Enhancing transparency of beneficial ownership information of foreign companies undertaking certain economic activities in the UK SUBMISSION FROM TRANSPARENCY INTERNATIONAL UK
Introduction In this submission, Transparency International UK provides a response to questions 1-20 of the Department for Business, Innovation and Skills (BIS) March 2016 discussion paper on proposals to enhance the transparency of beneficial ownership for foreign companies. The UK is offering safe haven to corrupt individuals, their associates and assets, allowing non-UK companies to anonymously purchase property and participate in public contracting. Evidence suggests that the majority 1 of grand corruption cases involve shell companies as the vehicle of choice for laundering illicit wealth. For this reason, introducing transparency around beneficial ownership of foreign companies will be vital to fight corruption and the multitude of negative impacts it brings at home and abroad. In summary:
We support the creation of a public register of beneficial ownership for foreign companies that purchase land or property in England and Wales or participate in public contracting in England. We believe this will aid transparency and accountability, and provide a level playing field for companies that have nothing to hide. To be effective, such a register would need to encompass properties currently owned by foreign companies. Such a register will only be beneficial if it is properly implemented through a competent body which can be held accountable for its performance and has powers to sanction companies which are noncompliant.
Principle Question 1: UK companies will have to provide beneficial ownership information under domestic legislation or declare that there are no people with significant control. Do you agree that foreign companies who want to buy land or property in England and Wales should be under a similar obligation? Yes. A common feature in corruption cases is anonymous shell companies registered in ‘secrecy jurisdictions’, which are used to launder illicit wealth, giving corrupt individuals impunity. A World Bank study found that 70 per cent of over 200 corruption cases involved the use of anonymous shell companies to launder funds and 2 conceal the true identity of corrupt politicians. In a UK context over 75 per cent of criminal corruption cases relating to property investigated by the Metropolitan Police’s Proceeds of Corruption Unit (POCU) involved
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Stolen Asset Recovery Initiative, Puppet Masters: how the corrupt use legal structures to hide stolen assets and what to do about it, 2011 - The data were calculated from a sample of 213 instances of grand corruption recorded in the last 30 years. p.117 2 Transparency International UK, Corruption on your doorstep p.5
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anonymous companies registered in ‘secrecy jurisdictions’. These jurisdictions are used because they do not store the names of the beneficial owners of companies’ on centralised public registers, meaning companies registered there can be owned and benefitted from anonymously. The UK does not have to rely on other countries to implement their own registers of beneficial ownership to stop the flow of corrupt wealth entering the UK. By requiring non-UK companies to provide beneficial ownership information when conducting certain economic activities, the UK can mitigate the negative effects anonymous companies have worldwide. 4
Over £120bn of property in the UK is owned by anonymous companies , and it is highly likely that a significant amount of this is criminal funds. If the system remains unchanged, this problem will only get worse with corrupt individuals continuing to exploit the UK to gain impunity and enjoy their stolen wealth. For this reason the UK must act as soon as possible to bring in obligations on foreign companies to disclose beneficial ownership information when seeking to own property.
Question 2: Do you have any views on the options for holding information set out above? As a pre-requisite to engaging in the economic activity covered in the discussion paper we feel that all foreign companies must disclose their beneficial ownership information to a resp0nsible body which would then give the company a unique identification number. Transparency International UK feels the body responsible for managing the register must have the following features in addition to those listed under paragraph 30 in the discussion paper to ensure it can operate most effectively.
The body must be accountable for its performance, it must operate in a transparent manner, which would mean making the register publicly available so the public could scrutinise its work. It must have clear and measurable goals e.g. it should have collected beneficial ownership information of all foreign companies who already own land and property within a year of the measures being introduced. This data should have the same levels of accessibility as the current UK PSC register. The body must publish the data in open data format. This ensures ease of access for UK law enforcement agencies, businesses and civil society as well as those who need access to the data overseas. We feel the body should be independent and have sufficient powers to sanction companies for noncompliance. It must also be sufficiently resourced to carry out these functions effectively.
