Today’s guest post, from Martin Kenney, the Managing Partner of Martin Kenney & Co., a law firm based in the British Virgin Islands (BVI), continues an ongoing debate/discussion we’ve been hosting here at GAB on the costs and benefits of public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. That debate was prompted by the UK’s decision to mandate that the 14 British Overseas Territories create such public registries, and Mr. Kenney’s sharp criticism of that decision in a post he published on the FCPA Blog. That post prompted reactions from Rick Messick and from me. Our pushback against Mr. Kenney’s criticisms stimulated another round of elaboration on the critique of the UK’s decision, with a new post from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). I subsequently replied, explaining why I did not find Mr. Kenney’s or Mr. Cook’s criticisms fully persuasive. Today’s post from Mr. Kenney continues that exchange:

Public [UBO] registers are rather cheap political playing to the gallery, saying “Aren’t we wonderful to have done this?” – ignoring the fact that what we have established in the UK does not work properly….  It seems to me outrageous that the UK Government, who lack a lot in the area of anti-money laundering, should thus seek to impose on their overseas territories measures – often, where they cannot be afforded economically, that go far beyond what the UK has.

– Lord Flight (Conservative), Member of the House of Lords, Speech to the House of 21 May, 2018, Debate on the Sanctions and Anti-Money Laundering Bill [HL]

The fact that Professor Stephenson welcomes a good discussion and has opened the doors to his blog once again, means it would be impolite of me to not provide a response to his latest observations.

From the outset, I will stress that I will not seek to address every point Professor Stephenson makes. However, having addressed those below, if there are others he wishes me to respond to, I will endeavor to do so.

Professor Stephenson has commented not only on my original posts, but also on that of Jersey Finance CEO Geoff Cooke. Professor Stephenson explains from the outset that, depending on the jurisdiction that is involved, ultimate beneficial ownership (UBO) of company identification information may or may not be readily available to law enforcement and others with an interest in the information. This is the thrust of my argument where it concerns the UK’s overseas territories. On the one hand we have the UK’s Companies House boasting an open public UBO register, whilst on the other we have overseas territories such as the British Virgin Islands (BVI) where they function with a “controlled access” UBO register.

To the extent that he or she has taken note of the instant debate over public UBO registers, the average person in the street will invariably pick the public register model as being the safest, most informative, and preferred method for collecting, housing, and disseminating UBO identification information. This is unsurprising given that since the Panama Papers hit the news in April 2016, mainstream media outlets and certain international charities and NGOs have promoted this as a self-evident truth. Moreover, it is difficult for the average person to understand that, whilst they are paying taxes deemed commensurate to their earnings, big business appears to be dodging their fair share.

Given that the readers visiting this website are likely to be well-versed in the difference between tax avoidance (legal) and tax evasion (illegal), I will not rehearse the point. I appreciate that there are ethical arguments on this subject. But the fact remains tax avoidance is touted repeatedly by tax justice campaigners as being one of the main reasons that completely open UBO registers are socially advantageous. The answer to this conundrum is much simpler than trying to force an imperialistic change of law onto the small Caribbean islands directly affected. A change to onshore tax laws would prevent avoidance, as the vast majority of people (rich or poor) abide by the rules and laws regulating their actions.

This brings us to cross-border tax evasion, fraud, corruption, and money laundering–and how we address these problems. I have explained previously that public UBO registers are only as good as the information provided by those required to furnish it. The fact that the UK has been shown to be paying lip-service to the problem on her own shores only serves to rub salt into the wounds of the Caribbean islands who have invested significant sums in responding to a multitude of calls from the Financial Action Task Force (FATF), the OECD, the US Treasury, and the UK government to collect, verify, house, and make available UBO information upon request from foreign authorities.

A rolling succession of calls to improve and expand anti-money-laundering (AML) compliance procedures in the offshore world have been made since the FATF first issued its black-list of non-compliant jurisdictions with its “40+9” recommendations for robust AML compliance systems, in 2000. The debate we are now having about public UBO registers must be considered within this 18-year history of big jurisdictions coercing little ones into improving their AML compliance game.

To put the issue into further perspective, many of you following this debate will already understand (or be working in) the world of AML and anticorruption compliance. Consequently, you will be aware of how expensive it is for compliance officers to undertake normal run-of-the-mill due-diligence checks. Now elevate that process to “enhanced due-diligence” and watch the costs soar.

