A Bluffer’s Guide to beneficial ownership

Written by: Kirsten Morel Posted: 04/09/2017

Bluffers Guide illoThere’s plenty of debate as to whether there should be public registers of beneficial ownership – BL gets to grips with where the Channel Islands stand amid the noise  

Last year, just a couple of months before he departed Downing Street in the wake of the Brexit vote, the then UK Prime Minister, David Cameron, announced that the UK’s Crown Dependencies and Overseas Territories would provide the UK tax and legal authorities with access to company ownership information. 

To some, this was a huge step forward in transparency. Indeed, Cameron described the move as putting transparency in these jurisdictions “far in advance of most other countries”. But to others, including the charity Oxfam, it wasn’t enough –Cameron would “need to do better than this”.

Cameron was promoting the fact that jurisdictions like the Channel Islands and the British Virgin Islands had agreed to collect and make available to UK authorities the beneficial ownership information of companies registered in those jurisdictions. But the problem for many campaigners was that this information wouldn’t be made public. 

If the former Prime Minister had hoped his announcement would be the end of the debate, he would be disappointed. The issue of access to beneficial ownership information is still very much alive and the subject of continued, heated discussion.

Here, we explain why beneficial ownership is such a big deal, and where things stand right now.

So, why the interest?

The calls for greater financial transparency have been growing louder for many years, particularly from supranational groups like the G20 and EU, acting through mandated organisations such as the Financial Action Task Force. 

As George Pearmain, Lead Policy Adviser, Financial Crime to the Government of Jersey, explains: “The Financial Action Task Force – which is the global standard setter for the prevention of financial crime, with a mandate from the G20 – requires jurisdictions to have available adequate, accurate and current information on legal entities and legal arrangements. This information is designed to be exchanged with law enforcement and tax authorities for the prevention of financial crime. 

“Registers of beneficial ownership are a method of having this information available. The requirement to have a register of legal entities is also included in a European Directive, the 4th Anti-Money Laundering Directive [4MLD], which requires all EU member states to establish registers.”

Behind these moves lies a desire to prevent financial crime, terrorism financing and tax evasion, all of which are difficult to prevent if the beneficial ownership of legal entities remains unknown.

“Unless financial and professional services bodies know who they are really dealing with – the beneficial owner – their ability to assist in the worldwide fight against financial crime will be limited,” says Pearmain.

What is ‘beneficial ownership’?

Jersey has operated a publicly accessible register of company ownership for nearly 30 years. Anyone can use it to identify the legal owners of Jersey-registered companies – and these can be nominees or corporate entities, as well as people. But ‘legal owner’ is not the same as ‘beneficial owner’.
 
As David Dorgan, Partner at Appleby, explains: “The law permits a split of legal and equitable (or beneficial) ownership. For example, the legal owners of shares in a company might legally own those shares for the benefit of other persons – the beneficial owners – who have specific rights. Therefore, beneficial ownership is about identifying the persons ultimately behind the legal ownership.”

Those people, according to John Harris, Director General at the Jersey Financial Services Commission (JFSC), “are the real persons who own a company or similar structure”. 

“A company owning a company is not the beneficial owner. You have to go all the way back to the real people who actually benefit from the company,” he says.

Whilst these examples focus on company ownership, the issue is much broader than that. The UK legislation, which springs from 4MLD, encompasses trusts and partnerships as well as companies.

Are all jurisdictions on board?

When it comes to transparency, countering tax evasion, terrorist financing and money laundering, an international approach makes sense. Anything less than this means there will be holes in the system that enable assets to be bought and sold without anyone knowing who’s behind them. So, does this international approach exist?

“There’s been pressure put on the Crown Dependencies and Overseas Territories to lead the way with the UK, but there’s no international consensus,” says Harris. “The UK feels strongly about it and European countries are on board, but the US and China aren’t.”

These are the world’s two largest economies, so their absence from such regulation is going to have an effect. “Certain states in the US drive a coach and horses through what the EU is trying to achieve,” says Christopher Scholefield, Partner at Jersey-based law firm Viberts. “If China and Hong Kong don’t [create registers of beneficial ownership] either, then there will be a huge regulatory imbalance.” 

The US is a long way from meeting such standards. As Jason Sharman, Professor of International Relations at the University of Cambridge, wrote in US magazine The Atlantic: ‘The United States, given its central place in the global financial system and the number of companies involved, is the worst in the world when it comes to regulating shell companies.’

Do the Channel Islands have these registers? 

“The JFSC currently already holds beneficial ownership information on new companies, and the duty to notify changes in beneficial ownership to the JFSC became law in April this year,” says Sean Cheong, Partner at Collas Crill. 

“The new beneficial ownership information law came into force in Guernsey on 15 August and Guernsey’s register will be maintained by the Registrar of Beneficial Ownership, a new office created by the legislation.”

David Dorgan also points out that “the laws of Jersey and Guernsey require service providers to know their clients regardless of the structure under administration – whether that be a company, a trust or a partnership – even if that information isn’t yet required to be submitted to a formal register.”

Are these registers truly feasible?

“They are feasible. We’ve shown they can be done,” says John Harris. “We have a register of this information centrally held here at the JFSC for all owners of all companies.”

While Harris’s point holds true for Jersey’s non-public register of beneficial ownership, Scholefield points out that it’s within the EU, of all places, that challenges are being made to the concept of public registers. 

“France had a court case in which it emerged that the obligation to make public the details of trust ownership was incompatible with human rights,” he explains. “Germany has also had issues with this, and the idea of a public register of company beneficial ownership has been ruled unconstitutional.” 

The answer, therefore, has become one of having a register that can be accessed by the authorities rather than the public, which is exactly the situation that Jersey and Guernsey have agreed to.

Why the refusal to go public?

One reason why public registers have been challenged in court, and why those in the Channel Islands resist them, is the increased risk of individuals being targeted for criminal purposes, should the full extent of their interests become publicly known.

“If registers are held publicly without adequate safeguards to protect potentially vulnerable individuals, or if data security is an issue with the exchange of privately held information, this does present a risk,” says George Pearmain.

“The Society of Trust and Estate Practitioners has written about this at length. Due to the risk, it’s a focus area in the Financial Action Task Force and the Global Forum. The individual’s rights and risk of harm to them must be paramount in considering these issues.”

Could registers damage business in the Channel Islands?

“Guernsey and Jersey have always adhered to the highest standards of compliance in their implementation of anti-money laundering and tax evasion prevention measures,” says Cheong.

“Clients have a right to privacy, and the registers in Guernsey and Jersey protect those rights without compromising the islands’ reputations. There’s no reason to believe that the islands won’t continue to attract the right type of clients and business.”

Jersey’s regulator believes the islands’ reputation for only dealing with high-quality businesses stands them in good stead. 

“There are two schools of thought,” says Harris. “One sees Jersey as a quality, well-regulated jurisdiction, which is something we know lots of companies want. The other sees secrecy as an issue for some businesses and Jersey’s approach doesn’t appeal to them. I think it’s an advantage to run a clean ship and strike an appropriate balance between privacy, responsibility and international cooperation.” 


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