Who benefits? How company ownership data is used to detect and prevent corruption

Using beneficial ownership data to reduce corruption

The first central registers of beneficial ownership were launched as recently as 2015. Despite this short history, actors from grassroots activists to investigators in financial intelligence units are using beneficial ownership data to tackle corruption.

Broadly, beneficial ownership data is used in three ways: investigating corruption; informing decisions to reduce corruption risks; and using analysis to deliver anti- corruption insights. Each of these is explored below. In many cases, the value of ownership data to counter corruption comes from its integration with other information, while innovation in data use is key to expanding the horizons of transparency and accountability efforts on every front.

Making the data in beneficial ownership registers public – for the extractive industries and the economy more broadly – maximises its potential for impact by expanding access to all potential data users, from foreign law enforcement to journalists. Public access increases the opportunities to make connections between ownership information across jurisdictions and with other data sources to carry out investigations and derive insights.

Investigating corruption, following the money

All forms of political corruption involve the abuse of power for private gain, and they usually involve some type of conflict of interest for those who make the decisions. Investigations by financial investigative units, law enforcement and journalists can help uncover these. In many of these investigations, data users follow the money, tracing transactions from bank account to bank account to link financial flows to individuals, and testing novel, data-driven approaches to this work.[5]

Knowing who owns companies can prevent investigators reaching a dead end. For example, in 2018, the UK issued an unexplained wealth order using evidence from the UK’s beneficial ownership register against a politically exposed person (PEP) from Azerbaijan.

The register showed that the wife of an Azerbaijani official – who had been jailed in 2016 for the embezzlement of the oil-rich nation’s public funds – had beena beneficial owner of a company which owned a golf club that was suspected to be purchased with laundered funds.[6] In December 2020, she lost a Supreme Court appeal to overturn the wealth order.[7] Assets worth GBP 3.2 million have been seized pending the outcome of forfeiture proceedings by the National Crime Agency.[8]

In cases such as this, company ownership information provides a critical piece of the puzzle to identify links between different individuals and legal entities. The utility of beneficial ownership data is expanded when combined with other information, such as real estate and other asset registers. For example, the independent media and anti-corruption investigation organisation Bihus.info investigated a Ukrainian MP, combining data from Ukraine’s asset and beneficial ownership registers to examine the source of UAH 1.2 million (approximately USD 42,000) in annual rental income that the MP had declared. They found that the source of the reported income was likely from proceeds of corruption. The High Anti-Corruption Court of Ukraine also investigated this case; in 2021, it ruled that the income was illegitimately acquired and should be subject to civil forfeiture, the first time this mechanism was used since it was introduced in Ukraine in 2019.[9]

Surveys of law enforcements’ views of central beneficial ownership registers highlight the time saved when conducting investigations through being able to efficiently access beneficial ownership information from a central register, rather than having to request it from each individual company being investigated. Interviews with eight law enforcement organisations, conducted three years after the launch of the UK’s public beneficial ownership register, revealed that all interviewees had used the register to inform criminal investigations.

Additionally, most law enforcement organisations said that the register had a positive effect on their work: “The introduction of the register [...] has made it quicker and easier to obtain information. Therefore, the process of identifying and developing an understanding of individuals that control corporate entities and the corporate networks of which they form part has been made more efficient”.[10]

Public registries can also be a more efficient alternative to time and resource consuming mechanisms for sharing information internationally, such as through mutual legal assistance requests.[11] Because the proceeds of corruption are frequently laundered and invested in assets outside the country where corruption has occurred, international cooperation and the sharing of beneficial ownership data is essential. To illustrate, the new UK beneficial ownership register for overseas entities owning UK property was hailed as a useful anti-corruption tool in Nigeria.[12] When national registers provide structured and interoperable data, beneficial ownership data can be readily combined with other data, such as procurement data, or with beneficial ownership data from other national registers to improve visibility of transnational corporate structures. This is demonstrated by the Open Ownership Register, the world’s first transnational beneficial ownership register, currently combining data from four national registers.[13]

The Zambian government is currently strengthening its disclosure system with support from Opening Extractives.

