The issue of knowing who is the "beneficial owner" of a trust or company has become a major compliance issue as governments seek - so they claim - to clamp down on forms of tax avoidance, and evasion.

UK business secretary Vince Cable has announced a massive series of reforms that promise to make life very different in future for company directors. As many high net worth individuals are directors themselves, and as the reforms are aimed in no small measure at the offshore centres and structures which Cable has often criticised for their opacity, this is an important issue for wealth managers.

At the G8 Summit in June, the UK agreed to require its companies to obtain and hold information on who owns and controls them, and to form a central registry of company beneficial ownership information. It also resolved to “review” the use of bearer shares – a favourite offshore vehicle – which do not require the identity of the holder to be entered in the company’s publicly-available register of members, and “nominee directors” who do not really control their companies but who act as cyphers for others. The proposal covers all these topics.

Who is the beneficial owner?

Cable's most prominent proposal is to set up a central registry of companies' beneficial owners. His definition of the phrase “beneficial owner” is to be found in an 89-page document called Transparency and Trust: a discussion paper. It is based on regulation 6.1 of the Money Laundering Regulations – itself an offshoot of the Financial Action Task Force's 40 Recommendations, last updated in February 2012. This says: “In the case of a body corporate the beneficial owner includes any individual who:

·        as respects any body other than a company listed on a regulated market, ultimately owns or controls (whether through direct or indirect ownership or control, including through bearer share holdings) more than 25 per cent of the shares or voting rights in the body; or

·        as respects any body corporate, otherwise exercises control over the management of the body."

Cable's document says that beneficial ownership should be interpreted “in the widest sense". This, it says on page 23, takes in both formal ownership of shares and “control”. In fact, at some points the definition seems to widen in Cable's eyes. At the top of page 12, for instance, it says: “Where a number of individuals collectively held more than 25 per cent [of] shares and agreed to vote those shares together, they would be treated as one person and considered as the beneficial owner of the company.” There is no mention of how a compliance department at the relevant bank might deduce this. There must be many cases in which all the sensible shareholders vote for the sensible option as one. The text goes on: “And if an individual effectively exercised control over the company, they would also be caught by the definition – irrespective of the number of shares (if any) that they held.” This seems to make every CEO a beneficial owner as long as he has the trust of the major shareholders.

The idea of a registry is only an issue for unlisted firms. Companies on regulated markets in the UK already have to list anyone who has a 3 per cent holding in line with exchange rules.

A central registry

What might be logged in the registry? The UK government is strongly in favour of including the beneficial ownership details of corporations and limited liability partnerships but only weakly interested in applying this to other structures. It expresses, however, the startling possibility that such a register might be kept far away from the eyes of the public. The police and tax collectors are, of course, to be the registry's main users but the language of the document is ambivalent about public disclosure. It says in places that there is a strong case for openness but states on page 36 and elsewhere that there are arguments on the other side.

What the JMLSG says

At present the Joint Money Laundering Steering Group guidelines, which interpret the UK's money laundering rules, are in a state of flux. There are no plans, however, to remove an old exemption that has long greased the wheels of business. It is the exception to the need to identify a client company's beneficial owner before any business is undertaken, found in regulation 9(3) and JMLSG Part 1 (general and non-sector guidance) 5.2.5. this states: “In any other case, verification of the identity of the...beneficial owner may be completed during the establishment of a business relationship if (a) this is necessary not to interrupt the normal conduct of business and (b) there is little risk of money laundering or terrorist financing occurring provided that the verification is completed as soon as practicable after the initial contact.” This exemption stands.

The government, however, is hedging its bets in this latest round of JMLSG reform. At 5.3.153 it is thinking of inserting the following: “If no individual owns or controls more than 25 per cent of the shares or voting rights in the body, firms should use judgement in determining whether an individual owning or controlling a lower percentage exercises effective control.” The figure of 25 per cent may not be the safe harbour that money-laundering reporting officers think it is.

Bearer shares

Bearer shares have long been useful to money-launderers as their ownership is hard to trace. These can still be created in the UK. As Coddan Services, a company formation agency, proclaims on its website: “The advantages of bearer shares are privacy and ease of transfer. A company with only bearer shares has no shareholders list or register. Therefore it is impossible to know for certain who the shareholders of the company are.” The government's proposal is to quash all bearer shares and turn them into ordinary registered shares. The document does not say whether the UK intends to force all its overseas territories to do the same, but this seems logical.

