05 Oct 2016
KYC360 examines the UK’s implementation of the PSC register, and the additional steps the UK – and other countries – are taking to combat financial crime.
The international agenda on corporate transparency has shifted dramatically since the release of the Panama Papers in April 2016. The leak of Mossack Fonseca’s cache of documents has highlighted, in particular, the urgency in tackling the issue of beneficial ownership/control of opaque legal structures which are too often exploited to conceal and launder funds across borders. The Financial Action Task Force (FATF), the international body which sets AML/CFT standards, has itself acknowledged the impact of the Panama Papers in shining a spotlight on the matter of beneficial ownership, describing it as, ‘a previously rather technical issue, with little awareness outside FATF circles’.
In certain respects, not least beneficial ownership, the UK is an international leader in the implementation of measures to counter money laundering and terrorist financing. At the same time, however, serious weaknesses have been identified in how the country intends to combat domestic and cross-border corruption. These weaknesses are in large part due to managing the often competing pressures and obligations from, for example, national and international regulators, Crown Dependencies and Overseas Territories, EU legislation, international investors, the guidance and standards of international bodies such as the OECD and FATF, and civil society and pro-transparency organisations.
The UK has recently taken a major step in implementing the Persons of Significant Control (PSC) Register, primarily the result of the 2013 G8 agreement to make it more difficult to use corporate structures to launder money. The register also anticipates the provisions of the EU’s 4th Anti-Money Laundering Directive (4th AMLD), which are due to be transposed into national law in all member states by mid-2017 (see our special report on this topic).
Since 6 April 2016 all UK companies (including dormant ones) have been required to identify and record their owners/controllers under Part 21A of the Companies Act 2006. From 30 June 2016, companies have been submitting a ‘confirmation statement’ to Companies House, providing the details of their PSCs. The confirmation statement replaces the Annual Return, which listed shareholders, but not necessarily those individuals with beneficial ownership/control. The 4th AMLD requires beneficial ownership registers to be available to competent authorities (e.g. the UK’s FIU), obliged entities (e.g. banks, financial institutions), and any person or organisation that can demonstrate a “legitimate interest”. The UK has gone further and is making the information available to the public, the first G20 country to do so.
An individual meeting one or more of the following conditions is deemed to be a PSC:
- holds, directly or indirectly, more than 25% of the shares in the company;
- holds, directly or indirectly, more than 25% of the voting rights in the company;
- holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
- has the right to exercise, or actually exercises, significant influence or control over the company; and/or
- exercises significant influence or control over the trustees of a trust or partners of a firm, where that trust or firm is not a separate legal entity, but where those trustees or partners would otherwise meet the conditions above.
The phrasing of the conditions has purposely been kept broad to capture the notion of control (or, “who actually runs the company?”). Rights to exercise significant influence or control could include non-directors who regularly direct the board to vote in a particular way, or someone whose recommendations are nearly always adopted by shareholders with the majority of voting rights. The requirement appears to successfully account for those individuals making important decisions, but who may not be a director or shareholder. For instance, the founder of a family business who holds a small proportion of shares, but exercises considerable influence over other shareholders, would most likely be obliged to register as a PSC.
The penalties for non-compliance, are, on the face of it, serious. PSCs are required to notify a company within a month of becoming a PSC, and companies have an ongoing obligation to maintain the register and take reasonable steps to verify PSC information. Failure to do so is a criminal offence and punishable by an unlimited fine and/or up to two years’ imprisonment. Until recently, Companies House has generally commenced striking-off proceedings for companies which have failed to submit Annual Returns on time, rarely bringing prosecutions. But Companies House has, independent of the PSC register, become increasingly litigious in the past few years. Coupled with these new unlimited fines and the threat of two years’ imprisonment, those who were hoping to skirt the obligation should be given pause for thought.
There are two obvious factors which will determine the efficacy of the register. The first is the reliability and accuracy of the supplied information – whether companies interpret the conditions correctly in the first place; and to what extent they verify the information they are provided by the PSCs themselves. The second factor is how the condition of exemption will be applied, and whether PSCs will be excluded where the justification is genuine (i.e. where disclosure would ‘expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation’). KYC360 expects legal challenges in this regard, which are likely to revisit the right to privacy arguments in the July 2016 case launched by ‘Mrs B’ in France challenging public access to the French trust register (see our special report here).
The success of the PSC register as a driver of transparency also rests on whether other countries follow suit, and then whether they are prepared to make beneficial ownership information available beyond their own borders. All indicators are that international bodies such as the EU, OECD and FATF will take the lead in overseeing the interlinking of such registers – but there is clearly a long way to go.
The May 2016 Anti-Corruption Summit in London saw France, the Netherlands, Nigeria and Afghanistan commit to launch their own public registers of company ownership. According to a UK government statement, Australia, New Zealand, Jordan, Indonesia, Ireland and Georgia also agreed to take the initial steps towards making similar arrangements. While these steps are tentative in some cases (‘New Zealand commits to exploring the establishment of a public central register of company beneficial ownership information’, according to statement issued by the country), it is certainly a move in the right direction. For the countries that have not signed up, they will undoubtedly be facing pressure to do so.
A coalition of international organisations, including Global Witness, OpenCorporates, Open Contracting, and Transparency International, is also creating a global register of beneficial ownership, which is expected to go live later in 2016. The information available on such a register is clearly dependent, however, on countries providing access to this data in the first place.
The resolve to exchange beneficial ownership/control information does appear to be strengthening, too. In April 2016 then UK chancellor, George Osborne, announced that the UK, along with Germany, France, Italy and Spain, had initiated an agreement for the automatic exchange of information on beneficial ownership. To date, 46 jurisdictions have signed up to the initiative, including three of the 14 British Overseas Territories – Anguilla, Bermuda, the Cayman Islands – and the three Crown Dependencies of Guernsey, Jersey, and the Isle of Man.