Beneficial ownership data is also used by journalists in investigations. The Organized Crime and Corruption Reporting Project (OCCRP) has developed an innovative data platform called Aleph to help journalists follow the money using “detailed data about persons of interest, companies, financial transactions, and more”.[15] Aleph prioritises datasets that assist users in tracking assets and company ownership, often across borders. It includes data from over 50 company registries, including central beneficial ownership registers, and allows journalists to contextualise information they obtain about people, companies or assets of interest. This can help identify leads to potential corruption cases.

For example, when journalists acquire information about company-owned bank accounts or properties, they can use Aleph to cross-check the names of companies listed as owners with documents and sources, including beneficial ownership register beneficial ownership register data, to find the registered owner, and compare it to other records, such as property registers and lists of PEPs. Connections in the data do not establish wrongdoing, but they can generate leads that merit investigation. For example, when the wealth of a public official is disproportionately large compared to their official income, this can be a red flag for corruption.[16]

Lares Corporation S.A. SPF on the Luxembourg beneficial ownership register

Source: www.lbr.lu/mjrcs-rbe, 13 October 2022

Reducing corruption risks through informed decision-making

Each day, governments and businesses make decisions about how to allocate resources; with whom to do business; and where not to invest. Placing beneficial ownership information in the hands of those with due diligence responsibilities can help uncover suspicious links, corruption and conflicts of interest that escape other routine checks.

Delivering clean procurement

Beneficial ownership information is used in government procurement processes to help identify who is behind the companies that jurisdictions select to provide goods, works and services. Procuring authorities use beneficial ownership data to identify conflicts of interest that may arise when there are links between companies bidding for tenders and politically connected individuals, and has the added benefit of being able to identify signs of fraud, such as bid-rigging.[22]

In the extractive sector, suppliers of goods and services, ranging from large multinationals to small local firms, undertake work valued in the billions of dollars for companies, state-owned enterprises and governments. Supplier contracts represent a major channel for local economic benefits from extraction, but they also pose significant corruption risk: a review of over 40 extractive industry corruption cases found that suppliers were involved in abuses in at least 29 countries across five continents.[23] Procurement transparency improves oversight of suppliers, and the publication of ownership data can help ensure that local procurement contracts are awarded fairly.

Publishing ownership data of companies that have submitted bids and received government contracts further increases transparency and can create a deterrent effect.[24] A World Bank study using data from 88 developing countries found that greater transparency in public procurement led to more firms participating in procurement markets as well as firms paying fewer and smaller kickbacks to officials; it was also associated with more participation among smaller firms with fewer resources to navigate corrupt systems.[25] Publishing beneficial ownership data on companies bidding for or being awarded government contracts is an approach being taken in jurisdictions such as Kenya and Slovakia.[26]

The European Union (EU) has used the ARACHNE, an “integrated IT tool for data mining and data enrichment” to carry out due diligence for its Social Fund and its Regional Development Fund.[27] ARACHNE uses beneficial ownership information along with other company information to “identify, based on a set of risk indicators, the projects, beneficiaries, contracts and contractors which might be susceptible to risks of fraud, conflict of interest and irregularities”.[28] ARACHNE’s implementation precedes the implementation of central registers in many EU member states, and uses a commercial beneficial ownership dataset.

Strengthening governance of extractives licenses

Competition for exploration and production licenses within extractive industries creates large incentives for corruption. Companies can seek unfair advantages using bribes or collusion, while government decision makers can leverage their power for private financial gain.[29] Government officials responsible for licensing decisions can use beneficial ownership information in a few ways.

It can inform decisions, such as whether to deny, revoke or decline to renew company licenses, in cases where the information points to potential corruption, such as conflicts of interest and bribery. It can also help identify regulatory compliance violations or fraud, such as instances when two or more companies with the same owners are colluding to drive down the prices of oil and gas leases.

