The launch of centralised beneficial ownership registers of the kind to be implemented in the UK do not represent the only or even the best way of recording and making available secretive ownership information, according to an academic study
The report into the effectiveness of beneficial ownership registers by academic Jason Sharman argues that it could be better to set up a structure of licensed corporate service providers (CSPs) to assess the true ownership of shell companies.
The call comes as the UK commits to a public beneficial ownership register, which will affect all inbound UK investment and follows announcements by the EU that it will also set up a similar register to operate across all 28 EU member states.
The Department for Business, Innovation and Skills (BIS) has indicated that the UK will use a 25% threshold to define beneficial ownership, which will be held on a publicly searchable database at Companies House.
Those companies not complying face losing ownership of their share, or being subject to criminal penalties, in a bid to cut down on the use of shell companies for tax avoidance.
Professor Jason Sharman, from the Centre for Governance and Public Policy at Griffith University in Australia, says this is in keeping with international moves to block the use of shell companies, but claims research shows ‘it is demonstrably wrong to say that they are the only way of achieving corporate transparency’.
For his report, Sharman contrasted the centralised register approach with that used in Jersey for almost 30 years, where there has been a regime of regulating CSPs, with the Companies Registry collecting information from these intermediaries.
In practice this means that 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.
Sharman states that there is comparatively little evidence of how centralised registries would work in practice, thanks to their current novelty and rarity, but it is ‘simply not possible’ to say that they work better than this alternative approach.
He cites his earlier research where over 3,700 CSPs worldwide were sent email solicitations from a variety of fictitious consultants seeking untraceable shell companies as part of a study to assess firstly, their propensity to respond to solicitations, and, secondly, CSPs’ likelihood to comply with international standards by verifying their customers’ identities.
The results showed that International Financial Centres (IFCs) on average performed notably better than OECD countries. Some IFCs like Jersey and the Cayman Islands had a good record of compliance, ie, not one of the CSPs contacted was willing to provide a shell company to the fictitious consultants without first seeing a number of official identity documents proving the customer’s true identity, Sharman said.
This was the case even when some of the email approaches explicitly offered to pay a premium if CSPs were willing to waive the rules on customer identification. In contrast, it was much more common for CSPs from OECD countries to offer shell companies without any requirement that the customer prove their real identity.
In his most recent study, Sharman says that the UK system of a centralised register faces problems of law and enforcement. He cites the unrestricted use of bearer shares, which the UK only moved to abolish in 2015, as an issue, but claims that a bigger problem is a lack of enforcement by the UK authorities.
The report states: ‘The default regulator responsible for enforcing these rules is HMRC. Almost all UK government agencies have been subject to extensive cutbacks as part of the austerity agenda, and inspecting CSPs is in any case some distance from HMRC’s core function of raising revenue.
'The upshot seems to be a lack of enforcement of the requirement that British CSPs establish the true identity of their clients. According to enquiries made by the NGO Global Witness, ‘there may never have been a single audit or inspection carried out to enforce this rule’.
Describing beneficial ownership registries as ‘something of a leap of faith’, Sharman argues that the same problem may apply, with a lack of verification of beneficial ownership declarations submitted to registries. In support of this, the study quotes the example of the Cypriot register, which reported a 10-year backlog in dealing with paperwork.
The study goes on to identify the US as presenting ‘by far the biggest problem’ to beneficial ownership regulation, as it has neither licensed CSPs nor registries of beneficial ownership information.
The report states: ‘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.
‘This disparity seems to be an indicator of the degree to which the policy debate over beneficial ownership is dominated by politics and public relations concerns, rather than a genuine desire to fix the problem of untraceable shell companies.’
The report, Solving the Beneficial Ownership Conundrum: Central Registries and Licensed Intermediaries is available from Jersey Finance