FATF and the Global Forum on Transparency and Exchange of Information for Tax Purposes are also due to make initial proposals by October 2016 on ways to improve the implementation of international standards on transparency, including beneficial ownership information and its international exchange. For its part, the European Commission has committed to report by June 2019 on the conditions and technical specifications and procedure for ensuring the interconnection of beneficial ownership registers of companies and trusts in EU member states, as set out in the 4th AMLD.
The UK has also committed to transparency measures in property acquisition and public procurement. According to government figures, between 2004-2014 over £180m worth of property in the UK has been investigated by UK law enforcement as suspected proceeds of corruption; 75% of these transactions used offshore vehicles. The government has, as a result, committed to obliging foreign companies owning property in England and Wales to disclose their beneficial owners. The government is also considering the case for requiring any company wishing to bid on a public contract to provide details on their beneficial owners. In 2013, public procurement accounted for around 33% of public sector spending; enhanced transparency is aimed at ensuring best value for money, fair treatment of legitimate businesses, and prevention of money laundering through public contracts.
Adding to the UK’s image as leader in the fight against corruption, it will host a new International Anti-Corruption Coordination Centre (IACCC) in London, due to open in April 2017. The IACCC has not as yet set out its resourcing plans, and detailed terms of reference have yet to be established, but it is due to work with law enforcement agencies in the US, Canada, Australia, New Zealand and Switzerland. The IACCC will be part of the UK’s National Crime Agency, and will be located with the International Corruption Unit (ICU), itself formed in 2015 and funded by the UK’s Department for International Development (DfID).
The above measures are clear indicators of the UK government’s commitment to bolster its AML/CFT regime in a context where the EU and other international bodies are stepping up the fight against corruption. There are, however, several concerns which undermine UK and broader international efforts to meaningfully address financial crime.
At odds with the UK’s claim to be leading the way in transparency, it was recently announced that Companies House had proposed to reduce the amount of time that records of dissolved companies are retained, from 20 years to six. The move comes amid increasing numbers of complaints from companies, and reportedly politicians, that retention of the records breaches data laws, the constant counterbalance to transparency. If the rules are indeed changed, over 2.5m company records could be wiped from the database, which will frustrate the work of law enforcement, journalists, and the compliance sector in detecting and preventing white collar crime.
The UK government has also been reluctant to require trusts to disclose beneficial ownership, as described in our special report, and has been criticised for u-turning on its commitment for Crown Dependencies and Overseas Territories to make ownership registers publicly accessible.
In respect of the IACCC specifically, there are concerns that locating the centre alongside the ICU may result in inefficiencies if not properly managed. Theoretically distinct in remit – the ICU investigates corruption and bribery cases which have a link with the UK, while the IACCC is intended to have a broader remit – one can imagine that the competition for cases will need to be carefully handled.
Finally, a wider concern is the US’ absence from any agreements to enforce or share beneficial ownership registers. One of the world’s largest economies, it has effectively become one of the largest offshore centres through states such as Wyoming, Nevada and South Dakota offering high levels of secrecy. Earlier this year, President Obama’s administration announced a legislative proposal to Congress which would require beneficial ownership information to be reported to the US Treasury’s Financial Crimes Enforcement Network (FinCEN) which could, in effect, become similar to a centralised beneficial ownership register. However, the efficacy of such a move will depend on the definition of beneficial owner, whether any obligation to disclose information would apply retrospectively, and how that information will be made available to law enforcement in other jurisdictions.
Broadly, then, the UK has taken concrete steps to act on its commitment for transparency by introducing, for example, the publicly accessible PSC register. However, test cases over the next few years will establish the extent to which individuals who really want to hide their control of a UK company can do so. The reluctance to seek beneficial ownership information for trusts, and the potential removal of Companies House information on dissolved companies, threaten the country’s image as a leading proponent of transparency.
There are also concerns at an international level. Around 600 country commitments were made at the London anti-corruption summit in 2016, but with no overarching framework such as FATF or the UN to oversee implementation, there may be less will and accountability to ensure the hundreds of promises are kept. The efforts of a minority of countries in adopting effective AML measures, such as publishing data on genuine beneficial ownership, will be seriously undermined if other countries do not follow their lead.
 Speech on the importance of the FATF Global Network, Speech by David Lewis (FATF Executive Secretary), 12 April 2016: www.fatf-gafi.org/publications/fatfgeneral/documents/MONEYVAL-speech-importance-of-FATF-Global-Network.html
 PM hosts major summit as part of global drive to expose, punish and drive out corruption, 12 May 2016: www.gov.uk/government/news/pm-announces-new-global-commitments-to-expose-punish-and-drive-out-corruption
 New Zealand Country Statement at Anti-Corruption Summit, London 2016: www.gov.uk/government/uploads/system/uploads/attachment_data/file/522722/New_Zealand.pdf
 How a global register of beneficial ownership can help end secrecy, Open Contracting, 4 April 2016: www.open-contracting.org/2016/04/04/open-contracting-beneficial-ownership/
 Countries committed to sharing beneficial ownership information, updated 2 September 2016: www.gov.uk/government/publications/beneficial-ownership-countries-that-have-pledged-to-exchange-information/countries-committed-to-sharing-beneficial-ownership-information
 OECD Secretary-General Report to G20 Finance Ministers, 23-24 July 2016 (Chengdu, People’s Republic of China): www.oecd.org/ctp/oecd-secretary-general-tax-report-g20-finance-ministers-july-2016.pdf
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