I have been considering the events of the past 12 months from an anti-money laundering (AML) regulatory perspective, and with what we may be faced with in the year ahead.
For me, the main issue arising from 2018 is the ongoing debate I have been having with a variety of NGOs and pressure groups who would see public UBO (ultimate beneficial owner) company register systems implemented across the board, including the Caribbean islands that provide offshore company services to the globe.
NGOs such as Transparency International and Global Witness have taken me to task on several occasions over our differing respective positions on this subject. I have stressed that both organisations do a tremendous job in advancing the public interest to counter corruption, to retard money laundering, and to undermine other forms of criminality. The world is a better place due to their efforts.
In May 2018, I wrote a post for the FCPA Blog, “Open company UBO registers are not the panacea to financial crime,” which as the title suggests provided a critique of those who were hoping that “open” public registers would foil sophisticated economic criminals, and that (separately) “tax avoidance” was best combated by changing laws onshore.
I was delighted that Global Witness’s Murray Worthy added his opinion to the debate, making some relevant counter-observations to my blog, but ultimately concurring (albeit in part) with my assertion that enforced regulation compelling company stakeholders to accurately disclose the identities of their UBOs was the way forward, rather than the lip-service currently being paid to this subject in places such as the UK and its flawed Companies House approach.
Murray stated in response:
As we have said many times before – simply having a public register isn’t a panacea — loopholes need to be closed and rules need to be enforced. That’s why we’re campaigning to improve the UK register and why it’s vital that the Overseas Territories build on the lessons already learnt in the UK.
I agreed with the points Murray was making. My only observation would be that the Overseas Territories have already learned from their mistakes of the past. The British Virgin Islands (BVI), which has historically suffered criticism, shot to prominence yet again on the back of the Paradise Papers release, following 2016’s Panama Papers. Many of the tales arising from these mass data dumps were hard to combat. Indeed, in years gone by, the Overseas Territories adopted a more than cavalier attitude to compliance, and the resultant criticism was deserved.
However, the inevitable attacks by the NGOs this year ignored the fact that the BVI and other locations, such as Cayman and the Bahamas, had already secured their “shores” with much tighter AML regulatory systems, and they were doing their best to enforce them diligently.
So, in 2018 we continued to see an onslaught of criticism against the Overseas Territories, despite the improved regulations they have put in place. It was this aspect of the UK’s and the NGOs’ criticism that I found unfair, unhelpful and prompted me to speak out on the Territories’ behalf.
In particular, I was extremely perturbed by the intervention of the UK law makers, who entered the fray stating that they were going to force the Overseas Territories to implement public UBO registers. Why? The much-lauded Companies House in the UK may be an open UBO register, but it is very poorly policed and there are still crooks using bogus information en masse to open English and Welsh companies. In effect, the public register in Cardiff is only as good as the information being provided by those who want to open an English and Welsh company: the lack of due-diligence is acting as an enabler.
If we add to the equation the ongoing scandals arising out of the Scottish Limited Partnerships situation, and their apparent ongoing abuse by crooks, in particular those hailing from behind the rapidly re-emerging Iron Curtain, the UK needs to get its own house in order before turning its sights on the Overseas Territories.
Indeed, in my May post for the FCPA Blog, I made the point:
According to the London Evening Standard, one company had an address which translated as “Street of the 40 Thieves” in “Ali Babba”, with another applicant describing their occupation as “fraudster.” Unsurprisingly, no action was taken against those responsible. The single Companies House prosecution success is shrouded in controversy, being a whistleblower seeking to illustrate how easy it was to mislead those compiling the register. This whole situation is shrouded in hypocrisy. If the UK and its vast resources cannot bring the true UBOs to book, what chance for the hard-pressed territories?
By October, was anybody surprised by the news that the UK’s National Crime Agency (equivalent of the USA’s FBI) had concluded that the Cayman Islands was entering into a process of passive resistance, by failing to cooperate speedily with the NCA requests for assistance? If indeed this was the case, perhaps the Caymans were objecting (via a form of civil disobedience) to what they saw as unfounded criticism of their compliance processes.
What struck me the most about this latter revelation was that the head of the NCA, Donald Toon, made the observation: “This is not quick work, because rich criminals are experts at hiding their ownership of corrupt assets.”
In my resultant post for the FCPA Blog, I suggested that the Cayman authorities were wrong to drag their feet, if indeed they were doing so, because this was arming those who would continue to attack the offshore financial services industry. That said, Mr. Toon’s observations regarding the deviousness of crooks who could easily bypass the public registers, confirmed (for me) the naivety of those who continue to believe that public UBO registers will resolve the world’s money laundering problems. They won’t, because crooks lie.