With these principles in mind we feel Companies House would provide the best option to fulfil these criteria; it has experience in implementing the UK Company PSC register, which will give the public access to information and it can be held and is accountable for its performance. Because of the need to be accountable to the public, we feel that a private body would not be suited to holding this information.
Question 3: Are there any additional considerations for where and how the information is stored that we should consider at this stage? TI-UK believes that the UK should not exempt companies because they are registered in jurisdictions which have central registers. This would pose the very real risk of companies seeking to launder corrupt wealth by targeting jurisdictions with the registers which offered the most secrecy in order to circumvent submitting 3 4
Transparency International UK, Corruption on your doorstep p.3 https://next.ft.com/content/6cb11114-18aa-11e4-a51a-00144feabdc0 (Accessed 31/03/2016)
their details to the UK register. Therefore TI-UK feels that all non-UK companies seeking to buy property or benefit from public contracts should register with the UK body overseeing the non-UK company register so the information is guaranteed to be accessible to the public, updated regularly and enforced to a high standard. To provide suitable levels of transparency the register must be updated on a regular basis. This could coincide with the obligations of the UK’s existing PSC register which require records to be updated every 12 months. These updates must show any major changes in beneficial ownership structure which have occurred over the past year to reflect the true nature of ownership of the company. When collecting beneficial ownership information, it is important to ensure the protection of individuals who can demonstrate credible risk to their security through public disclosure. However as with the UK’s PSC register, these individuals’ information must still be collected and kept on the centralised register. The body charged with overseeing the register should be vigilant against those looking to abuse loopholes related to privacy, avoiding publishing their beneficial ownership information. When the UK PSC register was introduced, law firms sought to allow wealthy clients to exploit loopholes around exemptions to retain 5 unnecessary privacy. This would entail a similar risk with non-UK companies. When a company seeks exemption it would be important to notify the NCA of this, so that they can investigate the reasoning for the exemption if it is in any way suspicious. Question 4: What information about their beneficial ownership should foreign companies be asked to provide? The declaration requirements should be the same as the details required from UK companies for the PSC register.
Personal information should be disclosed including name, service address, nationality, date of birth and usual residential address. The company should be obliged to describe the nature of control exercised including whether the person: 1. has direct or indirect ownership of more than 25% of the shares in the company; 2. has direct or indirect control of more than 25% of the voting rights in the company; 3. has direct or indirect right to appoint or remove a majority of the board of directors; 4. actually exercises or has the right to exercise significant influence or control over a company; and/or 5. actually exercises or has the right to exercise significant influence or control over activities of a trust or firm which is not a legal entity, which in turn satisfies any of the first four conditions over the company
As is the case with the UK’s PSC register, companies should state the nature of ownership using the band system that UK companies are subject to. Where a definitive position as to ultimate control has not yet been determined, or where the disenfranchisement provisions have been invoked, the company should declare what steps have been taken to identify registrable persons or relevant legal entities and the position in relation to any restrictions notices issued.
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https://next.ft.com/content/3822b494-0b9c-11e5-a06e-00144feabdc0 (Accessed 24/03/2016)
Extent Question 5: Should the requirement to provide beneficial ownership information be applied to foreign companies that already own property or land in England and Wales? Yes. In the UK there are over 100,000 properties owned by non-UK companies and many of these are based in 6 secrecy jurisdictions. The overall worth of properties belonging to non-UK companies exceeds ÂŁ170bn. In London, over 36,000 properties are owned by companies registered in secrecy jurisdictions, which is the equivalent of 2.25 square miles of property. Almost 10 per cent of properties in Westminster are owned by 7 anonymous companies. If beneficial ownership information was not collected from companies that already own property this would ignore the significant money laundering risk presented by property bought through secretive corporate 8 9 vehicles. Both the OECD and the FATF have recognised the risks associated with corporate structures being used to hide the identity of the beneficial owner. There is a strong possibility that a significant amount of the wealth invested through companies based in secrecy jurisdictions is criminal funds. Therefore obtaining beneficial ownership information from these companies would help expose those seeking to hide their illgotten gains. Requiring beneficial ownership information from foreign companies already owning property would also provide a level playing field for overseas investment. Failure to collect beneficial ownership information from overseas companies who already own property would create a two tier system and possibly lead to a situation where companies rushed to invest in property before requirements were brought in. The Scottish Land Reform Bill introduces the concept of requiring beneficial ownership information from 10 those that already own land. In addition, the UK PSC register has shown that huge amounts of beneficial ownership information can be collected in a small space of time. Currently over 3 million companies are registered with Companies House, therefore collecting the information of the 100,000 non-UK companies which already own property. It is reasonable to assert that this would require fewer resources. Therefore there is a need as well as a capacity to require beneficial ownership information from non-UK companies that already own property or land in the UK.