Moreover, beneficial ownership data could help in detecting conflict of interest in the evaluation of environmental impact assessments of extractive projects, which are preconditions for the issuance of licenses. In some cases, information from the jurisdiction’s own beneficial ownership register may be sufficient to raise red flags about conflicts of interest. In other instances, such as the case study in Argentina discussed above, investigations will benefit from cross references with data from other jurisdictions. This is only possible when data on beneficial owners is publicly accessible.

The EITI has been a key driver for transparency in extractives. Requirement 2.5 of the 2019 EITI Standard recommends that “implementing countries maintain a publicly available register of the beneficial owners of the corporate entity(ies) that apply for or hold a participating interest in an exploration or production oil, gas or mining licence or contract, including the identity(ies) of their beneficial owner(s), the level of ownership and details about how ownership or control is exerted”.[30] Recognising corruption risks, the requirement also notes that the definition of a beneficial owner should specify reporting obligations for PEPs.

Peer learning delivered through the Opening Extractives programme is supporting beneficial ownership transparency in Nigeria.

Data-driven approaches to effective company due diligence

Beneficial ownership data is used by entities regulated under AML legislation, such as banks and other companies, to complete mandatory know-your- customer checks. These checks use data from beneficial ownership registers or data providers who, in turn, rely on registers.[32] Many beneficial ownership data providers have pioneered data-driven approaches to due diligence and incorporated these into software solutions for banks and other businesses, sometimes referred to as the RegTech sector. AML-regulated institutions are often instrumental in detecting when transactions may be the proceeds of corruption. Their access to robust data is critical to ensuring AML policies succeed as well as spurring on innovation in beneficial ownership data use that can benefit anti-corruption efforts more broadly.

Beneficial ownership data is also used by both state-owned and private companies to carry out due diligence on the customers, suppliers, vendors and business partners with which a company chooses to engage. For example, Petrobras, a state-owned petroleum company in Brazil, now requires suppliers, customers, sponsored companies, partners and other counterparties to report their ultimate beneficiaries.[33] Key proprietary information sources used by companies for due diligence purposes incorporate and depend on ownership information directly sourced from beneficial ownership registers.

In a survey conducted by Open Ownership on the use of such data by private entities, mining and minerals companies all reported ownership information to be “somewhat” to “very” important for carrying out periodic anti-corruption assessments or compliance processes.[34] For electronics manufacturing and mining and minerals companies, such data is considered relevant for complying with legislation, such as the United States Foreign Corrupt Practices Act and the UK Bribery Act, and with AML regulations. This is amplified in contexts where corruption and bribery risks are perceived to be more prevalent.

A recent corruption case involving Glencore, a diversified resources company, illustrates the potential impact of companies’ failure to undertake proper third- party due diligence. The company pleaded guilty in June 2022 for bribery related to African oil operations, in part through agents and third parties.[36] Civil society actors have highlighted that Glencore implementing a third-party due diligence system that raises red flags for clear corruption risks is part of the solution. Other relevant measures include screening beneficial ownership of agents for PEPs with conflicts of interest, and for individuals or entities convicted or otherwise credibly shown to have engaged in corruption-related offences.[37]

In its recent anti-corruption reforms, Glencore has begun voluntarily disclosing the beneficial owners of its joint venture partners and its agents – particularly high-risk third parties.[38] Glencore’s 2021 ethics and compliance report states that its procedures require that they obtain beneficial ownership information and that they “will not partner or contract with any business partners assessed as a high corruption risk that decline to identify their beneficial owners, unless appropriate mitigation measures are implemented to reduce corruption risk”.[39]

Analysing data to deliver anti-corruption insights and impact

Beneficial ownership information can be used to detect patterns relevant to identifying corruption risks and evaluate the effectiveness of anti-corruption policies. Law enforcement, civil society, governments and others can analyse data as a means of better understanding patterns and behaviours that may point to corrupt practices. Such analysis can offer new insights into how corrupt actors navigate and exploit financial and economic systems, and trigger proactive investigations. The full potential of beneficial ownership data is still untapped, and significant potential remains to integrate it with other datasets to informanti- corruption policy making and uncover systemic risks.

