Data protection and privacy in beneficial ownership disclosure

III. Is Beneficial Ownership Disclosure Necessary to Achieve a Legitimate Aim?

What are the aims of beneficial ownership disclosure?

This section sets out arguments made by proponents of beneficial ownership disclosure for disclosing this data in open registers, as well as some of the doubts expressed by opponents. Examining the aims of BO disclosure, and to what extent central public registers achieve these aims, can help to determine whether beneficial ownership disclosure can be described as necessary from a human rights perspective, as well as what type of disclosure may be needed to achieve this aim.

The central aims of public BO disclosure can be broadly stated as the following:

• Supporting law enforcement efforts by making it easier for governments and other authorities to investigate and prevent illicit financial activity;
• Enabling better investigation and deterrence of criminal activity by creating additional layers of oversight and scrutiny from civil society and the public;
• Creating and encouraging greater transparency, fairness and confidence both between businesses and in the private sector more generally.

Why are open, central beneficial ownership registers necessary?

The aims outlined above are clear and appear legitimate. However, merely stating the aims is not sufficient to justify public BO registers: what must be asked is whether and to what extent such registers are actually necessary to achieve these aims. Justifying open registers therefore depends on answering two important questions: first, why is a central register necessary, as opposed to company reporting obligations, or trusts and corporate service providers (‘TCSP’) regulation? Second, why must the central register be publicly accessible, rather than closed or limited-access?

The case against public registers

Some argue that public registers are less effective than the alternatives. The issues they highlight are outlined below.

Reliance on company self-reporting

Critics of public registers have expressed skepticism about relying ‘on the criminal and corrupt to self-report their holdings.’ [62] Indeed, in countries that have implemented central registers, there is evidence that hundreds of thousands of companies have failed to identify their beneficial owners, while some companies have provided information to the UK’s register that has clearly been false. [63] A large number of companies in the UK have not disclosed any persons of significant control, while civil society has suggested that a large number of others have been submitting data that is clearly inaccurate. [64]

Because beneficial ownership schemes rely on self-reporting, there is therefore a risk that beneficial ownership data will not be representative either in terms of accuracy or coverage, and thus misrepresent the landscape.

Inaccurate or unverified information

A related concern is whether state registries – which often have limited capacity – will have the ability to verify that the information provided by companies is accurate and up-to-date. The World Bank’s 2011 Puppet Masters report concluded that central registers are generally less reliable than requiring TCSPs to collect and verify beneficial ownership information. [65] For example, according to Transparency International UK, as of February 2018 the UK’s Companies House had 20 people policing the compliance of four million companies. [66] Critics suggest that this implies that open registers are likely to contain numerous inaccuracies. [67]

There is also skepticism that additional access for NGOs and the media would improve verification. For example, some have raised questions about whether civil society would have, in the absence of a large scandal, the motivation ‘to comb through the haystack’ of a register, or the capacity and technical expertise to do so. [68]

According to critics, problems with relying on self-reporting are therefore exacerbated where public beneficial ownership registers have weak or non-existent verification systems, which makes it more likely that the registers will be inaccurate and unreliable, and rendering them ineffective.

Counterproductive

Others claim that companies and owners may be less candid in their disclosure to a public register than they would to law enforcement authorities. Some opponents of public registers have claimed that “tax authorities do not support public registers” for this reason. [69] While individuals and companies might be willing to provide personal details to public enforcement authorities, this argument runs, they would take additional measures to obscure it from the public eye. Even supporters of open registers recognize that they ‘may strengthen incentives of certain individuals to try harder to find creative ways to avoid disclosure.’ [70]

Some argue that a public register may also prove counterproductive if some jurisdictions that provide anonymity continue to exist, meaning that those wishing to hide their identity will simply choose to incorporate their companies there.71 The result may then be the funneling of high-risk owners into more secretive jurisdictions and the absence of their personal details from registers entirely. According to this argument, public registers risk damaging efforts to tackle financial crime by providing greater incentives for criminals to withhold their information.

