A number of legal and corporate vehicles including companies, trusts and foundations
allow businesses, investors and entrepreneurs to share and limit risk while managing contractual relationships and meeting their commercial needs.
However corporate vehicles can also be used to facilitate tax evasion and hide money laundering as well as other illegal actions or prohibited transactions through opaque structures and deceptive methods which conceal the true ownership.
What are Beneficial Owners?
The legal term “Beneficial Ownership” refers to property rights belonging to an individual or company while on official documents the property title legally belongs to another. The beneficial owner enjoys the benefits of ownership although someone else’s name is on official documents and owns the title and use of the property. The beneficial owner or owners then have direct or indirect voting power; control and influence over transactions and decision-making regarding the company and its shares. This is deceptive and a misuse of legal entities.
The problem with misuse of legal entities is that there are a countless number of ways to hide the identity of the beneficial owner including incorporating in a foreign jurisdiction. By formulating the corporation, association or trust in a foreign jurisdiction, authorities are compelled to undertake the complex and difficult process of cross-border investigation. The legal title of a company is not always the same as the name of the people who actually control it – the beneficial owners. A company can be listed under the name of a different trust, foundation or company; under the name of “Nominee shareholders” or anonymous “bearer shares” can be used. All these methods make it extremely difficult and even impossible to trace corporate relationships of the company back to the actual power-bearing beneficial owner.
Legal Regulation of Beneficial Ownership
FATF or the Financial Action Task Force recommends that countries ensure that correct information about the true beneficial owners of trusts, foundations and trusts is registered accurately; adequately; in a timely manner and that the information be available to authorities. However this recommendation is usually not heeded and corporate registries across the globe rarely record information on beneficial owners. Registries in most countries tend to rely on the banks and other professionals including lawyers; law enforcement and company service providers to do their due diligence. This naïve reliance on professionals involved in the registration process has not proved effective in preventing beneficial owners from masking their identity. Companies are still registering under the name of trusts, nominees and even people who have long been deceased. This results in corruption often involving anonymous corporate structures and shell companies – inactive companies used for financial gain (Global Witness 2013).
Stringent regulation is needed to ensure that accurate information is collected and verified on the true identity of company owners, trusts and other corporate vehicles. This information must be of public record and made available in corporate registries.
Latest Developments in Regulation of Beneficial Ownership
- In December 2014 the European Union approved an update to the Anti-Money Laundering Directive which would create a register of beneficial ownership information throughout the EU. However the register information would only be completely available to government authorities. Members of the public would have to pass test of “legitimate interest” to qualify for access to the information.
- The UK has recently taken action and established new transparency standards for corporate taxation. Following the G8 Summit of 2013 the UK introduced the Small Business, Enterprise and Employment Act (SBEE) which came into force in 2015. The new Act aims to increase transparency of UK company ownership and prosecute those who abuse corporate legislation.
- In July 2016 the UK published the world’s first fully open register of beneficial ownership. With this information businesses will know who they are dealing with and corporate corruption will be reduced. This remarkable open data initiative will have a great impact on the global corporate world.