EITI multi-stakeholder group in Ukraine discusses the importance of the verification of data in the public register.

Ownership information is already helping researchers evaluate impact in a range of policy areas, including in domestic resource mobilisation. For example, a recent study using beneficial ownership data[43] found that implementation of the Common Reporting Standard – which supports tax transparency through the automatic exchange of financial account information between jurisdictions – led to a change in how account holders in tax havens stored their wealth.[44] Similarly, the Organisation for Economic Co-operation and Development (OECD) uses data from the Open Ownership Register in its Analytical Database on Individual Multinationals and Affiliates. Its aim is to provide new insights on individual multinational enterprises (MNEs) and their global profiles. According to the OECD, “understanding where MNEs are, how they operate, and where they pay taxes is crucial for sound policy making and sound macroeconomic statistics”.[45]

Evaluating policy effectiveness

An iterative approach is often required to implement ownership transparency effectively, and data analysis can support the improvement of policies, regulations and business processes that jurisdictions have put in place to promote ownership transparency. Policy actors can use the data they hold to help understand the effectiveness of their disclosure regime in supporting anti-corruption policy aims. Civil society and journalists can also support this objective by using public data to hold governments to account for their commitments to effectively detect and deter corruption through reforms.

For example, Scottish limited partnerships (SLPs) – a legal formation with known corruption-related money laundering risks[46] – were not required to disclose beneficial ownership information in the UK when its register was established. After the number of new SLPs almost doubled in the year after the register’s launch, and these were linked to movements of USD 80 billion from Russia, the UK government brought SLPs within scope of beneficial ownership transparency rules, and the rate of new SLPs being set up dropped by 80%.[47] This data suggests the lack of transparency was an important factor in individuals choosing to use SLPs, and that their subsequent inclusion in the scope of disclosures was a deterrent. The media has since reported on similar patterns that point to the potential abuse of Irish limited partnerships and Northern Irish limited partnerships, which continue to be excluded from the scope of beneficial ownership reporting requirements in the UK.[48]

Analysing data to uncover systemic corruption risks

Beneficial ownership data disclosed to meet the EITI’s requirements has the potential to equip civil society with information that helps them better understand and monitor corruption in extractives. Without the availability of structured data, EITI reports help users link public ownership data to information on contracts, state-owned enterprises and revenues. These have triggered or informed investigations into specific deals in Cameroon, the DRC, Indonesia and Liberia.[54] More jurisdictions are now producing structured data and making it available in bulk, enabling analysts to proactively identify corruption risks.

For example, the civil society organisation Directorio Legislativo recently launched a platform for detecting potential corruption in Colombia called Joining the Dots[55] and is currently establishing a similar project in Nigeria. The project seeks to surface conflicts of interest and other red flags among companies that hold extractive licenses by combining data on beneficial owners and on PEPs with asset declaration form information. In Nigeria, it will use algorithms designed in consultation with local partners to identify context- specific risk factors and analyse connections between companies and PEPs. Bulk analysis can help reveal structural vulnerabilities to corruption. Staff note that the absence of public declarations of financial interest in Nigeria, which were used for the platform in Colombia, makes information from beneficial ownership registers essential.[56]

The project uses data from NEITI’s register and the CAC’s newly-launched public beneficial ownership register, although to date a lack of access to bulk data from the CAC register has been a challenge.

Other avenues for novel forms of data analysis are also being explored. New initiatives connecting ownership data to sanctions and real estate information could help play a role in identifying and countering kleptocracy and strategic corruption, issues which have taken on new salience since Russia’s invasion of Ukraine.[57] In resource-rich countries, inflated contracts are a known means of acquiring and distributing ill-gotten gains from natural resources.[58] By combining open contracting and spending data with structured ownership information, anti-corruption actors may be able to identify possible deviations from industry or market norms and determine the identity of those benefitting.

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