The case for open registers

Despite these concerns, there are convincing arguments as to why an open register is not only justifiable, but uniquely effective. The key potential benefits include the following.

The role of civil society and the public

There is a stark contrast between the estimated scale of financial crime and the (relatively small) number of high-profile investigations and prosecutions. Public authorities and financial institutions are clearly failing to catch the bulk of criminal activity or doing little to bring it to the public’s attention. As Jason Sharman points out, many states have small central registries that have “a largely passive, archival function revolving around receiving and filing documents”. [72] Furthermore, relying on financial service providers to highlight misdemeanors is not the whole answer, given the number of documented instances where these actors have helped their clients evade the rules (one well-reported example being HSBC, which paid a $1.9bn fine in 2012 for helping drug cartels launder money). [73]

A key benefit of an open register, therefore, is that it would allow for greater oversight and scrutiny from civil society and the public. While the Financial Action Task Force (FATF) established by the G7 nations does not require public registers, it has endorsed them as a means to ‘increase transparency by allowing greater scrutiny of information.’ [74]

NGOs, journalists and researchers do not just provide additional sets of eyes – they may have specialized knowledge that allows them to analyze information or spot suspicious activities that government authorities might miss. Moreover, when data is published according to common open data standards, it can be compared across jurisdictions more easily. [75] Should public registers be fully taken advantage of by civil society and others to regularly conduct additional analysis and checks for errors and inconsistencies, this could improve the overall quality, accuracy and effectiveness of registers. [76]

And there are additional benefits beyond criminal justice. The ability of civil society and the public to combat social or environmental harms caused by corporate practices often depends on litigation or direct pressure, both of which are significantly more difficult when the beneficial owners of companies remain unknown. [77] Further, many of the crimes that registers seek to deter and punish – particularly terrorist financing and corruption – are major causes of instability. Disclosing beneficial ownership data therefore complements broader efforts to improve corporate responsibility and political accountability.

Deterrence

Although criminals often lie, they may also disclose incriminating information in error. [78] And for those who do lie, a public register can make the lie less likely to go unnoticed. Greater scrutiny may discourage the ‘straw person’ from putting their name to cover for the true owner and risking punishment – a criminal might be happy to lie, but their straw person may not be. Similarly, individuals and companies in jurisdictions with weak government oversight, who may have previously turned a blind eye to suspicious financial activity, might be more cautious in the knowledge that resourceful journalists or NGOs now have access to the register.

In the UK, there is evidence that the requirement to publicly disclose beneficial ownership information has led to behavior change: following the requirement to disclose beneficial ownership information for Scottish Limited Partnerships (SLPs) – a prominent feature in several large grand corruption cases – the number of new incorporations fell dramatically. [79]

Others also point out that, while the accuracy of what is reported to a register cannot be guaranteed, the data still provides crucial leads and ‘red flags’ [80] – such as a company appearing to suppress information about who controls it. In other words, even if an open register does not show when people are lying, it might make it easier to tell if a person or company is hiding something.

Better access for authorities

One of the key FATF standards [81] for beneficial ownership disclosure is that there must be timely access to beneficial ownership data. Relying on company service providers (‘CSPs’) to produce beneficial ownership data on request may be problematic in this regard, as such institutions may be slow to cooperate. Moreover, if authorities are required to request information, it is possible that companies may be tipped off that an investigation is taking place.

Further, government authorities will need cooperation mechanisms should they wish to obtain beneficial ownership information held by other states, which adds additional bureaucracy and time to investigations. Other countries will not always be cooperative: the UK recently expressed frustration at the lack of cooperation from the Cayman Islands in combating money laundering. [82] The core crimes of concern – tax evasion, money laundering, terrorist financing – are global problems that cannot be solved by a handful of countries. Public registers, allowing authorities to easily access information from other jurisdictions, could therefore significantly facilitate national investigations with a cross-border element and global efforts to tackle these crimes more generally.

