19 July 2016
Questioning the effectiveness of a public registry in tackling financial crime
Long before the publication of the Panama Papers brought the issue to the fore, Jersey had taken a stance against the use of shell companies for financial crime. The use of shell companies to hide the identity of the real people in control is a key element in serious financial crimes, including large-scale corruption, tax evasion, sanctions busting and money laundering.
Financial crime must be combatted and maintaining an accurate record of the beneficial owners of each company – knowing exactly who the ultimate owner is and how they generate their wealth – is regarded as an important way of tackling it. Yet how that information is collected, and how easy it is to access, is part of an international debate which has grown since the Panama Papers were published in April.
Since 1989, Jersey has had a central registry which has collected information on the beneficial owner of every company registered in the island. In addition, corporate service providers (CSPs) are required to verify the identity of their clients before undertaking any business. They must know both who the ultimate owner of the company is, and how that individual generates their wealth.
Jersey has always maintained that its system meets, and even exceeds, international standards in combatting financial crime.
Yet even before the leaked Mossack Fonseca documents generated furore, the general perception seemed to be that all international finance centres (IFCs) were common in having lax regulatory standards. Jersey Finance, the industry’s promotional body for the island, is seeking to combat that inaccurate and misleading perception.
In 2015, Professor Jason Sharman, from the Centre for Governance and Public Policy at Griffith University in Australia, was commissioned by Jersey Finance to analyse the effectiveness of central registries and licensed intermediaries in combatting financial crime.
The decision to commission Professor Sharman followed the 2014 publication of ‘Global Shell Games’. He had been one of a group of academics who strength tested the regulatory systems of 180 countries. To do so, he impersonated money launderers, corrupt officials and terrorist financiers to see whether CSPs would offer to provide services even when approached by an individual they should have known to be high risk.
The academics found that, contrary to popular perception, the CSPs in international finance centres were less likely to engage with criminals than those working in OECD member states. Jersey’s system was found to be highly resilient, with not a single breach being recorded.
The objective of commissioning Professor Sharman was to differentiate Jersey from other IFCs by highlighting the quality of its regulatory regime. However, the timing of the publication of the report, ‘Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries’, meant that it also contributed to the debate which followed the Panama Papers.
Popular opinion rapidly settled on the notion that part of the solution to solving financial crime lay in establishing a publicly-accessible central registry and that any jurisdiction refusing to comply was somehow supporting the criminals.
The paper provided evidence that having a licensing regime for CSPs, rather than relying on a centralised registry alone, provided the best approach to managing beneficial ownership information. Professor Sharman also helped challenge the idea that a registry was better if it were public.
Beneficial ownership has been on the international political and regulatory radar for a long time. The G8, G20, World Bank, International Monetary Fund (IMF) and the Financial Action Task Force (FATF), as well as individual nations and the European Union, have made ambitious commitments to both collect and make available information on the beneficial owners of companies registered in their jurisdiction.
In 2013, the G8 endorsed the core principles as set out in FATF Recommendation 24, requiring competent authorities to be able to obtain adequate, accurate and current information on beneficial ownership of all companies. That year, the UK government announced that the transparency of ownership and control was to be a cornerstone of its G8 presidency, and that it would create a public register of company beneficial owners in order to:
The UK government, and more recently the EU, have adopted the position that meeting the FATF recommendations requires a centralised company registry containing information on beneficial ownership.
This stance is based on the proposition that centralised registries can adequately collect, verify and make the beneficial ownership information available to tax and regulatory authorities.
The research challenges this notion. Using the evidence of existing central registries and the way in which they operate, Professor Sharman suggests that in addition to central registries, licensed intermediaries are needed to effectively capture beneficial ownership information.
The research explains why untraceable companies are a problem (trusts and other corporate forms pose many of the same challenges, but they are largely excluded from this discussion), and then sets out FATF’s global standards.
The two leading options for meeting FATF’s requirements: centralised registries and regulated CSPs are analysed and the conclusions are that neither is infallible and that the most effective way of combatting financial crime is to have both − which Jersey does.
Professor Sharman emphasises that CSPs must be licensed. This is not currently the case in countries such as the United States and Australia. Authorities must be vigilant when auditing CSPs to make sure that they are collecting proof of identity and chains of intermediaries – for example, when multiple CSPs are processing transactions for the same client – must ensure that each has access to information on the identity of the beneficial owner.
Finally, the transfer of information from CSPs to the authorities must be relatively swift, giving CSPs legal assurance that they will not be sued by clients for breach of confidentiality or similar grounds.
