Bob Richards, the Government of Bermuda’s deputy premier and minister of finance, has cocked an almighty snook at the British government, asserting that “we will adopt public beneficial ownership when the UK, US and Canada do.” Chris Hamblin explores the implications of this valiant act of defiance.

Bob Richards, the Government of Bermuda’s deputy premier and minister of finance, has cocked an almighty snook at the British government, asserting that “we will adopt public beneficial ownership when the UK, US and Canada do.” Chris Hamblin of Compliance Matters explores the implications of this valiant act of defiance.

 

In 2004-5 the UK's Financial Services Authority proclaimed at one of its conferences that the six largest banks had agreed to go over and above their statutory duty and perform 'know your customer' checks on all accounts, even when the relationships went back to Elizabethan times. "It had nothing to do with us," said the FSA bigwig on the stand. "They made us do it," said the man from Barclays in the audience. The important point about this occurrence, besides the FSA's unfitness to operate which led to its ultimate demise, stems from the fact that the UK had already imposed 'retrospection' on all banks in its colonies and that, in some cases, business on the islands was draining away to the City of London because of it.

 

Will the most recent political sticking-point have the same effect on the UK's overseas territories, and will it be yet another story of a hypocritical mother country trying to make others suffer first? The government of Bermuda has taken steps to forestall such a tragedy, bravely proclaiming that it will only enforce 'public beneficial ownership' – i.e. the disclosure of the beneficial ownership of all companies and perhaps some trusts on a publicly available register – when the UK does.

 

The D word

 

It has mischievously thrown in another proviso as well, averring that it will publish a comprehensive public register of all known companies only when the United States does as well. As all readers know, the United States has a long history of protecting the opacity of beneficial corporate ownership in Delaware companies, which account for the majority of companies in the US, while loudly proclaiming its enthusiasm for intrusive controls and inspection in the fight against money-laundering. No change is going to occur in US policy on this point, as meeting after meeting of the Financial Action Task Force has proved, and the Bermuda government has signalled that no change will occur in its jurisdiction either.

 

In his proclamation, Bermuda's finance minister makes another promise: to "reserve any commitment to uphold a UK model of beneficial ownership prior to international policy development in this arena," but this is a redundant one in the sense that no manner of international accords will ever make the US give up its perquisites in Delaware, or for that matter in Nebraska (where Las Vegas has similar opacity laws) and Wyoming. The great powers' bluff has been called.

 

What is a ‘beneficial owner?’

 

In the law of the Turks & Caicos Islands, which is fairly representative of all common-law jurisdictions, a beneficial owner is any human being who owns or may be behind a legal entity or arrangement, or persons who exercise ultimate effective control (as they have a controlling ownership interest) over a legal entity or arrangement.

 

The Anti-Money Laundering and Prevention of Terrorist Financing Regulations 2010 contain their own definition of a beneficial owner for AML purposes, which is:

• an individual who is an ultimate beneficial owner of the legal person, partnership or arrangement in question, whether or not the individual is the only beneficial owner; and/or

• an individual who exercises ultimate control over the management of the legal person, partnership or arrangement, whether alone or jointly with other people.

 

The UK's Money Laundering Regulation 6 defines beneficial owners as individuals either owning or controlling more than 25% of body corporates or partnerships (or at least 25% of trusts) or otherwise owning or controlling the customer. These individuals are to be identified.

 

A register of sorts

 

No statute obliges anyone in the islands to maintain beneficial ownership information in a central registry, public or otherwise. Every company in the islands must, however, be incorporated or registered by the Companies Registry, which will hold certain information including the name of a company, its status and legal form, evidence of its incorporation, its constitutional documents, its registered agent, the address of its registered office, and the address of any registered agent. Under the Companies Ordinance 1981, as amended, this information is publicly available upon request. There is a partial exception to this rule in the form of ‘exempted companies;’ information held by the Companies Registry about these companies – defined by section 189 Companies Ordinance 1981 as those that conduct their business exclusively outside of the Turks and Caicos Islands – is not publicly accessible. In other words, offshore companies are immune from the prying eyes of the public, if not the government and investigators.

 

Pros & Cons in the Turks & Caicos

 

The Turks & Caicos consultative document on the subject, long since closed to responses, ventures a few arguments for and against the British initiative. First, the arguments in favour.

 

• A central register should give lawmen and taxmen a first port of call to identify information that may be of assistance to their investigations, without running the risk of tipping off the suspect companies or beneficial owners. The penalty for letting people know that they are under investigation (and thereby giving them a chance to evade detection) is two years' imprisonment in the UK.

• A central register should also help the authorities carry out more effective and efficient investigations and proceedings. Many compliance officers in the UK have come out in favour of such a register on the theory that a register that can only be looked at with express permission from the National Crime Agency or the Home Office would lead to crippling delays, especially over 'consent' suspicious transaction reports.

• The public – including journalists on the trail of corporate skulduggery – would be allowed to scrutinise the information, increasing the likelihood of errors or inaccuracies being spotted and therefore contributing to the integrity of beneficial ownership information held in the jurisdiction that offers it, in this case the Turks and Caicos Islands.

• A publicly available central register would support wider local and international objectives on the vague subject of 'transparency' (a word that is much abused, not least by governments and regulators) and good corporate governance by allowing investors, the market and other companies to “understand better and with whom they are doing business.”

