What can global governance teach us about beneficial ownership policy?

Guest blogpost

Beneficial ownership transparency policy is fast becoming an established norm of global governance. Progress has been a long time coming. Although Global South countries, activist groups and academics have identified anonymously-owned companies as a risk for corruption, money laundering and tax evasion for decades, it took until 2015 for the first public beneficial ownership register to be created in Ukraine. Only eight years later, Open Ownership has identified over 120 countries which have committed to creating a central beneficial ownership registry, and over 50 who have already done so.

That momentum is bolstered by recent commitments from influential governments and international organisations, including:

1. The European Union’s Fourth and Fifth Anti-Money Laundering Directives;
2. the United States Strategy on Countering Corruption;
3. the UK Government’s Economic Crime and Corporate Transparency Bill;
4. the Financial Action Task Force (FATF)’s strengthened beneficial ownership recommendations;
5. Articles 12, 14 and 52 of the United Nations Convention Against Corruption.

The road to corporate transparency will nonetheless be long, and setbacks should be expected. For example, last year the Court of Justice of the European Union ruled that public access to beneficial ownership information conflicts with privacy rights. While there are reasons for optimism overall, success will be more likely if policymakers learn lessons from other parts of global governance.

Why countries adopt global governance policies

The fast rise in countries committed to beneficial ownership disclosure mirrors the adoption of FATF’s anti-money laundering (AML) policies since 1989. In 2008, the politics professor Jason Sharman asked why the number of countries with anti-money laundering policies rose from none to 170 in two decades. He considered four possibilities:

1. Coercion, in which countries adopt policies to avoid punishment;
2. Mimicry, in which countries adopt policies for legitimacy, for example to signal governance maturity;
3. Competition, for example by undercutting other countries with lower tax rates;
4. Learning, in which policymakers replicate successful policies from other countries.

Sharman concluded that the main cause of AML policy adoption was coercion; countries were concerned with the impact of low FATF Mutual Evaluation scores and the risk of being blacklisted. Legal academic Nkechikwu Valerie Azinge-Egbiri’s recent book which studies African countries’ compliance with FATF AML standards supports that view. However, while coercion can help resolve collective action problems, it can also undermine domestic political agency. This experience with AML policy poses the question of how beneficial ownership policy can be encouraged through a focus on domestic policy goals and learning, as well as the collective fight against money laundering.

International pressure and domestic policy goals

There are many domestic policy goals which governments can target through beneficial ownership policy, including integrity in procurement, natural resource governance, protecting national security, and preventing tax evasion. For example, the Kenyan government has explicitly connected beneficial ownership policy to its public procurement reforms. Governments are also coming under increasing international pressure to implement FATF’s beneficial ownership transparency policies, and many countries committed to beneficial ownership transparency in COVID-19 procurement to access the International Monetary Fund’s pandemic emergency funding.

One risk of focusing exclusively on international pressure at the expense of domestic policy goals is that countries will create reforms on paper but not implement them in practice. Academics Florence Dafe and Rebecca Engebretsen studied how certain governments under pressure to regulate their banks feigned compliance with the Basel II international standards. By passing legislation but not enforcing it, governments can seek to avoid both punishment from international institutions and the costs of implementation.

International institutions are aware of this. For example, in addition to its two technical compliance beneficial ownership transparency recommendations, FATF also measures effectiveness. It remains an open question as to how much external peer reviews can identify sincere implementation of beneficial ownership transparency policy, especially in the short term. Either way, focusing on domestic policy goals will be critical in building genuine commitment to beneficial ownership transparency reforms, and understanding how to adapt emerging good practice, such as the Open Ownership Principles, to local context.

Political economy

Governments’ commitment to reform will not just depend on the strength of domestic policy incentives. Those very benefits will mean that beneficial ownership disclosure will often be opposed by corrupt or criminal interests. Political economy theories can help us understand the power dynamics between reformers supporting corporate transparency, and their opponents.

For example, one of the most important shifts in British political history occurred when successive governments from the 1820s shifted towards a low-tariff import policy, culminating in the repeal of the protectionist Corn Laws in 1846. The American political scientist Peter Katzenstein argued that this is what made Britain “the leading state in the international political economy of the nineteenth century”. However, the critical factor behind this shift was a realignment in Britain’s domestic balance of power from the landed aristocracy towards its commercial, industrial, and financial elites, not just objective domestic policy benefits.

Political economy analysis is already considered essential in understanding governance reform. Early anecdotal evidence suggests that beneficial ownership policy is no exception. It is no coincidence, for example, that the first public register was created in Ukraine after widespread anti-corruption protests and the Maidan Revolution.

My own doctoral research will analyse global patterns of beneficial ownership transparency reform in its first decade. I will be asking when do governments comply minimally with international standards because of coercion and domestic opposition, and when do governments seek to substantively create transparent systems of companies and other relevant assets? I look forward to reporting my initial results later this year in a second blog post. If you would like to share your perspective, I would welcome hearing from you at [email protected].

Angus Barry is a PhD candidate at the Blavatnik School of Government, University of Oxford, researching the implementation of beneficial ownership transparency policy. He is interested in how governments respond to international pressure and domestic policy goals in deciding whether and how to pass corporate transparency laws, and create effective corporate transparency systems. In this guest blog post, Angus discusses what lessons we can draw from other areas of global governance.