Centralised registers that identify the beneficial owners of offshore structures – whether publicly accessible or not – sound great in theory but they are problematic in practice. The model proposed by the UK is inferior to private sector-led systems already operational in jurisdictions such as the BVI and Cayman.
A centralised register maintained by a public body is a target. Any group with a vested interest in damaging the offshore industry would pursue these registers and it is difficult to envisage every single offshore centre, some with limited resources, withstanding a sustained attack from hackers.
There are really only two constituencies that benefit from the names of the beneficial owners of offshore structures appearing in public registers: investigative journalists and non-governmental organisations that are opposed to the existence of low tax jurisdictions. The causes pursued by these constituencies may be laudatory, but the vast majority of beneficial owners are not engaged in illegal or immoral activities. They seek privacy, and public registers undermine such efforts.
OIL is not opposed to a regulatory system that is more transparent or uniform, giving investors and those that transact with them greater certainty of treatment, regardless of jurisdiction. But service providers that are subject to proper oversight – and whose bona fides are underpinned by a licensing mechanism – are better positioned to deliver this than a system of filing into central registers by the general public.
Registers of beneficial ownership and automatic exchange of tax information have emerged as key demands by the G8 (now G7) nations, with a view towards assisting government agencies in tracking tax evasion, and other criminal activities. Last year, the group instructed all members to publish action plans on beneficial ownership, and this extended to the British Overseas Territories (BOTs) and Crown Dependencies (CDs).
The action plans led to public consultation processes in the relevant jurisdictions. The UK completed its consultation last year, but before the results had been collated or published, Prime Minister David Cameron already announced his ambition to create a publicly accessible register of beneficial ownership. France is the only other G8 nation that has so far committed to such an undertaking. More recently, the EU has voted in favour of public registers of trusts and companies in all EU states, with the UK, ironically, lobbying against the inclusion of trusts in this initiative.
Consultations in the British Virgin Islands (BVI) and Cayman Islands closed earlier this year. OIL submitted a response, voicing its opposition to public or central registers. It is a view shared by the vast majority of the offshore industry.
First and foremost, there is no clear definition of a beneficial owner for certain kinds of structures and no clear method for assembling public registers. The UK, for example, has no licensed and regulated service providers – no gatekeepers involved in the formation of corporate vehicles – and minimal private sector expertise in the collecting and analysing of beneficial ownership information.
The UK government appears to believe that the preferred process for cataloguing beneficial owners is adding an extra box to the form used for filing annual tax returns. This fails to appreciate that beneficial ownership is often far more complicated and requires more than additional space on a form. More importantly, anyone using corporate vehicles for nefarious purposes is unlikely to freely report their identity and activities. A surge in “nominee beneficial owners” would surely follow.
It is also worth noting that the UK has made no visible effort to pursue the commitment in its own action plan to review the supervision of corporate service providers alongside public registers. Seasoned critics must wonder why the component that would place a heavy burden on public resources has been quietly forgotten about and the component that would be private sector-driven – the onus is on individual investors to gather and disclose information held in registers – remains. After all, service provider licensing has proved effective in jurisdictions such as the BVI and Cayman.
The BVI and Cayman recognise that their models are not perfect, but they can justifiably claim to have systems and processes superior to those advocated by the UK. Indeed, peer reviews conducted under the auspices of the OECD’s Financial Action Task Force (FATF) have found that these jurisdictions’ anti-money laundering checks to be among the best in the world.
Even if public registers are an appropriate response to abuse of corporate vehicles in the UK, this doesn’t necessarily hold true for jurisdictions that already have the requisite infrastructure.
In the BVI and Cayman, due diligence is conducted on applicants seeking to set up offshore structures by regulated service providers. The resulting documentation is held in confidence, but not complete secrecy: service providers must report any suspicions to the authorities and then there are mechanisms through which regulators, law enforcement and tax authorities can make information exchange requests.
These jurisdictions respect the privacy and confidentiality of their clients, but in recent months such concepts appear to have morphed into dirty words. Prime Minister Cameron has written to all of the BOTs and CDs, exhorting them to follow the UK’s lead and push for public registers of beneficial ownership. He acknowledged the need to be very careful about any initiative that puts personal information in the public domain. To this end, the UK has decided that information which could be used to facilitate fraud and identity theft will not be available on the public register, but instead held securely.
It will remain to be seen what this means in practice. Should the G8 nations, however, ultimately accept that a version of the model whereby the identity of beneficial owners is available for enforcement purposes, but not publicly available, there will undoubtedly remain a push for centralised registers of beneficial ownership – a notion to which OIL and many other service providers are fundamentally opposed.
If we have learned anything in the digital age, it is that any personal information in the public domain, especially of a financial nature, can be used for fraudulent purposes. Public registers are likely to discourage entrepreneurs and job creators from taking the commercial risks that are part of wealth creation.
The UK, should it take the lead on the issue, would be the first to bear the cost. According to the IFC Forum, representing international legal and financial institutions: “In the likely event that Asian and US financial markets do not adopt these proposals with the same speed and scope, there is a real danger that significant investment to the UK will be at risk.”
A centralised register maintained by a public body is a target. Any group with a vested interest in damaging the offshore industry would pursue these registers and it is difficult to envisage every single offshore centre, some with limited resources, withstanding a sustained attack from hackers. Centralised databanks would also be more susceptible to information leaks from disaffected employees – let’s call it the “Snowden factor” – and potential misuse by foreign governments and tax authorities.
Security comes in disaggregation. In the BVI and Cayman, beneficial owners’ details are held by privately-owned service providers that are legally obliged to cooperate with regulators, law enforcement and tax authorities. The livelihoods of these service providers rely on enduring reputations for discretion and confidentiality, so they will invest well in security, and be accountable to their clients.
The offshore industry will benefit from better regulation in the long run. Operating under a uniform and consistently applied set of rules, clients will gravitate towards more experienced, properly regulated and reputable jurisdictions.
At OIL we have no doubt that the likes of BVI and Cayman already qualify for inclusion in this category. It is therefore with no small sense of irony that we watch global standards evolve. The G8 nations leading the process appear to be among the least adept at implementing the systems they envisage, based on the infrastructure currently in place. They would be advised to study the approaches of established offshore centres that – in order to sustain the financial services business on which their economies depend – have developed systems that are both workable and that meet international standards.