• Anyone who set up such a register – in this case the Turks and Caicos Islands – would be seen as a leader in the global movement towards greater international 'transparency'.

 

The arguments against the idea of full public disclosure are fewer in number but no less important.

 

• Companies might be worried about the way in which centrally held beneficial ownership information may be used and about the revenue that they might lose if people do not want to be associated with their beneficial owners, however law-abiding those owners might be.

• The 'rich list' is often known among criminals as the 'hit list'. Sometimes the best defence against hoodlums who target weak-willed people of high net work, perhaps by kidnap or extortion or fraud, is not to publicise one's wealth or holdings. A vulnerable individual may feel at risk if his personal information is on public record for other reasons; for instance, if he has beneficial ownership of (and possibly other involvement in) a company that shelters women from domestic violence or conducts experiments on animals.

• Lastly, and most tellingly, if the move to a central and public register is not universal, the financial services industry in first-mover jurisdictions could suffer a loss of business as a result of the above concerns. This publication does not believe that the US will ever give up the competitive advantage that opacity bestows on its corporations in Delaware and elsewhere.

 

Trusts on the table

 

Equally tellingly, the word 'trust' is nowhere to be found in the consultative document. This is in line with the original thrust of the policy paper from the British Department for Business, Innovation and Skills last year, with no plan for placing the beneficial ownership of these vehicles on the register. Lately, however, the British government has indicated that certain trusts will be on, although this is something of a grey area and the details have yet to be worked out. It is likely that this will be yet another sticking-point between the UK and the colonies it is trying to bully into setting up publicly available registers.

 

Trusts and companies in the BVI

 

What would be the effect of a mandatory register of beneficial ownership (either privately or publicly available) on anyone who wants to take security over shares issued by an offshore company which are owned by separate legal and beneficial owners? Billions of dollars of debt finance have been advanced upon the strength of such security under the British Virgin Islands Business Companies Act 2004 and remain outstanding. Hamish Masson of Harney's wrote recently of the consequences for that jurisdiction: “At first glance it appears that the presence of a mandatory register of beneficial ownership, be it private or public, would be of assistance to lenders looking to take security over shares in a BVI company. Whilst it would undoubtedly facilitate the due diligence process to some extent, it would probably be unwise for any potential secured party to rely on the contents of a register at the exclusion of including the ownership representations in the share security document.

 

“Furthermore, the proposed register has been discussed [in January's consultative paper] in terms of ultimate beneficial ownership, and would not make clear whether the immediate shareholding is subject to trusts, or merely reflective of the ultimate ownership of the shareholder(s). Where a declaration of trust exists, the presence of a register would not absolve the secured party from checking that the trustee has the necessary powers to provide the security over the shares. Further, lenders advancing money in good faith may be at further risk of being found to have 'constructive notice' of third-party equitable interests, which may adversely affect their recourse to security. Nor would it assist the due diligence process for resulting or constructive trusts.”

 

Montserrat: lagging behind?

 

In September 2013 the Government of Montserrat published a paper in which it promised to obey the Financial Action Task Force Recommendations Nos 24 and 25, which require member-countries to obtain and maintain identifying information on the beneficial owners of companies and legal arrangements. It said that it was doing so “to ensure transparency of ownership and control of legal entities and the adherence of good corporate governance.” This absence of compliance up until that date makes it appear that the shift towards a British-style register of beneficial ownership will be more strenuous for Montserrat than for most other Caribbean jurisdictions under British rule.

 

In the publication the island authority also promised to consult interested parties about the need to establish a centralised register of companies’ beneficial ownership information and the level of accessibility that the public should have to the information. The vague plan was to insert the beneficial ownership information in the already-existing Companies Register and the consultative process – long since closed for comments – asked banks, trusts and other entities some very basic questions.

Anguilla's Action Plan

 

Last year the island of Anguilla unveiled its 'action plan' in which it promised to consult interested parties on the issue of corporate transparency with a focus on bearer shares and the resources of competent authorities to access information on beneficial ownership. One of the questions was whether the information ought to be available in a central registry and whether it ought to be publicly available. The consultation, long since closed for comment along with the many others, attempted to ascertain the public’s views on:

• whether Anguilla's existing Commercial Registry should hold 'enhanced information' on the beneficial owners (i.e. on individuals with significant control or influence) of all entities registered in Anguilla;

• whether all companies should be given statutory tools to identify their beneficial ownership – a worrying indication that they do not even have that at this stage;

• what additional rules might be required to ensure that companies, and possibly the registry, shoud indeed obtain information about beneficial ownership at all companies;

• what information is currently provided to the registry;

• how frequently it should be updated;

• how to ensure that it is as accurate as possible;

• whether bearer shares should be abolished; and

• whether existing bearer shares should be converted to ordinary registered shares.

 

The consultative exercise appeared to be more 'upbeat' about the prospect of enacting the British-inspired reforms than those of other islands, stating on its flyleaf: “By recognizing the importance of corporate transparency in the fight against domestic and international crime, Anguilla will protect its position as one of the top places in the world to invest and to conduct business.”

 

The offshore territories that the British government is trying to coerce into publicising their registers are still digesting the results of their consultative exercises. Bermuda is the only one to have made a public policy statement on the matter. It would be interesting to see which jurisdiction is next.