Question 6: Should the Government work with Devolved Administrations to ensure a single approach across the whole of the UK? Yes. Whilst property is a devolved issue in Scotland and Westminster can’t legislate for a UK-wide approach, the Government should endeavour to coordinate as much as possible with devolved legislatures to ensure a cohesive transparency regime around beneficial ownership of non-UK companies owning property or benefitting from public funds.
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This is based on land registry price paid data, for a significant number of properties, no price paid data was given therefore the actual total will be higher, likely over ÂŁ200bn. Data accessed from: http://www.private-eye.co.uk/registry (Accessed 21/03/2016) 7 Transparency International UK, Corruption on your doorstep p.3 8
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OECD, Report on Tax Fraud and Money Laundering Vulnerabilities Involving the Real Estate Sector (2007) FATF, Money Laundering & Terrorist Financing through the Real Estate Sector (2007)
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https://next.ft.com/content/3b4234da-eb55-11e5-bb79-2303682345c8 (Accessed 24/03/2016)
Costs and benefits Question 7: What are the costs and benefits to business, the economy and society of transparency of the beneficial ownership of foreign companies that own land/property or wish to enter into the public contracts? Benefits Transparency over the beneficial ownership of foreign companies would stop the abuse of opaque corporate structures which allows corrupt individuals to buy UK property. Requiring beneficial ownership information would act as a deterrent for those seeking to hide illicit wealth in the UK as there would be a far greater chance of being caught. This would provide great benefits to countries who suffer from the looting of public funds and the bribery of public officials. This degrades the level of public services, hinders development and causes insecurity as well as undermining public trust in institutions. From a UK perspective, stopping the flow of corrupt money would bring benefits; namely a likely reduction in the potential for corrupt money to inflate house prices, increase inequality, and distort industries and institutions. The UK would also benefit on a reputational level. The Prime Minister has said that the UK is no place to ‘stash 11 dirty cash’ , creating a register of beneficial ownership for non-UK companies would close the loopholes which exist around property ownership. This would be a real signal of intent that the UK was looking to shed its reputation as a safe haven for corrupt individuals and their illicit wealth. Law enforcement agencies would also benefit from transparency around beneficial ownership of foreign companies. Having a searchable database would increase efficiency as law enforcement agencies would not always have to request the information from other jurisdictions. Transparency International identified a lack 12 of time was the main obstacle to the NCA investigating suspicious activity reports related to corruption. This has led to low levels of corrupt funds being frozen and recovered, compared to the threat faced by corrupt funds entering the UK. A register of foreign company beneficial ownership would address this and could conceivably lead to higher rates of corrupt asset restraint and recovery. Those firms that are subject to the Money laundering Regulations would benefit greatly from beneficial ownership declarations from foreign companies. A crucial part of the due diligence process is identifying the beneficial owner of a company; this can often constitute a costly and time consuming process. If a firm cannot verify the beneficial owner it can lead to the business being lost. However with instant access to a public register of beneficial ownership of foreign companies, regulated firms would have a verified source of beneficial ownership in minutes. UK businesses would benefit from being on a level playing field with foreign companies. Having the same transparency requirements would ensure UK companies aren’t unduly disadvantaged. Costs The cost to businesses would be minimal, under international money laundering standards companies must know who their beneficial owner is. Updating the body which oversees the register of non-UK companies would also have very limited costs, as this activity would fall in with companies’ other reporting requirements. If the body tasked with administering the register was run on a cost-recovery basis, the additional costs to companies when registering for the first time would be limited. Whilst still costing more to register than for 11 12
https://next.ft.com/content/4d83097a-34ef-11e5-bdbb-35e55cbae175 (Accessed 24/03/2016) http://www.transparency.org.uk/publications/empowering-the-uk-to-recover-corrupt-assets/ p.16
