Improving beneficial ownership transparency in Ukraine: Review and recommendations
Recommendations
The prerequisite for the benefits of user engagement to be reaped is that the beneficial ownership data is as complete as possible, and available to the public in open data format. Ukraine is a leader on beneficial ownership transparency for providing broad access to its companies data. However, this data could be improved in a number of ways to ensure that it can meet the policy goals of stemming corruption and improving the business environment in Ukraine. Below, we provide recommendations on how to improve the completeness and quality of the data.
As stated in the introduction, these recommendations are intended to spark further conversations rather than prescribe strict technical solutions. Open Ownership will continue to provide Ukraine with direct technical assistance on implementing beneficial ownership transparency.
Enforcement and compliance
It is critical that a robust system of sanctions against both non-compliant companies and beneficial owners be instituted and enforced by the Ministry of Justice in order to ensure a more complete data set. Below, we provide some recommendations and suggest initial steps for implementation. Open Ownership would be pleased to provide the Ministry with support in setting appropriate sanctions and enforcement mechanisms.
Understand the problem of low compliance
The fundamental reasons behind the low compliance with the reporting requirements enshrined in legislation elude us without further investigation by the Ministry of Justice. As we have discussed above, reasons could include a lack of awareness of the new legislation and related deadlines and a lack of clear sanctions and incentives.
The results of any further research into the causes of non-compliance could be used to suggest a clear policy and/or communications agenda to improve compliance. For example, a communications campaign could be launched if awareness of the legislation or how to submit data is low, and proper enforcement of fines, an increase in the fine, and eventual striking off the company register for continued non-compliance, would address the lack of fear of sanctions.
As previously discussed, ensuring the data is highly usable will provide an incentive on the part of companies to keep data fresh. But this benefit is only reaped when the norm is compliance, not non-compliance. The Ministry might also consider making beneficial disclosure rules a condition of pre-qualification for government tenders, licenses and permits, although this would cover only a small percentage of companies.
Clarify sanctioning regime and ensure robust enforcement
We can provide some specific recommendations on sanctions and enforcement to bring Ukraine’s beneficial ownership legislation in line with international best practice. We suggest that both non-compliance and making a false declaration are sanctioned in the same manner, as recent legal commentary suggests that the fact that there is no single body responsible for compliance is creating confusion.[30] We also recommend stronger sanctions against companies, including the ability to strike off those companies that are persistently non-compliant. In general, we find the UK’s sanctions to be a good model for best practice.[31]
We do not have clear data on whether requirements have been enforced by the issuing of fines, but given the low levels of compliance we suspect it is not a common practice. The Ministry should issue a final deadline for disclosure after which enforcement should be pursued proactively, using regular bulk checks of the data to identify companies that have not provided statements to the Unified State Register.
Access to useful data
We have repeatedly commended the Ministry for ensuring wide access to companies data. Below, we recommend changes it can make in partnership with NAIS to ensure that data is genuinely useful. OpenOwnership would be pleased to work closely with the Ministry and NAIS to provide best practice guidance and implement these recommendations.
Collect and publish beneficial ownership information as structured data by default
The Ministry of Justice should adopt a system whereby company information can be submitted electronically, perhaps without the need for a registrar, using in-line data entry points that allow for structured (i.e machine-readable) information. The Ukrainian companies register itself could be improved by reducing the number of entries where free text can be entered and replacing these with dropdown menus with discrete entries (for example, for nationality).
Ensure unique identifiers for companies and individuals
The Ministry should end the practice of reusing the company numbers of dissolved companies - through regulation if necessary. Additionally, it should work with NAIS to find a solution to the problem of disambiguating individuals that does not violate Ukrainian data protection laws. Registrars already collect unique identifiers for beneficial owners; if hashing these is still a violation of data protection laws they can be used to generate unique ID numbers for the purposes of disambiguating in the companies register.
We also recommend that some biodata is provided, because this eases disambiguation when Ukrainian data is compared with data collected in other jurisdictions. As is done in the UK, registrars should collect the full birth date, home address, and contact address (usually a registered address) for each beneficial owner, and publish the month and year of birth and contact address only.
Provide data about timeliness and access to historical data
It is important that the beneficial ownership data model – and indeed the companies register in general – be able to represent beneficial ownership as statements made at certain times, where older statements are stored rather than replaced. We also recommend that access to historical data be extended to apply not just to small-medium sized limited liability companies, but to joint stock companies as well.
This will prevent corrupt or bankrupted individuals from hiding their past business history by simply dissolving a company and registering a new one. The UK’s Companies House retains the data on now defunct companies, plus historic information on a company’s directorships (though not as yet on beneficial owners), allowing for users to see how a company’s officers have changed over time, and the dates between which a person served as a director.
Similarly, if we understand beneficial ownership data to be a set of statements about a relationship made at a certain point in time, it is important to show when that statement was made, and until when it is valid. This will allow users to assess its trustworthiness and also to raise red fags; for instance, a company that has not updated its beneficial ownership for several years would raise suspicions. This has the corollary benefit of assisting the Ukrainian companies register with verification of the data and enforcing regular updates to the register. A simple way for users to fag out-of-date information for both the Ukrainian companies register and other users to see should be included in the register’s design. This will give companies an incentive to keep their information up-to-date and avoid being flagged.
Update regulation to set deadlines and require confirmation statements
The current law stipulates that companies must report directorial or ownership changes, but does not set a deadline for this. It is difficult to enforce any such provision unless a baseline is set regularly. The Ministry should set a time frame by which changes should be reported, and require companies to submit a confirmation statement on a yearly basis covering all required company information, including beneficial ownership information.
