A report by an academic, which focuses on ways of combatting money laundering and tax evasion, argues that public registers are not necessarily the most effective way forward.

Creating public registers of beneficial ownership will not necessarily stamp out flows of dirty money and there are more effective instruments at hand, a report by an academic says that also takes a swipe at the US for failing to have laws addressing this thorny topic.

As the media and political drama around the so-called Panama Papers affair continues, an Australia-based academic, in a paper commissioned by Jersey Finance, has put the case for public registers under the microscope – and found the case is wanting.

Jason Sharman, of Griffith University, has challenged the wisdom of public registers as the best way to proceed. Referring to an earlier study of such issues, called Puppet Masters (2011), to which he contributed, Sharman said it concluded that a beneficial ownership regime based on licensed corporate service providers worked better than one based on company registries. (CSPs lodge the necessary paperwork and perform the administration necessary to create a company.)

“The most positive verdict on such registries was that they are better than nothing. One major reason behind the tepid support for registries was the judgment of those who worked in registries themselves that the proposed system would not work. Company registries have a largely passive, archival function revolving around receiving and filing documents,” the report said.

And in the conclusion, the report was harsh on the US, which is ironic as the country has been notable in attacking offshore centres such as Switzerland in recent years. “When it comes to beneficial ownership regulation, at present by far the biggest problem is the US, which has neither licensed CSPs nor registries of beneficial ownership information (and has opted out of the worldwide Common Reporting Standard on tax information exchange as well),” it said.

“As has been convincingly demonstrated by a variety of US government reports, from the Senate Permanent Subcommittee on Investigations, to the Treasury Department, to the Government Accountability Office, not to mention a variety of media and NGO exposés, untraceable US shell companies are routinely used in facilitating serious crime. While the US does attract some criticism for its poor performance in this area, it is peculiar that IFCs are subject to much more international pressure and negative publicity, even though objectively their performance is much better,” the report said.

The report, entitled Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries, examines why untraceable companies are a problem (trusts and other corporate structures pose many of the same challenges, but they are largely excluded from Sharman’s report). He examines the two main options for dealing with beneficial ownership data: centralised registries and regulated CSPs.

“Strongly encouraged by a coalition of crusading transparency non-governmental organisations, in the last few years the British government, and more recently the EU, have adopted the position that ensuring the availability of beneficial ownership information requires a centralised company registry with this information on file. This policy stance is based on the proposition that centralised registries are the only way to adequately ensure that companies can be linked with their beneficial owners, or at the very least that centralised registries are demonstrably superior to other means of accessing beneficial ownership information,” the report said.

“This discussion paper takes issue with this stance, arguing that centralised registries are not the only way of finding companies’ beneficial ownership. Furthermore, on available evidence they may not even be the best means of doing so,” it continued.

“This judgement applies in the legal sense that the global rules on beneficial ownership clearly allow countries to take different routes to achieve the desired outcome. More importantly, this judgement also applies in relation to actual effectiveness, where there is comparatively little evidence of how centralised registries would work in practice, thanks to their current novelty and rarity. On the basis of available evidence, it is simply not possible to say that centralised registries work better than the leading alternative [CSPs], and it is demonstrably wrong to say that they are the only way of achieving corporate transparency,” it said.

With untraceable shell companies, an inherent problem, the report said, is lack of information; there is no credible historic or current estimates of how much tax evasion or money laundering goes on. This makes it hard to know whether new policies, such as creation of public registers, will have a significant effect. 

Meanwhile, registries of beneficial ownership are “vanishingly rare”, the report said, noting that Jersey has been one of the earliest pioneers. It is too early to know if registries reduce abuses more effectively than other policies. 

Corporate service providers come in a wide variety of forms, from dedicated wholesale firms that form and sell thousands of shell companies each year, to law and accountancy firms that provide shell companies as an incidental sideline, to sole traders relying on a website to draw in a few dozen customers. 

Sharman’s report said an important advantage of CSPs in regulatory terms is that they form a “crucial link between customers and the authorities”. 

All CSPs must know something about their clients, even if it is just to make sure that the clients pay CSPs’ fees. Similarly, all CSPs must provide some information to the authorities, even if it is just giving the company registry the name of the shell company, the report said.

“Given this position, many jurisdictions, particularly international financial centres, have imposed a duty on CSPs to collect and verify documents establishing the true identity of beneficial owners,” it continued.

CSPs make business conditional upon customers providing a notarised or certified copy of the picture page of their passport, usually supported with utility bills or other proof of residence. CSPs have a continuing duty to make sure that any changes of beneficial ownership are reflected in their records. Law enforcement and regulators can then access this information as needed, including in line with requests from their foreign counterparts, the report added.