UK companies, the cost would be minimal when contrast with the benefits of buying a house in the UK or bidding for a contract. The costs of setting up a register of non-UK companies compared to the UK company PSC register would be far smaller too. Companies House has developed systems and infrastructure by which information is collected and the total number of non-UK companies for which information would need to be collected would be far fewer. It is important to acknowledge that corrupt individuals will seek to game any system put in place to expose their criminality. In the case of registering beneficial ownership this may include listing a nominee to obscure the identity of a corrupt PEP. Even with this in mind, a public register of beneficial ownership of non-UK companies adds an extra obstacle for criminals to negotiate, which in turn adds to their risk of being caught. The risks involved in attempting to game the system will act as a deterrent in themselves to some.
What enforcement mechanisms should be used?
(Section 5)
Question 8: How should any new requirements to provide beneficial ownership information of foreign companies purchasing property in the UK be enforced? Enforcement should follow similar rules and principles as the UK company system for obtaining beneficial ownership information. Beneficial ownership information should be kept on a company register, which should also be shared with the central authority charged with administering and publishing the register. Information should be verified and updated by the company every 12 months. To collect this information, those who qualify as beneficial owners should have a duty to make themselves known to those in the company collecting the information. Foreign companies should be given the same powers as UK companies to obtain beneficial ownership information from owners. In the case of companies already owning property in the UK, a lien should be held over the property preventing it from being transferred until the beneficial ownership information has been submitted. For those companies seeking to purchase property, the transaction should not be completed until the relevant beneficial ownership information has been given. To ensure compliance, companies must list a UK professional such as a solicitor or an accountant who would be responsible for verifying beneficial ownership. The professional should be publicly declared along with beneficial ownership information. This professional would also be responsible for being vigilant against suspicious behaviour and submitting a suspicious activity report if they felt the company was using the proceeds of crime to purchase property.
Question 9: What type of sanctions do you think would be proportionate, effective and dissuasive to ensure beneficial ownership information is obtained: a) in the case of new foreign companies acquiring land or property in England and Wales; and b) in the case of existing foreign companies owning land or property in England and Wales (if the obligation to provide beneficial ownership information is extended to them)? a)
New foreign companies seeking to acquire land or property should not be allowed to complete their purchases until they have obtained the required beneficial ownership information and submitted it to the body charged with overseeing the foreign company beneficial ownership register. b) Foreign companies that already own land or property should be given a certain time-frame of 12 months from when new requirements are brought into force in which to obtain relevant beneficial
ownership information and submit it to the body responsible for collecting it. Failure to do so in this time should result in a fine being imposed and a lien being held over the property. It is vital that the beneficial owner would not be able to transfer the land or property until they have given the required information as this could result in corrupt funds being successfully laundered. If false information is provided, or a company fails to keep accurate records there should be serious consequences both for individuals and the company itself. As with the current system for UK companies, criminal penalties of 2 years imprisonment and fines should be available as sanctions. Fines for non-compliance should be proportionate to value of the property and to the level of non-compliance exhibited. For example if the company does not publish the details of investigations into beneficial ownership information, or the company fails to communicate to a certain standard with authorities charged with collecting the information, a higher fine would be imposed. Any fine payable should increase incrementally every 12 months until the company makes the required disclosure and be linked to the value of the property in question e.g. 5% of total value after 12 months of no disclosure, 10% for the next 12 months, 20% for a further 12 months, etc. The eventual seizure and sale of the property should also be an option after a certain amount of time. For example once the fine exceeds the value of the property, it should be sold with the assets of the sale going to the body charged with administering the register. As noted in the discussion paper it may be more difficult to enforce these sanctions therefore a broader array of penalties for non-compliance should be available. Companies who provide false or inaccurate information should be barred from certain economic activity within the UK such as being unable to purchase new property, bidding for public contracts or applying for planning permission on a property. In addition to ensure fines are paid a lien could be held over properties of companies