My good friend, fraud investigator Burke Files of Tempe, Arizona, put my point in a LinkedIn response to one of my FCPA Blog pieces, in a more pithy and pugnacious way than I have been able to muster: “The UBO registers are useless. For honest owners it becomes a burden. And for the dishonest, tis but a shimmy and a wiggle to go un-noticed and/or recorded.”
So, moving forward to the New Year, what do I predict will change? Sadly, I cannot see the onslaught against the Overseas Territories ending anytime soon. The NGOs will continue to target offshore service providers, insisting on open UBO registers. The campaigners hold a very firm assumption that this is fundamental for transparency. I will continue to tell them that they are incorrect, and they will continue to tell me why I am wrong.
As 2019 arrives, our debate will continue. But I would still like to wish them (and you) a very happy New Year and look forward to advancing the discussion on this and other important subjects in 2019.
With thanks to Tony McClements, Senior Investigator at Martin Kenney & Co, for his assistance with this post.
Martin Kenney, pictured above, is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com | @MKSolicitors. In 2014 he was the recipient of the ACFE’s highest honor: the Cressey Award for life-time achievement in the detection and deterrence of fraud. He was selected as one of the Top Thought Leaders of the Legal Profession in 2018 and 2019 by Who’s Who Legal International and as the number one offshore lawyer for asset recovery in 2017 and 2018.
Martin – As always, your insights are grounded in thoughtful and sound reasoning. However,I think finding that UBO registers are not effective against subversion does not relegate them to be entirely ineffective. On the contrary, efforts to subvert the registers creates a pattern of behavior that indicates knowledge (scienter) and increases prosecutorial effectiveness. Further, as we learn more about the subversive activity, we can close the gaps and develop improved regulation and enforcement efforts. Thankfully we didn't declare the world-wide web too vulnerable to hackers to be able to be an effectively controlled environment for commercial activity – we developed firmware and software solutions that help us control that environment every day and that alone has exponentially advanced commerce (and access to markets). I don't agree with the argument that ineffectiveness should cause us to walk away.
TI and Global Witness are right in their view of shining light on beneficial ownership. This information is not of mere interest, it has been identified as the root that allows masses of humans to be subjugated to autocratic rulers and fosters human abuse. The issue is too important to just dismiss. The system may not be strong and mature – but it is up to us to strengthen and grow it. More than a good idea – I think its a duty.
Thank you for this thoughtfully expressed reply to my submissions.
In the interest of being concise, my blog did not lay out and address the most telling and poignant problem flowing from the law of unintended consequences regarding public UBO registers. Those who have a firm grip on their assumptions favouring 'open' systems of transparency regarding UBO data do not seem to appreciate this:
• Before the establishment of a global standard to fight money laundering by means in part of the good work of the FATF's 40 Recommendations of the late 1990's and early 2000's, UBO data was not being collected anywhere by means of a compulsory legal and regulatory process. This was an investigative disaster. It made our work as fraud and asset recovery lawyers substantially more challenging than it is today.
• The collection and housing of UBO data in a well-regulated environment in places like the BVI, the Cayman Islands, and the Channel Islands has been manna from Heaven for fraud and corruption fighters.
• We as anti-fraud professionals have since used secret court investigative disclosure orders (like ex parte Norwich Pharmacal / Bankers Trust orders wrapped in seals and gags), to uproot this UBO data in stealth. Such orders are akin to a secret US Grand Jury subpoena, but they are available to all victims of fraud, large or small, private or public, corporate or individual. That one tool has led to billions of dollars of recoveries of stolen and purloined value. I bear witness to this.
• However, most of the value of this crucially important UBO data is destroyed to the extent it is brought out into the open, because crooks will not countenance their names being linked to their asset-holding vehicles if it be in a place for all to see at the click of a mouse.
Nowhere do I see the Guardian, Global Witness, the EU, or other champions of public UBO registers grapple with this costly unintended consequence of their push for "open" transparency in contrast to a system which uses "controlled or regulated" forms of transparency. The latter is a system that actually works; and that carefully seeks to balance the rights of the innocent to their dignity through privacy; and the practical facility of the fighters of fraud to do their jobs effacaciously.
On a separate yet related subject, I only wish that Delaware stops being the black hole of UBO data that it is. The road to Hell is arguably paved by lobbyists in Washington DC for the state of Delaware, as well as members of Congress from this state, who seem to be perfect in their game of defending the horribly noxious and indefensible. I refer to the system in Delaware of no-one being required to know the faintest thing about the identities of the UBOs of 800,000 Delaware companies. That remains shocking.
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