An open register that acts as a central, directly accessible repository of this data would help to eliminate some of the barriers and inefficiencies, and therefore facilitate timely access to important beneficial ownership data. This could help both law enforcement and financial institutions to carry out checks quicker and at less cost. [83]

Benefits to companies and the private sector

Advocates for public registers see specific benefits for companies and the financial sector too.

First, greater transparency allows for greater confidence in commercial relationships and trades: Businesses generally want to know with whom they are doing business – it is key to their ability to assess the risk of a particular transaction or commercial relationship. Yet their ability to do so has become increasingly difficult with the ‘complex ownership trails that cross geographical and legal boundaries.’ [84] EY’s 2016 Global Fraud Survey indicated that 91% of senior executives surveyed worldwide believed it was important for them to know the beneficial owner of the entities with which they do business. [85]

This greater transparency and openness can foster confidence in the private sector both from investors and the general public, a benefit explicitly recognized in the EU’s 5th Anti MoneyLaundering Directive. [86] It could similarly help rebuild the public’s trust in the commitment of governments and companies to combat corruption and tax evasion.

Second, companies and other financial institutions are subject to various anti-money laundering and terrorism financing regulations that require them to monitor and disclose suspicious activity. These obligations of due diligence can be costly and difficult when companies have no way to verify the information provided to them. This can leave companies exposed to corruption, bribery or terrorist activities, and potential regulatory consequences of large fines or even prosecutions. Public BO information provides an additional dataset against which companies can check the information provided to them, which allows companies to more easily and reliably conduct due diligence at lower cost, as well as flag up any inaccuracies or inconsistencies they find. [87]

Lastly, the benefits to companies go beyond risk reduction. Openness can improve a company’s reputation with investors, employees and the public. Tullow Oil, for example, welcomes the publishing of production-sharing contracts with governments “because it will show how [the contracts] are weighted, which contrary to common perception is usually in the government’s favor”. [88] And, in any case, some companies see the move towards transparency as inevitable, and choose to embrace it so that they will be better placed to shape standards. [89]

Economic benefits

Some governments and commentators believe that the implementation of a public register would in fact boost countries’ economies by increasing tax revenue, curbing illicit flows out of the country and increasing the economy’s attractiveness to foreign investors (a potential benefit cited explicitly by countries including Nigeria). [90] Transparency International Canada noted that the US Treasury supported legislation for BO disclosure because ‘[a]nonymous companies and trusts deprive treasuries of billions of dollars in tax revenues each year, add considerable cost to law enforcement, and hinder asset recovery.’ [91]

Evidence that public registers work

World Bank studies have found evidence of lower levels of corruption in countries with more transparent procurement processes. [92] Meanwhile, Global Witness has demonstrated that civil society can use open beneficial ownership registers to uncover leads for further investigation through its 2018 Companies We Keep project, which analyzed the UK PSC register for inconsistencies and irregularities. [93]

And, while it may be difficult to argue that open registers are a definitive solution to illicit financial activity, few would even make such a claim. Supporters have repeatedly emphasized that beneficial ownership registers are not ‘a panacea or a cure-all’ [94] but that they form an incremental step in a broader strategy. The Global Legal Research Center’s report to Congress found that ‘most of the countries that have beneficial ownership registration laws in place view public beneficial ownership registration as an anti-money laundering tool that works in alignment with other legal mechanisms, such as access to company information, risk assessment, government monitoring, and law enforcement.’ [95] Further, the European Court of Human Rights has emphasized that ‘necessary’ does not mean ‘indispensable,’ [96] and other courts have taken necessary to mean ‘adequate’ or ‘appropriate,’ rather than wholly successful. [97] In this respect, and in light of the arguments examined above, there is a strong case to be made for open registers.

Footnotes

[62] Sharman, J., 2016. Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries, Jersey Finance. Available at: https://www.jerseyfinance.je/news/solving-the-beneficial-ownership-conundrum-central-registries-and-licenced-intermediaries-academic-paper-published#.W3FkZJMzaHq.

[63] Armitage, J., 2017. Exposed: The Italians making a mockery of UK law. Evening Standard. Available at: http://www.standard.co.uk/business/ occupation-fraudster-address-street-of-40-thieves-how-italians-mocked-uk-company-rules-a3589906.html [Accessed August 9, 2018].

