Wednesday, 19 June 2013

Beneficial Ownership and American Exceptionalism

"Russia, Canada and the US despite the encouraging language were not up for public registries and full disclosure of beneficial ownership. Competition, costs, and privacy concerns, not to speak of the UKs own position, arguably along with the US (Delaware), the weakest of the G8, must have been a handicap." (Geoff Cook, Jersey Finance)
The first move towards transparency must be beneficial owner registers kept by a regulatory authority, even if those are not public. It is interesting to note that David Cameron acknowledges that the UK business community would be opposed to a public registry unless other countries also conformed to that standard, but in the meantime, a registry supervised by a regulator, would be a good step in the right direction..
While Deputy Tadier continues to criticise Jersey, it should be noted that at present, Jersey, the Isle of Man and Guernsey each have a register of beneficial ownerships regulated by their respective Financial Services Commissions, and with firm requirements to check the authenticity of the ultimate beneficial owners of companies - customer due diligence, CDD, and apply a risk rating to them, as well as reporting any suspicious transactions.
For all David Cameron's rhetoric, the UK does not have this. It has no regulated central registry of beneficial ownerships. Cameron has pledged that this will be forthcoming, although since then, he has been hedging about whether it is initially made public or not. So in terms of requirements, the UK has a certain amount of catching up to do.
At the moment, Company A in the Jersey could be owned by an onshore parent, say Company B, where the identity of that company's parent may well be a complete mystery. There is no central registry of beneficial owners in the UK, and no requirements for due diligence.
The situation is even worse in the USA. There is no central registry of beneficial ownerships under State regulatory authorities. As the Financial Times notes "Companies registered in Delaware do not pay income tax there unless they have operations in the state. The disclosure rules when setting up a corporation or partnership - which costs anywhere from $180,000 to $75 per year - are simple, with the main constraint being the provision of a "natural person" to be the contact for that entity in case law enforcement officials come knocking on the door."
Recently, 19 former prosecutors and activists sent President Obama a letter urging greater transparency. They wanted disclosure of beneficial ownerships of these corporations which the prosecutors say are ways for "corrupt politicians, tax evaders and organized criminals to hide and launder stolen money."
But this is a long term problem. Back around 2000, Senator Carl Levin of Michigan first proposed legislation for Congress which would require states to disclose beneficial owners of corporations set up in their state. It has come back, and has failed three times since 2000.
Unlike Jersey, where suspicious transactions have to be reported to the authorities, and a central register of beneficial owners is kept, an Immigration and Customs Enforcement investigation in the USA was hampered in tracking some 800 dummy corporations - incorporated in the USA - and for which it suspected there were hundreds of millions of dollars of suspect money. The reason? The states where the corporations were registered had no requirement for owners to be identified. As a report notes:
"Reports were offered showing $14 billion to $18 billion of suspicious transactions going through U.S. shell corporations. The U.S. Department of Justice has fielded thousands of requests from our international partners for information on who owns corporations suspected in money laundering and other fraud. We cannot help them because we don't know who owns thousands of these corporations set up in the U.S."
Automatic exchange of information sounds like a good idea, and is being heavily promoted by David Cameron, but it falls down when confronted with shell companies formed in states like Delaware or Nevada.
Banks in the United States cannot at present even provide the kind of data the United States asks of Swiss Banks, because there is no legislative requirement to collect that information. And there is no way you can exchange information on a Delaware holding company if you cannot say who the beneficial owners are.
Unless the bigger players like the US can come on board with the drive towards a beneficial owner registry, all the dodgy money will migrate there, as indeed much already has. To date, the US government has struggled to pass any measures through Congress, and the omens are not good for the future.
There's a wonderful exchange in Yes Prime Minister
Hacker: We must fight for the weak against the strong.
Sir Humphrey: Then send troops to Afghanistan to fight the Russians.
Hacker: The Russians are too strong.
Sir Humphrey: What was that about law and justice?
I'm reminded of this when I hear David Cameron "summoning" the Crown Dependencies, and in part asking for something they already have, and the UK does not - a registry of beneficial ownerships. Of course it is terribly easy to summon small Islands to the Conference table and sound off about transparency, but what about America? I can imagine a fly on the wall might hear this:
Cameron: We must demand transparency and a register of beneficial ownership, and force it through. We must have fair taxation.
Cabinet Secretary: Then tell President Obama.
Cameron: The Americans won't take any notice of me.
Cabinet Secretary: What was that about fair taxation?
As the Guardian noted:
"Cameron wanted a couple of other G8 leaders to join him in pressing for public registries, but in the end none did so. All the G8 would agree to was that "some basic company information should be publicly accessible".
"Who, therefore is to blame for the summit's lack of real progress? Clearly, the G8 countries that put up strong resistance to change need to be named and shamed. This list includes the United States, where the tiny state of Delaware is the tax haven of choice for shell companies."
And Gavin Hayman noted:
"The credibility of this depends on the ability of the White House to advance legislation," said Hayman said. "The U.S. has promised this kind of thing before ... and not a lot happened."

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