which refused to provide information or provided false information to prevent them being transferred. The UK professional named by the company responsible for submitting beneficial ownership information should also be liable to punishment if it is found false information has been provided. Penalties could range from being struck off the relevant professional register to imprisonment if it is found they were complicit in submitting inaccurate information. The body charged with holding the register of non-UK companies should have the powers to pass on information of companies who have been non-compliant or purposefully evasive in disclosing suspicious activity to law enforcement. Companies using opaque structures has been raised by FATF as a red flag indicator for money laundering therefore the body charged with collecting this information could act as an early warning system to suspicious behaviour.
Public procurement (Section 7) Questions 10: Do you agree that knowing the beneficial ownership information of those companies participating in public contracting will help the contracting authorities operate a fair and straight forward approach towards the procurement? Yes. Public authorities are accountable for how they spend their money and who benefits from public funds. Therefore to ensure public funds do not end up in the wrong hands, beneficial ownership information should be required as a pre-requisite of gaining a public contract. It is also important that companies are held to the same transparent standards as the contracting authorities are who are obliged under the Public Contracts Regulations 2015 (the Regulations) to publish who has won the contract and its value.
Declaring beneficial ownership also allows the Government to gain greater value for money. The case of Mapeley shows the dangers of not being aware of the companies’ ownership structure or intentions until late into the procurement process, as the company moved its beneficial ownership to a company registered in 13 Bermuda, and depriving the UK of taxes it would have received. This could conceivably happen in the future with the contract being transferred to a company with connections to corrupt individuals.
Question 11: Do you agree this ÂŁ10million (procurement) threshold would be appropriate for the ideas set out below? No, we disagree with this proposal. There should be a level playing field between UK companies and non-UK companies seeking UK government contracts. All UK companies will have to disclose their beneficial ownership information whatever their size. We therefore do not see why non-UK companies should be subject to a size threshold.
Question 12: What are the potential benefits and burdens for contracting authorities and for bidders of this approach in option A (procurement)? Would it provide a proportionate way to deliver the proposal taking into account the 3-year exclusion that would apply for not providing a beneficial ownership unique identifier number? See answer to question 15.
Question 13: What are the potential benefits and burdens for contracting authorities and bidders of the approach in option B (procurement)? Would the 3 year exclusion period be proportionate? See answer to question 15.
Questions 14: What are the potential benefits and burdens for contracting authorities and bidders of the approach in option C (procurement)? See answer to question 15.
Questions 15: What are the potential benefits and burdens for contracting authorities and bidders of this variation of option C (procurement)? We feel the variation of option C which allows for earlier disclosure of beneficial ownership represents the most effective option for promoting transparency in contracting. Earlier disclosure or lack of disclosure ensures the contracting authority does not waste its time on the evaluation process only for the company not to provide information, which would be a danger of option D. Obtaining beneficial ownership is essential for contracting authorities to complement the UK’s transparency in contracting initiative, therefore the requirement of authorities to decide on a case by case basis whether they need beneficial ownership information as referred to in option A would allow the system to be circumvented by the authority in question. The data must also be published on a public register of beneficial ownership, a procedure which might not be completed if as option B suggests the information could be given directly to the contracting authority. We feel that as part of every public contract there should be conditions which would allow for the termination of the contract in the case of:
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False, inaccurate or misleading information being given. If the company gave information which later turned out to be false or the ownership structure of the company changed dramatically immediately after the contract was given, then the contracting authority should be able to terminate the contract. If the bidder did not give full updates on the status of beneficial ownership at pre-agreed time periods then this could also be grounds for termination of the contract. The periods by which updates would be needed could coincide with the current 12 month period for UK companies on the PSC register.