[64] Maybin, S, 2018. Potters Bar and Ukraine’s stolen billions. BBC. Available at: https://www.bbc.com/news/uk-42950097 [Accessed September 18, 2018].

[65] Van Der Does De Willebois, E. et al., 2011. The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, World Bank. Available at: http://documents.worldbank.org/curated/en/784961468152973030/The-puppet-masters-how-the-corrupt-use-legal-structures-to-hide-stolen-assets-and-what-to-do-about-it.

[66] Transparency International UK, 2018. UK companies set up to launder proceeds of corruption. Available at: https://www.transparency.org.uk/uk-companies-set-launder-proceeds-corruption [Accessed September 18, 2018].

[67] Kenney, M., 2018. Open company UBO registers are not the panacea to financial crime. The FCPA Blog. Available at: http://www.fcpablog.com/blog/2018/5/7/martin-kenney-open-company-ubo-registers-are-not-the-panacea.html [Accessed September 18, 2018]; Sharman, J., 2016. Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries. Available at: https://www.jerseyfinance.je/news/solving-the-beneficial-ownership-conundrum-central-registries-and-licenced-intermediaries-academic-paper-published#.W6Eq_HXwa3S [Accessed September 18, 2018].

[68] Forstater, M. 2018. Beneficial Openness: Is More Transparency Always Better? Center For Global Development. Available at: https://www.cgdev.org/blog/beneficial-openness-more-transparency-always-better [Accessed September 18, 2018].

[69] Burggraf, H., 2018. House of Lords rejects public beneficial ownership registers for six overseas territories. International Investment. Available at: http://www.internationalinvestment.net/products/house-lords-rejects-public-beneficial-ownership-registers-overseas-entities/ [Accessed August 10, 2018].

[70] Stephenson, M., 2018. Public Beneficial Ownership Registries: A Response To Recent Criticisms. GAB Blog. Available at: https://globalanticorruptionblog.com/2018/05/15/public-beneficial-ownership-registries-a-response-to-recent-criticisms [Accessed August 10, 2018].

[71] Kenney, M., 2018. Open company UBO registers are not the panacea to financial crime.

[72] Sharman, J., 2016. Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries, Jersey Finance. Available at: https://www.jerseyfinance.je/news/solving-the-beneficial-ownership-conundrum-central-registries-and-licenced-intermediaries-academic-paper-published#.W3FkZJMzaHq.

[73] Viswanatha, A. & Wolf, B., 2012. HSBC to pay $1.9 billion U.S. fine in money-laundering case. Reuters. Available at: https://www.reuters.com/article/us-hsbc-probe/hsbc-to-announce-1-8-billion-settlement-in-u-s-money-laundering-probe-sources-idUSBRE8BA05M20121211 [Accessed September 20, 2018].

[74] FATF – Egmont Group, 2018. Concealment of Beneficial Ownership, Available at: http://www.fatf-gafi.org/publications/methodsandtrends/documents/concealment-beneficial-ownership.html. [Accessed August 13, 2018].

[75] Russell-Prywata, L., 2018. To Be Effective, Public Company Ownership Registries Must Be Linked. Available at: https://globalanticorruptionblog.com/2018/11/01/guest-post-to-be-effective-public-company-ownership-registries-must-be-linked/ [Accessed November 4, 2018].

[76] Leon, S., 2016. A First Look at the UK Beneficial Ownership Data. Global Witness. Available at: https://www.globalwitness.org/en/blog/first-look-uk-beneficial-ownership-data [Accessed August 6, 2018].

[77] Sharpe, R., 2016. Eight Reasons Why Everybody Needs to be Able to See Company Ownership Information (not just the Police). Global Witness. Available at: https://www.globalwitness.org/en/blog/eight-reasons-why-we-all-need-be-able-see-beneficial-ownership-information-rather-just-police/ [Accessed August 6, 2018].