To illustrate the point further, in regard of the UK public UBO register, Global Witness reported in February of this year:

  • 4.1 million companies are now on the UK’s beneficial ownership register.
  • 4,000 beneficial owners are listed under the age of two (including one who has yet to be born).
  • Over 40% of the beneficial owners of Scottish Limited Partnerships (SLPs) are either a national of a former-Soviet country or a company incorporated there, compared to just 0.1% of all UK limited companies.
  • Just five beneficial owners control more than 6,000 companies raising the question of whether some of these individuals are simply stooges put in place by the real owners.

It is more than surprising that there has only been one prosecution of an individual who supplied false information to the UK public register. Kevin Brewerdid so openly as a whistleblower, intent on exposing loopholes that fraudsters can and use with impunity. The 65-year-old businessman submitted the name Vince Cable, the UK’s Liberal Democrat party leader, as a UBO. He found himself in court and ordered to pay more than £10,400 as a result.

In essence, the much-revered UK company UBO database is fantastic for tracing and monitoring honest people, but not much use where crooks have something to hide. At this time, it is reported that Companies House has only six members of staff to police the accuracy of the UBO data filed by 4.1 million companies. To verify this information to the point where you have satisfactorily identified the UBOs of 4.1 million companies beyond all reasonable doubt (in a criminal case) or beyond a balance of probabilities (in a civil case) or even to a reasonable basis to suspect wrongdoing (an AML reporting standard), would likely bankrupt the organization. (One English judge once held that a suspicion of money laundering is something more than a fanciful possibility that it exists.) This is one reason why the calls for public UBO registers in the UK overseas territories are flawed.

If the UK and all its resources are incapable of policing its own companies, how are small Caribbean jurisdictions with cross-border financial services centers going to cope? But cope they do. They have managed to build a system via heavy investment that actually verifies UBO information much more diligently and successfully than the UK. It relies mostly on a regime of licensing and regulating privately owned trust companies which form and administer offshore companies. These trust companies are regularly inspected by local AML regulators to ensure compliance with local AML Codes. The required UBO and know-your-customer (KYC) data is collected by the trust companies and, in the case of the BVI, down-loaded into a central electronic UBO database called BOSS.

In contrast, the UK plays at collecting UBO information, while its overseas territories invest heavily in appeasing those who demand transparency and to respond to legitimate calls from overseas governments and official bodies (e.g. the FATF and the OECD).

This brings me onto my next point: that of transparency and the argument that if you have nothing to hide why do you object to a public register? Plus, the rhetorical question to the effect of – “if you have nothing to hide, why open an offshore company rather than one in the UK?”

To answer these questions, we must also consider the most basic and simple of facts:

  • Firstly, that offshore companies are tax-efficient (call them tax havens if you must), so there may be an immediate fiscal advantage to using one. This tax advantage is lawful and thereby above board (notwithstanding the ethical argument against tax avoidance I alluded to earlier).
  • Secondly, the confidentiality the islands provide is a valuable commodity and accords with a reasonable expectation amongst civilized people. We do not wish to have the State, a Guardian reporter, or Global Witness in our bedrooms, our bank accounts, or our confidential financial affairs without good reason. This expectation of confidentiality is closely aligned to human dignity. Please note the word “confidentiality.” I did not use the word “secrecy” for all the reasons I explained previously.
  • Thirdly (and this is the main reason that a great many companies are registered in the BVI and similar), is access to the English legal system and the Judicial Committee of Her Majesty’s Privy Council as the ultimate court of appeal of legal disputes.

Imagine you are an American entrepreneur who wants to build a hotel in Russia. To do so you have a Nigerian investor and a Ukrainian investor with whom you want to enter into a partnership. So where do you set up your new company – Nigeria? Ukraine? Russia? None of these options sound too appetizing to each of the nationals involved. Also, we can rule out the USA, as this is hardly neutral where Russia is concerned. Somewhere like the BVI operates under an English-based system of law. As a consequence, it provides the foreign nationals in this hypothetical example with access to a fair, neutral and virtually incorruptible legal system.

There are many genuine reasons why people require offshore companies other than to swindle and commit crime. Some people live in countries where with a stroke of a pen, a corrupt politician or dictator can steal all their assets. A family office in Guatemala faces kidnapping risks. Not only do these people need the legal certainty and moderate political risks that an offshore company provides, but their lives may literally hang on the confidentiality they afford. Mr. Cook made this point in his commentary. Professor Stephenson replied that he remains unconvinced of the validity of this concern as he thinks that all rich people in Guatemala are already known to local kidnappers – regardless of what measures are taken by the members of a wealthy family to lead a low-key or modest life-style locally. I am not so sure that Professor Stephenson is correct to dismiss Mr. Cook’s point quite so quickly.  Particularly given how bracing and violent some parts of the world are.

