UK targets overseas territories transparency

September 2018  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

September 2018 Issue

Hundreds of billions of pounds of criminal money is laundered through the UK each year according to the National Crime Agency (NCA), with entities established in British overseas territories (OTs) – which include some of the world’s biggest financial centres – thought to be complicit.

In a bid to reduce fraud, the UK government has proposed new disclosure rules – via an amendment to the Sanctions and Anti-Money Laundering Bill 2018 – which would require the 14 UK OTs, including the Cayman Islands, Bermuda and the British Virgin Islands (BVI), to publish company ownership registers by December 2020 – a requirement the government believes will “help stamp out money laundering, tax evasion and terrorist financing”.

For transparency campaigners, it has long been clear that the opacity provided by certain jurisdictions has been used to hide a variety of financial crimes, including high-end money laundering linked to corruption. “Law enforcement, civil society and journalists have regularly exposed how corrupt individuals have achieved impunity through the use of opaque corporate structures based in places like the BVI,” asserts Steve Goodrich, research manager at Transparency International UK.

However, in the view of Anthony Turner, a partner at Farrer & Co, the UK is at the vanguard of implementing transparency measures for corporate entities, trusts and the ownership of UK land. “Registers of beneficial ownership which are publicly accessible are key to the UK’s approach to these aims,” he says. “The UK wants OTs to adopt similar standards for corporate transparency and, if they do not, the UK will introduce legislation requiring them to do so. To this end, the UK’s register of people with significant control (PSC) will be the template for these registers.”

As might be expected, OTs are none too happy about the idea of publicly accessible registers of ownership – which go beyond Financial Action Task Force (FATF) international standards – and have raised concerns that such a measure could undermine their positions as leading offshore financial centres.

Despite these concerns, Mr Goodrich sees the imposition of company ownership registers as essential. “The regularity with which companies based in OTs appear in corruption cases shows the importance of subjecting these registers to wider scrutiny,” he believes. “As vividly illustrated by the Panama and Paradise Papers, these jurisdictions have played a key role in facilitating a wider range of illegal and ethically questionable behaviour. Bringing transparency to companies in OTs is a critical moment in the fight against corruption, and has the potential to build momentum for greater global corporate transparency and good governance.”

Devil is in the detail

Whether the UK’s desire for its OTs to up their transparency game will translate into tangible change is of course a matter of conjecture at this stage. Even so, some commentators have suggested there is a likelihood that any benefit from an increase in transparency could be a ‘one-hit wonder’ and simply result in ‘dirty money’ being channelled into other territories.

“The imposition of public registers risks driving companies to other offshore financial centres that are not as well-regulated as the OTs,” says Kayla Theeuwen, an associate lawyer at WeirFoulds LLP. “There is also a risk that companies registered in OTs with public registers will under-report or will fraudulently report information about beneficial ownership. If these risks come to fruition, we may see the opposite of the intended effect in OTs: companies are likely to redomicile, and UK law enforcement and tax authorities may have less information – and less accurate information – at their disposal to facilitate the global fight against money laundering and other financial crime.”

While acknowledging that beneficial ownership registration laws and public online access to information are important steps, for Andres Knobel, an analyst at the Tax Justice Network (TJN), they do not go far enough. “The devil is in the detail,” he says. “For example, many OTs still have bearer shares that are not registered by a government authority.” Further muddying the waters is the exactness to which thresholds are applied – the UK has a threshold of more than 25 percent ownership before someone may be identified as a beneficial owner – as well as the exceptions to registration law that exist in a number of territories.

“The BVI, for instance, has a loophole in its beneficial ownership registration law that allows BVI companies not to identify their beneficial owners under certain circumstances,” explains Mr Knobel. “The UK requires limited liability partnerships (LLPs) to register their beneficial owners, but not limited partnerships (LPs), which only need to register their legal owners. More importantly, not all trusts need to register their beneficial owners. For those that do, the information is not made public.”

Clearly, there appears to be much scope for a shifting of the sands in the months to come. “With a period of 18 months between the measures receiving approval in the House of Commons – in what was widely seen as a U-turn on the part of the UK government – and the publication of the new registers, there may be some changes to the operation and ownership of the companies affected,” suggests Jane Keir, a partner at Kingsley Napley LLP. “This may mean that the measures are not as effective as they might seem at first.”

