required • Likely compliance • Potential unintended consequences • The varying impacts of the alternate options.

The US International Narcotics Control Strategy Report estimates that some £15 billion of dirty money is laundered through the UK each year. Globally, the estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.

Against the scale of this criminal economy, in the UK, the Serious Fraud Office’s annual budget is being reduced from approximately £50 million in 2010 to £30 million by 2014.

In the private sector, the recent FSA thematic review on ‘Anti-bribery and Corruption Systems and Controls in Investment Banks’ found that "The majority of banks in our sample, including a number of major UK banks, are not taking adequate measures to mitigate the risk of money laundering and terrorist financing in their trade finance business… Common weaknesses include: having no clear policy or procedure documents for dealing with trade-based money laundering risks thus failing to identify potentially suspicious transactions; producing little or no management information on financial crime risks in the trade finance business; not developing specific training on the risks of crime relating to finance relevant staff.”

The current AML regime in industry and investigative resource in law enforcement are vastly inadequate for the scale of the challenge of combating international money laundering.

A register of beneficial ownership has long been identified as a key component in the fight against money laundering. The reasons for it to be made public, including cost effectiveness reasons for law enforcement, are set out in answer to question 19.

Bearer shares 27. Prohibiting the issue of new bearer shares. 28. Whether individuals should be given a set period of time to convert existing bearer shares to ordinary registered shares? How long?

Bearer shares should be prohibited within a time period set to enable existing bearer shares to convert their holdings to ordinary registered shares. Thereafter, bearer shares should cease to have legitimacy. Recent case law illustrates how they have been used to support money laundering and grand corruption. The case of former President Chiluba (of Zambia) involved the far from untypical misuse of a bearer share company and trusts to hold and transfer assets anonymously.

In 2007 the Zambian attorney general brought a civil recovery action in England against Iqbal Meer, a London solicitor, and others for their role in assisting ex-President Frederick Chiluba and X.F. Chungu, the director general of the Zambian Security and Intelligence Services (ZSIS) to funnel funds stolen from the Zambian State. In May 2007, Mr Justice Peter Smith found that Mr Meer had incorporated Harptree Holdings in the British Virgin Islands, a company with bearer shares. Mr Meer admitted that he had incorporated the company on behalf of a Mr Faustin Kabwe for the purposes of the Zambia Security Intelligence Services. The bearer shares in Harptree were held in trust by a nominee at Bachmann Trust Company Ltd. Harptree was formed with the intention of purchasing Belgian property to pay off one of the coconspirators in the case, Kabwe, a financial advisor and friend to Chiluba and Chungu. These property purchases involved a monetary transfer from Zambia’s Ministry of Finance to accounts over which Kabwe was Ultimately in control.

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Iqbal Meer was at first instance found liable for dishonest assistance, but his appeal was allowed on the basis that only negligence had been demonstrated (Attorney General of Zambia v Meer Care & Desai (a firm) [2008] EWCA Civ. 1007). At one point in the chronology the UK Office for the Supervision of Solicitors met with Mr Meer and asked him about the ownership of Harptree to which his response was that he did not know whether Kabwe or somebody else was holding the shares – a response he could legitimately make only because of the way bearer shares work.

We see no business case for bearer shares and support FATF recommendations for their abolition.

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Annex I

Transparency International UK (www.transparency.org.uk), the UK national chapter of TI, fights corruption by promoting change in values and attitudes at home and abroad, through programmes that draw on the UK’s unique position as a world political and business centre with close links to developing countries.

TI-UK:    

Raises awareness about corruption; Advocates legal and regulatory reform at national and international levels; Designs practical tools for institutions, individuals and companies wishing to combat corruption; and Acts as a leading centre of anti-corruption expertise in the UK.

TI-UK’s vision is for a world in which corruption is greatly reduced and the UK has zero tolerance for corruption both at home and abroad.

Contact: Nick Maxwell Research Manager Transparency International UK E: nick.maxwell@transparency.org.uk T: + 44 (0)20 7922 7976

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