In response to my point that a public UBO register will do more harm than good to complex anti-fraud or corruption and asset recovery inquiries (by, in part, causing valuable investigative information to migrate away from open transparent systems to black holes like Delaware), Professor Stephenson states that: “I get the logical structure of the argument, and it’s perfectly coherent—but if it’s indeed true that Delaware is so much better for hiding dirty money, then why do so many kleptocrats and money launderers and tax evaders and others opt for the so-called offshore jurisdictions?”

Let me first answer this question with another question: why were so few Americans implicated in the Panama and Paradise Papers? Answer: because they didn’t need to go to another jurisdiction – their country provides a nearly completely secret and much more shady system that removes the necessity to go elsewhere.

I can add that in my 30+ years of experience in cross-border fraud and asset recovery investigations, I rarely see a single or two-jurisdiction layered structure used in the holding of dishonestly concealed wealth. Most large scale asset recovery matters involve scores of layered companies domiciled in numerous countries; and which are in turn displayed in several independently constructed wealth holding strands (such that if one strand of concealed wealth gets locked-up by pre-emptive asset freezing orders, several others still exist and may never be discovered).

The analysis used by Professor Stephenson in an attempt to poke holes in my conclusion that an “open” UBO register is a bad substitute for a controlled one, reveals a misunderstanding of the level of complexity involved in the work required to successfully trace, discover, attribute, freeze, and recover hundreds of millions or billions of dollars of fructus sceleris (the fruits of fraud). Our investigations take us to multiple ports of call, in many directions, and to a cavalcade of varying repositories of evidence. Live witnesses. Bank records. Public databases. Travel records. Immigration records. Civil litigation records. Divorce records. Accounting records. And yes: company ownership registers. We don’t win cases from a single database or one witness. We do so from the secretly carried out accumulation of very substantial pools of information – hopefully undisturbed or diminished by its being too public in nature.

This work is not done well absent its being done under the protection of utmost secrecy; and by means of access to pools of valuable asset holding investigative material that fraudsters and kleptocrats do not expect to be freely available. If an NGO or a news outlet discovers one link in a chain of companies associated with a fraudster or corrupt public official from a public register – and if they report on it precipitously (or absent coordination either with law enforcement or a victim’s legal team) – they will likely destroy the value of the partial information that has been “outed.”

I remain unconvinced by Professor Stephenson’s view that an army of NGOs and reporters – even if equipped with an artificially intelligent software program designed to identify relevant links in big data – will crack complex fraud or corruption cases based on what is filed in public UBO registers. Their work may also do more harm than good by tipping-off a defendant into taking evasive action with his concealed assets before a meaningful remedy can be put into place – like a freeze order.

Professor Stephenson adds that where the US is concerned: “I support legislation pending in the U.S. Congress that would create a confidential UBO registry. That’s certainly better than nothing….” So, the US, that champion of the oppressed and fighter for global good, is only considering a confidential register like those already operated in the UK’s territories. Does anybody else see the developed-world hypocrisy here? Furthermore, does anybody reading this think that Donald Trump and his government would ever really consider this as an option?

In regard to why open UBO registers would make my job of identifying concealed assets even harder, the simple explanation is that, in all the years I have been doing what I do, it gets harder and harder to achieve my goal as the world tightens the regulatory loopholes. Why? Because crooks simply continue to adapt and tell even bigger lies and compound the situation by making the company “ownership tree” even more of a tangled morass. Nay – a multi-faceted, fragmented, multi-layered and multi-jurisdictional puzzle.

It is this adaptation by the world’s leading economic criminals and kleptocrats that renders them almost impervious to traditional methods of law enforcement attack. My two investigators, both retired fraud detectives from the UK, explain that as soon as stolen money gets laundered by professionals our odds of tracing it drop significantly. As soon as the money passes through a few companies and banks in different jurisdictions, the sheer cost of chasing the money in many instances, sees the case confined to the “too-hard-to-do-tray/” No further action taken by law enforcement is the normal response.

Law enforcement does not have a bottomless budget to chase stolen value, and neither do our clients. The ethically-challenged are devious by nature. Whatever you do to frustrate them, they will work around it. It is this “work-around” that causes me and those in my field most of our problems. Measures such as added regulation and public UBO registers can surprisingly counteract the intention for employing them.

I am not suggesting that we deregulate and do away with our quilt of modern AML compliance procedures. They serve a disruptive purpose, and they generate valuable investigative material when housed in “controlled” settings. But every time we tweak and add to them, we inadvertently make law enforcement’s and other relevant professionals’ tasks greater, and either the taxpayer or our clients’ ability to pay for justice that much costlier.

