James Cohen of Transparency International recently published a post on the FCPA Blog extolling the virtues of an open public register of ultimate beneficial ownership (UBO) in my home country of Canada. These ambitions appear genuine and clearly well-intentioned. However, in my view, they are also naïve.
At the heart of the misunderstanding about UBO registers is, I believe, the fact that the debate has been oversimplified. Instead of styling the discussion as public vs. private UBO registers, we should really be talking about controlled systems of transparency vs. unlimited systems of transparency.
I advocate and argue for the former: a system of controlled transparency, which in my view – based on 30 years experience tackling economic criminals – is far more effective as a tool for battling corruption than a completely unlimited system of transparency.
Transparency campaigners regularly point to the UK Companies House UBO registry as a model of transparency. However, it was Transparency International itself, which in late 2017 launched a paper entitled “Hiding in Plain Sight – How UK Companies are Used to Launder Corrupt Wealth,” criticizing the UK and Companies House on several levels. There were several startling facts in its report, including:
The UK is one of the simplest places to start and run an enterprise in the world, ranking seventh in the world. A key factor behind this is the minimal effort and cost required to set up a company, with the UK coming third in the World Bank’s ratings of this metric. Whilst this is in many ways a good thing and contributes a great deal to the UK economy, there are some significant loopholes which also make it attractive to money launderers.
Perhaps most significant was that, according to TI’s report, there were only six members of staff trying to police and provide oversight to over four million companies.
It is a dubious practice to praise the UK for having an open UBO register system that everyone should copy, then criticize it for being effectively useless for crime prevention because of its lack of due diligence and oversight.
In his post, Mr. Cohen makes no mention of the significant increase in costs needed to employ additional staff to try and render any open register meaningful. This contradicts the quoted advantages to those setting up a company in the UK, requiring only “minimal” information. It is this selective approach underscoring transparency campaigners’ ambitions, which is one of my core concerns with their arguments.
Such arguments also miss the point when they state that genuine businesses find the information available on open public registers advantageous. Of course they do. But how will the register disclose the possibility that they may be considering doing business with a fraudster, terrorist, or politically exposed person?
If transparency campaigners wish to push for open public UBO registers, then they should do so at least providing answers about the additional due diligence and oversight costs required to make these registers meaningful. They also need to explain who will meet these costs.
I would encourage campaigning organizations such as Oxfam or Transparency International to look more carefully under the surface of well-regulated financial services jurisdictions such as the British Virgin Islands or the Cayman Islands. Here in the BVI, we have over two decades of accumulated UBO disclosure materials concerning hundreds of thousands of companies, which are housed inside regulated trust companies and (now) a controlled-access UBO register.
This body of information is regularly accessed by foreign law enforcement authorities. Any attempt at stripping away the confidential nature of this valuable investigative material will paradoxically (and rapidly) destroy its value as a means to right wrongs, to secretly follow and freeze the fructus sceleris (the fruits of fraud) and put fraudsters and corrupt dealers in prison.
When it comes down to it, there are a handful of key questions relevant to the debate between those who would advocate unrestrained access for all to the private data of companies, and those who argue for a more measured approach:
- Who can incorporate companies and are they regulated? Do they comply with the FATF’s recommendations to combat money laundering to know-your-customer, or not? In Canada, there is no regulation of this industry. Absent this, a public UBO registry will be seriously flawed, receiving masses of unverified information. The innocent will comply and the guilty will not.
- How does one go about ensuring that the data concerning the identities of UBOs of companies filed in a companies registry is correct and verified? The UK model is a disaster. Will the Provinces of Canada employ hundreds of analysts to verify the accuracy of public UBO data?
- Who should have access to UBO identification information reposed in companies registries? Law enforcement and victims of fraud armed with a disclosure order are obvious legitimate candidates. But the whole world? What is the cost of that? And what is to be gained by that?
In my professional view and experience, unlimited systems of transparency are seriously flawed when it comes to defeating unlawful activity. Ironically, it requires secrecy to conduct complex fraud and asset recovery cases and criminal inquiries if we’re to defeat organized and sophisticated forms of economic crime. If implemented, public UBO registers will simply make these investigations much more difficult, as the fraudsters bury themselves more deeply behind ever-growing layers of “straw men.”
With thanks to Tony McClements, Senior Investigator at Martin Kenney & Co, for his assistance with this post. He served for 33 years with UK police forces and has specialised in Fraud & Financial Investigation since 1998. He is also a lecturer in these subjects at the University of Central Lancashire (UCLAN).