BY ANDREW TARPEY – GROUP COMPLIANCE OFFICER
There has been a great deal of debate and legislative movement recently regarding the public accessibility of corporate beneficial ownership information. On the one hand, transparency advocates have argued for increased implementation of publicly accessible beneficial ownership registers that require companies to declare who owns and controls them, claiming that efforts to do so are necessary to root out bad actors who abuse the financial system by using it to hide funds derived from illicit means, such as fraud and corruption. Even people who set up legal structures are doing so to the detriment of society, say critics, arguing that the establishment of complex, opaque financial structures allows the ultra-wealthy to obscure the extent of their financial holdings and deprive governments of much needed tax revenue. Taking a contrary point of view, privacy advocates make the point that beneficial ownership transparency creates a loss of privacy which has the potential to manifest itself negatively in several ways, such as through identity theft. In countries with higher rates of crime, those whose wealth is public knowledge can be put at risk for extortion, burglary or even kidnapping, thus evidencing the benefits of a system that prioritizes privacy.
Those arguing for greater transparency have been winning the battle in recent years. Part of their momentum comes from three well-publicized leaks of financial documents known as the Panama Papers (which occurred in 2016), Paradise Papers (2017) and Pandora Papers (2021), all of which were released by a group known as the International Consortium of Investigative Journalists. The leaks of these financial documents, which were taken from law firms and financial service companies in many different countries, revealed a massive international network of financial arrangements, bank accounts and companies controlled by prominent business people, world leaders, celebrities, and oligarchs. While virtually all of the financial arrangements revealed in the leaks were legal and legitimate, a small number of documents showed that criminals had utilized shell corporations for illegal purposes, such as tax evasion and fraud. The leaks also revealed that some companies had been used to evade international sanctions, and were connected to individuals with known or suspected ties to the regimes in Russia, Syria and North Korea. On the backs of these financial leaks, governments across the world took action to open up transparency of corporate ownership. In the United States, Congress passed the Corporate Transparency Act (CTA) in early 2021. The CTA mandates that companies which do business in the United States, both foreign and domestic, need to file a beneficial ownership information report with FinCEN (Financial Crime Enforcement Network, an agency of the U.S. Treasury Department). This report must detail the individuals who ultimately own or control 25% or more of the ownership interests of the entity or exercise substantial control over it. Prior to the passing of the CTA, the U.S. federal government didn’t maintain any register of corporate ownership, as the registration of entities only occurred at the state level. Reporting of beneficial ownership information to FinCEN is set to begin in 2024.
The United Kingdom has also pressed forward with efforts at opening up corporate transparency, with the hope that, like the U.S., its efforts will root out “bad actors” attempting to use the financial system to hide their illicitly-derived funds. The U.K. has had a publicly available companies register for some time, but saw a need to go further in efforts to increase corporate transparency. Earlier this year the U.K. passed the Economic Crime (Transparency and Enforcement) Act 2022, a move which was largely driven by Russia’s invasion of Ukraine. For years it’s been well-known that Russian oligarchs have seen London real estate as a particularly attractive investment. With Russia’s invasion of Ukraine and the resulting sanctions that followed, the U.K. government saw it as a necessity to take serious steps to address the illicit Russian money flowing into the U.K. property market. The 2022 Act creates for the first time a Register of Overseas Entities which requires overseas entities that own land or property in the U.K. to declare who their beneficial owners and controlling persons are. By setting up such a register, the British government is hoping to identify those Russians investing in the U.K. property market, and for good reason: a report earlier this year in the U.K.’s Evening Standard newspaper revealed there are nearly 1,900 Russian-owned properties in London alone, with thousands more throughout the U.K. Though it’s unknown how many of these property owners have a close association with the Kremlin, U.K. authorities seem intent on finding out.
However, despite these attempts by the U.S. and U.K. governments to open up beneficial ownership information, transparency advocates were recently dealt an unexpected blow. In a judgment handed down on 22 November 2022 (summarised here), the European Union’s Court of Justice ruled that allowing unfettered public access to beneficial ownership registers was an unjust infringement of privacy rights, and thus European Union member states had to remove public access to such registers and modify legislation requiring it. Publicly available registers were implemented as part of the EU’s 5th Anti-Money Laundering Directive in 2018 as a way to improve transparency regarding trusts, companies and other legal arrangements. While EU countries were required to set up publicly accessible registers, individuals could petition the administrator of the register to restrict access to personal information under certain circumstances. Such a petition was brought by a business owner in Luxembourg who argued that his personal safety was put at risk by having his personal information revealed to the general public. The court sided with the business owner and stated that while the establishment of the registers was done with good intentions, it didn’t justify the “serious interference with the fundamental rights to respect for private life and to the protection of personal data.” The decision is certain to cause dismay among transparency campaigners who had seen the winds blowing in their direction for the last few years and thus were stunned by the court’s ruling.
It will be interesting to see what effect this ruling will have on the British Overseas Territories of Bermuda, Cayman Islands and British Virgin Islands, all of which have robust offshore financial centers. Those territories have been strong-armed by the British government in recent years into establishing their own publicly accessible beneficial ownership registers and have reluctantly agreed to do so. Their registers were supposed to be up and running by the end of 2023, but the ruling has thrown a new twist into the matter. The United Kingdom isn’t part of the European Union post-Brexit, and the ruling has no direct effect on the U.K. or the British Overseas Territories, but it remains to be seen whether the territories will use the ruling to delay, water down or altogether scrap the registers that they were to set up after heavy pressure from London.
The Southpac jurisdictions of the Cook Islands and Nevis have no beneficial ownership registers and there are no plans by either government to introduce them. If you wish to discuss migrating a company to Nevis or the Cook Islands from another jurisdiction, please get in touch with your regular Southpac contact or contact us here.
Disclaimer: The above contains a commentary on current laws concerning beneficial ownership. It is not intended to constitute tax or legal advice. Seek a duly licensed professional for tax or legal advice.