Some of you reading this will be concluding that I am so against open UBO public registers because I have a vested interest in maintaining the status quo. In fairness you would be partially correct to do so. But my position is not only built upon a foundation that my job may become more difficult. It is also based on the fact that as we increase regulation and the ethically-challenged adapt, the chances of people attaining justice diminishes – either because law enforcement can no longer afford to continue their investigation, or because a client can no longer afford to right the wrong that saw them harmed.

As I was completing this reply, a friend sent me a link to the debate in the House of Lords on the UK’s Sanctions and Anti-Money Laundering Bill of 21 May 2018. It contains a number of speeches by members of the House which lend support for many of the points I have been seeking to make in the blog debate with Professor Stephenson. Here are some excerpts from the speech of Lord Flight (Conservative)  delivered at about 5:40 pm on 21 May, 2018 as reported by Hansard’s:

It is shameful that the UK has a far worse record than the overseas territories. The reforms in the UK do not work because they do not include any non-British company and have no verification, whereas the arrangements that both the Crown dependencies and overseas territories have put in place provide all the necessary information to the appropriate authorities on asking. It is also a much more tightly and accurately kept register.

Also, Lord Flight offered this to the House:

The amendment goes far beyond any international legal requirements or global standards on sanctions and anti-money laundering compliance, all of which are robustly adhered to by the BVI. It is not required either to facilitate the prevention of money laundering or for the purpose of tax compliance. The BVI not only already applies international best practice standards in relation to anti-money laundering compliance but now operates a secure beneficial ownership information database, directed by BVI competent authorities, including for sharing with the UK Government. In terms of tax compliance, the BVI was an early adopter of the OECD common reporting standard on automatic exchange of information.

It has been the long-standing position of the BVI that if a requirement for publicly accessible registers of the beneficial ownership of companies becomes the global standard, it will comply with that standard. In the meantime, the BVI meets all current demands of the Financial Action Task Force – which, I might add, the UK does not. FATF is the global standard-setter in this area. As a result, the level of regulation for registering a company is far stricter in the BVI than in the UK.

Lord Naseby (Conservative) made the point in his speech that many other countries are unlikely to adopt public UBO registers:

We should also recognise that other parties in the world are not going to produce public registers. It looks as if the EU has decided that that would interfere with human rights.  We do not think the special relationship with the USA is likely to be very powerful, not least when the Foreign Secretary cannot even meet the President. There are others, such as Singapore and Luxembourg, which are unlikely to move.

I fear that the overseas territories are being hung out to dry, not least by some of the international charities, which keep suggesting that they are the cause of the money laundering happening to the detriment of some of the poorest countries in the world. I have to say, having seen the performance of Oxfam and Save the Children – Oxfam in relation to Haiti and the governance of Save the Children – that they have lost the moral high ground. I exempt entirely the International Red Cross from that comment.

Finally, Lord Neuberger of Abbotsbury (who served as the President of the Supreme Court of the UK from 2012 -2017) offered these serious words of concern about the apparently unlawful nature of the Bill requiring the UK’s overseas territories to introduce public UBO registers by 2020:

My Lords, I strongly support the amendment of the noble Lord, Lord Naseby. The clause which he seeks to remove from the Bill is a classic example of a proposal which may seem right to many people… but, after proper consideration can be seen to be very wrong.

Unlike most countries, our constitutional arrangements are based on conventions and mutual respect rather than pieces of paper, and we break those conventions and trample on that mutual respect at our peril. As the 2012 White Paper on the territories recognised, the UK’s legislative power over the territories is in practice and by convention limited to, “external affairs, defence, internal security (including the police) and the appointment, discipline and removal of public officers”-

– and, I would add, compliance with the UK’s international obligations. Accordingly, the proposal would run contrary to the established distribution of powers – quite apart from the points made about the constitution of some of the territories.

Not only that, it would do so in a most inappropriate way. There has been no consultation with the democratically elected Governments of any of the territories about the legislation. There has been no investigation of the effectiveness of this law in relation to any of the territories. There has been no inquiry as to the economic and social consequences of the legislation on any of the territories.

I regret to say that the proposed law appears to be old-style colonialism at its worst: damaging legislation which has no cost for the legislating country but which will cause hardship to the victim countries, and does so not merely without representation but without consultation or full investigation. But it gets worse. The law is imposed in circumstances in which it is indisputable that the BVI, Cayman and Bermuda comply with all current international transparency and taxation requirements, such as those laid down by the OECD. This was recognised by the very full and generally rather critical December 2017 EU Muscovici report, which identifies which countries are uncooperative by hiding assets, and so on, and it does not include any of the territories.

With that, I end this reply to Professor Stephenson’s last response in our interesting debate on what is an important issue, no matter what your predilections may be.

This piece was originally published on The Global Anticorruption Blog