[78] Messick, R., 2018. Public Disclosure of Beneficial Ownership: Do the Naysayers Have a Point? GAB Blog. Available at: https://globalanticorruptionblog.com/2018/05/09/public-disclosure-of-beneficial-ownership-do-the-naysayers-have-a-point [Accessed August 10, 2018].

[79] https://www.globalwitness.org/en/campaigns/corruption-and-money-laundering/anonymous-company-owners/companies-we-keep/.

[80] Sztykowski, Z., 2018. What we really mean when we talk about verification: Truth verification (part 4 of 4). Available at: https://openownership.org/news/what-we-really-mean-when-we-talk-about-verification-truth-verification-part-4-of-4 [Accessed August 13, 2018].

[81] http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf, p.14.

[82] Caribbean News Now Staff, 2018. UK frustrated by Cayman Islands lack of cooperation on money laundering. Caribbean News Now. Available at: https://www.caribbeannewsnow.com/2018/09/16/uk-frustrated-by-cayman-islands-lack-of-cooperation-on-money-laundering/ [Accessed September 18, 2018].

[83] Department for Business, Innovation and Skills, 2013. Company ownership: transparency and trust discussion paper. Available at: https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper[Accessed August 13, 2018].

[84] LexisNexis, The Hidden World of Beneficial Ownership: a Due Diligence Challenge for too Long, Available at: https://www.lexisnexis.nl/__data/assets/pdf_file/0010/256717/LxNx_BeneficialOwnership_NL.pdf.

[85] EY, 2016. Global Fraud Survey 2016. Available at: https://webforms.ey.com/gl/en/services/assurance/fraud-investigation–-dispute-services/ey-globalfraud-survey-2016 [Accessed September 18, 2018].

[86] Paragraphs 31 and 32 of Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843. [Accessed 10 March 2019].

[87] See: Ross, A., 2016. No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts, Transparency International Canada. Available at: http://www.transparencycanada.ca/wp-content/uploads/2017/05/TIC-BeneficialOwnershipReport-Interactive.pdf; Department for Business, Innovation and Skills, 2013. Company ownership: transparency and trust discussion paper. Available at: https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper [Accessed August 13, 2018].

[88] The Economist, 2014. The Openness Revolution. Available at: https://www.economist.com/business/2014/12/11/the-openness-revolution.

[89] Ibid.

[90] Ukwu, J., 2017. Buhari’s government begins move to end secret company ownership in Nigeria to fight corruption. Naija.ng. Available at: https://www.naija.ng/1124014-federal-government-moves-uncover-beneficial-owners.html [Accessed September 18, 2018].

[91] Ross, A., 2016. No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts, Transparency International Canada. Available at: http://www.transparencycanada.ca/wp-content/uploads/2017/05/TIC-BeneficialOwnershipReport-Interactive.pdf [Accessed August 13, 2018].

[92] Knack, S., Biletska, N. & Kacker, K., 2017. Deterring kickbacks and encouraging entry in public procurement markets : evidence from firm surveys in 88 developing countries, The World Bank. Available at: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP// [Accessed September 20, 2018].

[93] Global Witness, 2018. The Companies We Keep.. Available at: https://www.globalwitness.org/en/campaigns/corruption-and-money-laundering/anonymous-company-owners/companies-we-keep/#chapter-0/section-0 [Accessed September 18, 2018].

[94] Stephenson, M., 2018. Public Beneficial Ownership Registries: A Response To Recent Criticisms. GAB Blog.

[95] Global Legal Research Center, 2017. Disclosure of Beneficial Ownership in Selected Countries, The Law Library of Congress. Available at: https://www.loc.gov/law/help/reports/pdf/2017-015244.pdf.

[96] Handyside v. the United Kingdom no. 5493/72, 7 December 1976

[97] Privacy International et al, 2016. Necessary and Proportionate: Global Legal Analysis. Available at: https://necessaryandproportionate.org/global-legal-analysis [Accessed September 18, 2018].

Next page: IV. How Can We Balance Beneficial Ownership and Privacy Concerns?