With these criteria, licensed CSPs effectively act as gatekeepers for a central registry. They refuse to provide services for any company that is not able to provide satisfactory information on the ultimate beneficiaries and they ensure that the information collected meets the required standards.
When analysing central registries, Professor Sharman argues that they often have a passive, archival role in receiving and filing documents, rather than an investigative or enforcement function.
Many central registries barely had the resources to adequately fulfil an archival function, let alone verify the information – and he cites one European central registry where it was discovered that information submitted by companies had lain unopened for ten years.
Professor Sharman uses the ‘Jersey model’ as a template for an effective central registry. Unlike conventional registries, Jersey’s actively verifies beneficial owners’ identities at the time of first registration and runs their names through due diligence software.
The registry coordinates with licensed and regulated CSPs who ensure that beneficial ownership information is kept up-to-date, and company registration is only approved if trained staff at the registry are confident that they have accurately identified the beneficial owner. Although no system is perfect, Professor Sharman has confidence in this system.
It is vital that the information held can be readily provided to tax and law enforcement authorities, but what is wrong with making it available to everyone?
The information held in Jersey’s central registry is available to legitimate authorities, but it is not open to the public. There have been calls for the Crown Dependencies to follow the UK and make their central registries open to the public, but it is something Jersey opposes.
The argument put forward by the media and NGOs is that the public would act as a watchdog if they have access, but we have used the research as a starting point for challenging the notion that a public registry would be effective.
Implementing a public register of beneficial ownership that is based on the premise of self-reporting (such as the UK’s registry) is likely to be ineffective. Anyone misusing companies to engage in criminal activity is unlikely to comply with the requirements on a self-reporting basis. Without the need for information to be verified by experts (either CSPs or within the registry), there would be little to deter criminals.
There is a risk that the introduction of public registers would increase instances of crimes such as identity theft, cyber crime and extortion. With public registers making personal information available, there are legitimate concerns that the risk of kidnap and ransom would be heightened.
The UK is committed to moving to a public register of beneficial ownership, yet to date there are only a handful of other countries that have also committed to them. This reduces the incentive for other jurisdictions to reciprocate as they would already be able to receive the information without incurring the cost of collecting and sharing their own beneficial ownership information.
Proponents of public registries suggest that they make it easier for people to identify who really owns companies and therefore who they are transacting with. However, the UK’s register is not just being put in place for trading companies, but also for companies such as private investment holding companies, legitimately incorporated to hold investments on a personal basis with no wider business engagement. Therefore, the argument of ‘who one is trading with’ is of less relevance.
Article 8 of the UK’s Human Rights Act 1998 states that ‘everyone has the right to respect for his private and family life, his home and his correspondence’. Public registers could be an unnecessary and disproportionate intrusion of an individual’s right to privacy.
There are other ways of meeting FATF standards without the violation of human rights. Jersey’s institutional, legislative and regulatory framework has recently received a glowing report from the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, known more concisely as Moneyval. The independent report concluded that Jersey is ‘in a leading position in meeting the standard of beneficial ownership transparency’.
The information held in Jersey’s Companies Registry is not available to the public, but has always been available to tax and regulatory authorities who request it and there is a trend towards that information being supplied automatically.
The OECD’s Common Reporting Standard (CRS) is the global standard for the automatic exchange of financial account information and aims to prevent cross-border tax evasion. The CRS has been designed to provide maximum consistency with US FATCA. Jersey has committed to the early adoption of the CRS, meaning that account information for 2016 which is held in Jersey will be automatically reported to the tax authority in the individual’s home jurisdiction in 2017.
Given this move towards automatic information exchange, there would be negligible additional benefit obtained from a public register. This view has seemingly been supported by the recent announcement that, rather than each of them introducing public registers of company beneficial ownership, the competent authorities of UK, France, Germany, Italy and Spain will instead automatically share beneficial ownership information.
Professor Sharman’s work gave an independent endorsement that Jersey’s system of capturing and verifying beneficial ownership information meets FATF standards. His paper also challenged the popular perception that simply introducing a central registry would combat financial crime and helped to counter the UK’s presumption that a central registry should be public.
The international debate on the most effective way of tackling financial crime goes on, and I hope that, through this research, Jersey has contributed.
'Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries' by Professor Jason Sharman is available at www.jerseyfinance.je
Read more in the offshore finance debate in our article from the BVI Financial Services Commission, ‘True transparency'.
You can also read GoodCorporation’s take on the Panama Papers in their analysis ‘Tactical tax planning’.