OTs’ response

The response of the UK’s OTs to the new transparency measures has been unequivocal to say the least. Many feel they constitute a breach of trust and call into question the constitutional rights of the people situated in these territories, as well as their overall relationship with the UK.

“In general terms, the OTs have not reacted well to these proposals,” says Mr Turner. “They see this as an unjustified exercise of sovereignty over them and a move which will harm their economies. In real terms, there is less resistance to beneficial ownership registers as a concept, which already exist in a number of territories and to which authorities have access. It is the public nature of the register that is of more concern.”

For the record, it is not unknown for the UK to legislate for OTs without their consent, but only in extraordinary circumstances, such as the abolition of the death penalty and the decriminalisation of homosexuality. “Legislating for OTs, without their consent or consultation, and particularly in respect of financial services, disenfranchises legislatures and electorates,” believes Ms Theeuwen. “It is democratically-elected governments in OTs that are responsible for domestic fiscal matters, not the UK government.”

Despite this fiscal autonomy, some OTs have stated that the imposition of public registers would be acceptable if they were already established as an international standard. “Many OTs have already demonstrated a commitment to combating financial crime through, for example, the early adoption of the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard (CRS), and the implementation of private registers of beneficial ownership that can be accessed by local authorities and shared with UK authorities,” says Ms Theeuwen. “Imposing public registers in advance of a global consensus risks damaging the strong relationships between the UK and OTs, and fosters resentment by the OTs towards the UK.”

Not the crown dependencies

The UK’s decision to legislate for its OTs, but not its three crown dependencies Jersey, Guernsey and the Isle of Man, also leading offshore financial centres, has generated much debate over its legitimacy and how much sway convention should hold. The TJN, for one, insists that the members of parliament (MPs) involved in amending the Sanctions and Anti-Money Laundering Bill 2018 were wrongly advised that the crown dependencies could not be included in the amendment.

The proposals which would have applied the same transparency measures to the crown dependencies are believed to have been dropped from the amendment to the bill due to a longstanding principle that the UK government does not legislate for the crown dependencies on domestic matters unless they consent.

“The UK government takes the view that as a matter of constitutional law, parliament has the power to legislate for OTs,” explains Mr Turner. “While the UK may ultimately feel that it is also able to legislate for crown dependencies, for historical reasons the convention is that this is only done with their agreement. It seems that the UK government did not want to use this issue to test that position. The crown dependencies will nonetheless remain under pressure from the UK government to make their registers public.”

Some commentators are sanguine as to the prospect of the crown dependencies being included in the bill at a future date. “The UK parliament has agreed to legislate for OTs and there remain complex constitutional questions as to whether this can also be applied to the crown dependencies,” reflects Mr Goodrich. “One would hope that they would be an active player in leading these reforms instead of an obstacle to progress.”

Flushing out

While the UK government’s desire to mitigate the potential for money laundering, tax evasion and terrorist financing in OTs is generally deemed laudable, whether the measures deployed to achieve this prove to be watershed legislation or action that ultimately falls short, remains to be seen.

According to Ms Theeuwen, legislation which: (i) imposes requirements that go beyond current international standards; (ii) targets OTs but not crown dependencies; (iii) requires the implementation of publicly accessible registers of beneficial ownership of companies, but not other legal entities that may be vehicles for money laundering and terrorist financing; and (iv) burdens certain OTs that are still recovering from the 2017 hurricane season, “may be less successful than originally contemplated, particularly in the short term”.

“Increased transparency is inevitable,” believes Mr Turner. “Public registers allow interested persons, such as the press, to uncover information which may highlight illegal funding. However, the law abiding will always comply with these requirements and the key is that these measures effectively target criminals, who presumably will not comply voluntarily with public registers. These registers are merely one part of the overall approach to combat illegal finance. Effective enforcement is required in order for there to be a meaningful deterrent to illegal financing.”

Challenges aside, there is clear belief among transparency advocates, as well as OTs with caveats, that the measures introduced by the UK government represent a step in the right direction in terms of encouraging a global standard for public disclosure of beneficial ownership information.

“If implemented effectively, greater transparency over who controls companies in the UK’s OTs could be a watershed moment in the fight against corruption and financial crime,” says Mr Goodrich. “There is a real opportunity here for the UK government and these jurisdictions to provide real global leadership on corporate transparency and in tackling financial crime.”

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Fraser Tennant