TI-UK also feels that companies should have disclosed beneficial ownership information to the UK body responsible for holding this information rather than to the contracting authority as this information should also appear in open data format on the broader non-UK company register. The company could then simply give the contracting authority its unique number to fulfil its declaration requirements.
Questions 16: How does the approach in option D compare with options A-C in practical terms? What are the potential benefits and burdens of option D for contracting authorities and bidders? See question 15.
Questions 17: What other issues should be taken into account when considering the options outlined about procurement in the discussion paper? No comment.
Questions 18: Are there other options potentially available to Government regarding procurement, which would achieve the same aims overall, that have not been set out here? If so, what are the associated likely practical constraints and benefits? No Comment.
International benefits from the new approach (Section 8) Questions 19: Would the approach proposed in this paper help developing countries combat corruption in the manner described above? Yes. Anonymous companies are often used by public officials to transfer their illicit funds to the UK. Access to beneficial ownership information would aid UK authorities in tackling corruption around the world. In the UK, investigations into James Ibori and Saadi Gadafi took years to be completed partially due to the use of 14 anonymous companies to purchase property. A register of foreign companies’ beneficial ownership would have assisted a great deal in both these cases by allowing law enforcement agencies, regulated sectors and civil society to assess who the beneficial owners of the companies buying property were. If the register was made public it would allow overseas law enforcement agencies and civil society groups to conduct their own investigations into public officials and hold their Governments to account. Overseas businesses would be able to use the register to verify beneficial ownership information to conduct more thorough due diligence. Through this, the global anti-money laundering system would be strengthened and the global regulatory burden would be eased. 14
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By implementing a foreign register of beneficial ownership this would help set good practice around the world. In particular countries which experience high levels of public sector corruption would be able to learn from the UK’s experience and implement registers that would leave them less vulnerable to corruption and prevent their politicians using the UK as a place to stash their dirty cash.
Questions 20: What would be required from foreign governments in terms of access to local company and personal records in order for the England and Wales register to operate in support of developing countries? To maximise the utility and the accuracy of the UK register, foreign governments could establish their own public registers of beneficial ownership of companies operating in those jurisdictions. This would allow for cross-referencing any information they had on local companies registered or operating in that jurisdiction and flag any information discrepancies they have to the UK body administering the register. This would improve the accuracy of the register and help to root out any false declarations. Potential money launderers would have to deceive two registers, which doubles their risk, as well as exposes them to scrutiny the public and civil society in two countries. However to complement foreign registers and assist in reducing corruption risks, the register would need to have the following criteria:
It would need to be publicly accessible so that governments could have instant access to the information of companies they wish to do business with. It needs to be updated regularly to reflect changes in ownership structures of companies. The data needs to be as accurate as possible. The body administering the register could ensure accuracy through strict sanctions of companies and individuals which are not compliant or submit false information.
About Transparency International UK Transparency International (TI) is the world’s leading non-governmental anti-corruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption. Transparency International UK (TI-UK) is the UK chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at national and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anti-corruption expertise in the UK. We work in the UK and overseas, challenging corruption within politics, public institutions, and the private sector, and campaign to prevent the UK acting as a safe haven for Corrupt Capital. On behalf of the global Transparency International movement, we work to reduce corruption in the high risk areas of Defence & Security and Pharmaceuticals & Healthcare. We are independent, non-political, and base our advocacy on robust research.
Contact Ben Cowdock Research Officer ben.cowdock@transparency.org.uk
Rachel Davies Senior Advocacy Manager rachel.davies@transparency.org.uk www.transparency.org.uk