Nominee directorships

Everyone in the offshore world knows about the “Sark Lark”, the old lattice of nominee directorships in the 1990s that resulted in many Channel Islanders holding posts at 2,000 companies at any one time. This situation, where one director is “fronting” for others, is a money-laundering problem. It still plagues the UK slightly today, with 1,175 people holding more than 50 directorships which, owing to their very number, they cannot possibly handle in a “hands-on” sense. On page 47 the government says that it does not intend to prohibit nominee directors entirely. It acknowledges the fact that they have their place as “placemen” that other companies might want on the boards of their subsidiaries. One of the options of the proposal paper, however, is a suggestion to make it an offence for any director to divest himself of the power to direct a company – an ambiguous phrase that sounds difficult to enforce.

There is another suggestion to require nominee directors who have laid their leadership rights aside to tell Companies House about it. Again, there is great doubt about whether the public should know, although Cable says that there is a “strong case” for publicity. Failing this, the government might simply issue a proclamation to all nominee directors asking them to behave.

The government, however, is unambiguous in its desire to ban corporate directorships. These are permitted in the Companies Act 2006, although they are quite rare in the UK. Under these rules, offshore companies can be the directors of British companies, although at least one director of every corporation has to be a natural person. This is a recipe for money-laundering and is almost certainly going to end.

Most peculiar: the odds and ends of the proposal

The proposal is full of peculiarities. Out of nowhere, on page 5, comes something called “the court.” Never mentioned before, it becomes a permanent fixture in the proposal. Sometimes it is spelt with a big C, sometimes not. On page 16 Cable talks of it considering various factors in directors' disqualification proceedings. On page 28 it is exercising its power to suspend dividend payments. On page 44 it is freezing unidentified shares. Elsewhere in the document, the government is thinking about giving it some powers. This hyper-active court is mentioned 57 times in the document, giving disqualified directors reprieves here, finding them unfit there, sometimes in conjunction with statutes and sometimes not. The mystery of its identity is never resolved. The report gives the reader the indelible impression that the adults who made the decisions at the G8 summit left the writing-up of their proposals to younger minds.

The text contains one piece of colossal cheek. It says that each year in the UK, about 1,200 directors are disqualified from running companies and about 90 directors are prosecuted for misdeeds that they committed in their capacities as managers. The document then says that the enforcement regime's “adequacy has been called into question as individuals apparently responsible for major corporate failures have seemingly gone unpunished. This has been a particular issue in the banking sector.”

Anyone who did not know the history of the last five years would scarcely suspect that this came from a government that has refused and is refusing to sanction the prosecution of any bank director for the Ponzi schemes and other crimes that emerged after the crash of 2008. It is also failing to do so in respect of the LIBOR-fixing scandal and has been refusing to do so for years. In the words of Time Magazine: “We now know that both the Fed and the Bank of England could see and were being told that something was awry with the London interbank offered rate already in late 2007.” The Bank of England did not stop the practice. The Serious Fraud Office has only just charged two traders for their part in the biggest scam in history. Bank directors, in the UK as in the US, are safe.

Cable's proposal strays into the most peculiar – but potentially the most momentous - byways. Occasionally, and in no detail, it speaks of new laws to force each director to “prioritise the safety and stability of the firm first over the interests of shareholders”. This sounds innocent enough, but such a change would revolutionise the ways in which companies work and are sold. Anyone who doubts this ought to ask the CEO of a listed company – who typically spends his days trying to present a “picture” to the stock market – what life would be like if “shareholder value” was no longer the top priority.

Bank directors are not safe from this proposal. The text, on page 61, states: “We welcome views on the merits of strengthening responsibilities of banking directors by amending the directors’ duties in the CA06 [Companies Act 2006] to create a primary duty to promote financial stability over the interests of shareholders.” If any director thinks that they are being unjustly blacklisted, the government has another eye-popping piece of news for them on page 62: the kind of justice he can expect to receive from a regulatory tribunal is described as “a trial.” There is no mention of what this portends for the future of real trials.

On page 56 there is more bad news: “There is...a strong case for arguing that a material breach of sectoral regulations – such as in the banking sector – is incompatible with fulfilling directors’ duties as set out under the CA06.” The document goes on ask interested parties whether any breach of sectoral regulations is a matter of unfitness that may be taken into account by the court in disqualification proceedings.

The government seems to be envisioning a future where every part of business is regulated. No director – however trivial his sector – should be safe from being banned from acting in that sector. On top of this, however, the paper makes it quite clear that the government is thinking of turning such a ban into grounds for disqualifying him as a director in every other part of the business world. It never goes into detail but is unmistakeable in its intent when it proposes to “grant appropriate sectoral regulators the ability to ban people from acting as a director [sic] in any sector.” [Its own italics.]

Regulators have long had the power to ban people from the financial sector, presumably because of its importance to the rest of the economy. It appears as though the G8 wants such regulation to become universal throughout business – a vision of government not preached to any democratic electorate since the days of Mussolini.

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