Update regulation to close loopholes and ensure granularity
No information is currently available in the Ukrainian companies register on the means through which beneficial owners control a company. The draft legislation referenced above will require this to be reported. Alongside this legislation, regulation or guidance must be written to provide a clear test of beneficial ownership for people reporting data to the companies register, laying out all of the circumstances in which an individual would qualify as a beneficial owner, and instructing registrants to select one or more. These selections must include granularity within that data point. For instance, beneficial owners who control a company through a shareholding should be required to indicate the percentage of shares that they own.
The shareholding threshold should be abolished altogether. Critics argue that this would increase the reporting burden for companies with thousands of shareholders, but this is only a minority of companies and is typically done deliberately for the precise reason of obscuring a true beneficial owner. Other countries where extractives companies operate, such as Ghana, are abolishing thresholds on the premise that even a small stake in an extractives company is highly lucrative.[32]
For those rare situations where a company genuinely has no beneficial owners, or where the company is in the process of finding out this information, this should be explicitly identified as such, and appropriate processes and sanctions put in place to ensure that this is not abused. Current legislation in the Ukraine allows for this but it is not uniformly applied and could be made more granular according to the UK model, which explicitly lists the reason for nondisclosure.
Most company structures are fairly straightforward, without a lengthy chain of ownership between the target company and the natural person owners. A small number of companies will have several entities between themselves and the beneficial owners. We will work with the Ministry of Justice and NAIS to implement the requirement in the draft legislation that companies report their means of control and full chain of ownership. We discuss business process recommendations around representing the full chain of ownership in Annex A.
Management of the register
In this section, we offer recommendations on how the existing information can be improved in terms of submission, validation and verification. Each of our recommendations directly respond to what we observed in the Ukrainian context, but are informed by international best practice.
Put user needs at the centre of development of the companies register
The Ministry of Justice should continue listen to users’ needs and monitor the companies register use to see how it is being utilised. In particular, user needs underlie all of our recommendations to improve data quality and must remain central to improvements undertaken by the Ministry in the future. This prioritisation is encapsulated well by the first of the UK Government Digital Services (GDS) Design Principles, “Start with user needs”:
"Service design starts with identifying user needs. If you don’t know what the user needs are, you won’t build the right thing. Do research, analyse data, talk to users. Don’t make assumptions. Have empathy for users, and remember that what they ask for isn’t always what they need."[33]
Such processes are, thanks to GDS, both tried-and-tested and well-documented.[34]
Integration with Open Ownership and use of the Beneficial Ownership Data Standard (BODS) will help Ukrainian data reach more users. Both tools have been developed with agile, user-focused strategies. Integration will enable Ukrainian beneficial ownership data to be accessible through the Open Ownership Register’s simple but powerful interface, allowing easy access for end-users and improving usability. It will also enable the data to be linked with beneficial ownership data from other jurisdictions, and ultimately will improve data quality by making it more usable and more accessible. Additionally, we will translate the data to English, increasingly usability by non-Ukrainians. The method by which Ukraine’s beneficial ownership information can be linked to the Global Register is examined in Annex B.
Design technology to validate and verify beneficial ownership data
One critical step toward ensuring data is validated upon entry is to collect beneficial ownership data as structured data by default, allowing inline validation by design. Open Ownership can support NAIS on designing a form to capture data that is automatically in BODS format and has robust inline validation.
With company information available to Ukrainian companies register staff as data, and with staff technically trained to use that data, they will be able to verify and clean data in bulk. Transparency International recommends that verifying beneficial ownership data be done by “cross-checking the information provided with other government databases such as tax agencies, passport authorities, vehicle and property registries, electoral registries, (among others), on-site inspections, use of software, and other information from independent and reliable sources.”[35] In other words, by comparing granular, well-structured data with other data sets to surface inconsistencies – a function which we have said is a key argument for providing open beneficial ownership data. Structured data allows for discrepancies to be fagged automatically, without the need for time consuming manual checks from registrars on individual records.
When it comes to analysing beneficial ownership data, civil society is a key knowledge partner. By comparing the UK’s beneficial ownership data with US sanctions lists, civil society organisations were able to identify 76 beneficial owners of UK companies whose personal data matches that of sanctioned individuals. Bulk data analysis can also surface data quality issues – these civil society organisations also found many beneficial owners who listed their birth dates as occurring in the future due to the lack of basic validation through the form they used to submit their information.[36]
We recommend that the Ministry work with international civil society and other investigative bodies (for instance, law enforcement) to identify key datasets that can be combined to surface quality issues and red fags. We would be pleased to support the Ministry and NAIS on identifying key datasets and defining a verification process.
Encourage verification by users
We have argued that users serve an important verification function, as they will discover inconsistencies and incorrect information in the course of using the data for their daily work. Companies House provides a simple form for users to submit notices of missing or incorrect information on company records, and states that it “has a duty to draw [these notices] to the company’s attention.”[37] Companies House has reported to us that it has received a great deal of these notices on its beneficial ownership data and is following up on them.
We recommend that NAIS implement a similar system that allows users to give feedback on individual records via a simple form, and to use this feedback to follow up with individual companies on errors or incomplete information.
Footnotes
[30] Svintsitsky, Andrei, undated. Available at http://uz.ligazakon.ua/ua/magazine_article/EA007997 [in Ukrainian]
[31] The UK’s Small Business, Enterprise and Employment Act of 2015.
[32] GHEITI, “Ghana EITI Beneficial Ownership Roadmap”, October 2016, p10.
[33] Government Digital Service, “Design Principles”.
[35] Martini, Maira. “Technical Guide: Implementing the G20 Beneficial Ownership Principles.” 2015.
[36] Palmer, Robert, “What does the UK beneficial ownership data show us?” Global Witness, November 2016.
[37] UK Companies House, “Service Information.”