Regulating Beneficial Ownership Learning from History Ex ante analysis in UK 2002

1
Regulating Beneficial OwnershipLearning from
History Ex ante analysis in UK 2002

• John Howell
• John Howell Co Ltd
• UK
• www.jh-co.com

2
Structure of Talk

• The 2002 Study.
• Scoping the EU Study.
• Lessons learned.
• NB These slides only cover Part 1

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Origins of UK Interest

• UK Performance and innovation unit study (June
  2002).
• Recovering the Proceeds of Crime, use of
  disclosures and abuse of ease of incorporation.
• Asset Recovery Agency established.
• Misuse of Corporate Vehicles OECD 2001.
• FATF et al.

4
2002 - The Mischief (1)

• Companies play a useful role as limiting
  liability encourages enterprise
• But criminals exploit anonymity and ease of
  incorporation
• Able to keep real ownership secret
• Better disclosure regime needed to tackle
  (especially) serious organised crime gangs

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2002 The Mischief (2)

• Criminals can control companies without owning
  them (legally or beneficially).
• Shadow directorship rules ineffective.
• Disclosure regime neither supports inquiries into
  ownership, nor produces data that are complete,
  current or avoid tipping off.
• Poor data and search systems.

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UK Proposals

• Five Two cumulative options identified.
• Small company details (for LE only) to all
  company real time data (fully public).
• Variables soon multiply.
• Substantial effort just to define the initial
  categories (good early work by HMT) and...
• ..complex iterative process to get to watertight
  options.

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Hand Out 1

• Summary of Options

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Base Case 1 - Context

• Lots of types of companies with lots of special
  legal characteristics (for perfectly good
  reasons) which create weak spots.
• UK company formation very easy, quick and cheap
  (online, immediately for 35).
• Good for UK plc and UK lawyers (40 of
  international contracts under UK law).
• Favourable tax regime.

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Base Case 2 Why UK Ltd?

• Company formation agents there to help 10 of
  companies owned by overseas interests.
• Dont have to be registered as a business in UK
  to do business, though you must comply with rules
  of doing business (data, tax).
• UK obligations usually not extraterritorial.

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Base Case 3 - Ownership

• Legal owners are the members and the legal owner
  of a share is the shareholder or warrant holder.
• Natural or legal, holding in full or in part.
• Shareholding under contract by nominee.
• Legal and beneficial ownership often separated.
• Beneficial ownership is not a share class
• Legal definition a person who holds or is
  entitled to a beneficial or equitable interest in
  property, such as a person for whom a trust is
  created.
• armonisation a nightmare

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Base Case 4 - Control

• Control is arguably more important than ownership
  of whatever type (smokescreens).
• Inland Revenue, FSA, Take Over Code all dwell on
  control, but study followed fact and degree of
  changes in ownership in percentage terms.
• Did not determine way to define beneficial
  control but highlighted key role of directors,
  including nominee directors.
• Influential beneficial owners are shadow
  directors.

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Base Case 5 - Disclosures

• Duty to (i) disclose to Companies House (ii)
  keep a register, with respect to both
  shareholding and director events. De facto
  disclosure via stock transfer forms.
• No Section 212 powers as with PLCs.
• Companies House a registry checks a filing is
  made but little content analysis.
• Prosecutions rare and very public.

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Base Case 6 Searching Data

• Companies House Data publicly available for a fee
  online.
• Includes director disqualifications.
• Substantial data bases in UK Experian, DB.
• Used by LE but not linked (though intelligence
  might be doing so).

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Base Case 7 Investigative Powers

• Ownership and control investigation powers mainly
  in CA 1985 S442, S444.
• S2 CJA 1987.
• NCIS, National and Regional Crime Squad, 53
  constabularies, HMCE, IR, DWP, FSA.
• PACE 1984, Terrorism Act 2000.
• Civil Powers Anton Pillar order.

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Story So Far

• No gatekeepers, no due diligence.
• Automatic incorporation without ID.
• S352 ignored nothing to pinpoint control.
• Tipping off risk, offshore trails problem.
• Open record creates public order risk (HLS).
• Tracing BO takes up vast amount of time.
• Lack of FIs.
• Poor data.

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Making the Options Workable

• Need to ensure the options could have intended
  effect intense discussion.
• Duty to declare that they are not BO or else
  nominate Next in Line not end BO.
• Compare disclosures to spot discrepancies.
• Practical smurf-proof percentage threshold.
• Movements both ways.

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Lesser Options

• One line certification.
• When thresholds passed - 3 absolute (and
  movements of 1 for Option 1c).
• Disclosure made to company (Option 1) or to
  Companies House (Option 2) via Annual Return.
• Option 3 requires timely disclosures to Companies
  House.

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Greater Options

• Option 4 Database with ownership look-up.
• Option 5 Adds directorship data.
• Both available to LE on inquiry.
• Open Register
• At company (Option 1) or Co. Ho. (others).
• Information campaign.
• Appropriate enforcement regime.

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Establishing Benefits and Beneficiaries

• Who would benefit and how?
• ? Value of data and access by option.
• Effects and preconditions for effects.
• Criminal and civil initiative.
• Secondary (wider crime reduction) effects and
  their sensitivities.
• Wide range of beneficiaries.

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Confirming Benefits

• Everybody thought the proposals would help by
  increasing capacity.
• More, and more complex, investigations.
• More success time frame, evidence quality.
• More data leads, evidence.
• Data mix n match proactive policing.
• Secondary effects deter advisers, press lesser
  charge, intelligence led approach.

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Benefits to Industry

• Open Register on balance more useful.
• Safer environment from data sharing.
• Small, vulnerable companies.
• Cost savings from standardised data, CDD.
• Maximising shareholder returns.
• NB some LE wanted closed register to preserve
  illusion of data advantage and public order
  (dubious given other powers).

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Serious Arrestable Offence

• Little chance of automatic detection of false
  reporting.
• Deterrent effect of potential arrest, search
  especially on advisers.
• Increased willingness to point finger.
• Light touch regime for petty infringement.
• Serious consequences where intent involved.
• Sanctions regime key in getting to benefits.

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Judging Benefits - 1

• Too complex to get to precise values.
• Hierarchy of benefits and common factors.
• User estimates of orders of economy.
• First Order (10) basic efficiency gains.
• Second Order (15-25) complexity/scope
• Third Order (30-50) strategic change.
• See Handouts 2 and 3

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Judging Benefits - 2

• Identify areas where benefits accrue.
• Intelligence, investigation, evidence gathering,
  deterrence.
• How would industry use open system?
• Small changes in large numbers.
• Stop migration from petty to serious crime.
• Sensitivity to tax regime, data quality.

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Costs

• Direct, compliance, effect on sales, competition,
  unfair costs.
• Easier in that many of them simple transaction
  processing costs.
• Many variables to cost and combine.
• Model based on Companies House costs.
• Key point how many BOs?
• See Handout 4.

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Beneficial Owners

• 1.1 million companies have capital lt 100.
• 3.5 shareholders per company.
• Most companies are husband and wife.
• 300,000 at risk (5 20 chance).
• 125,000 beneficial owners.
• Few costs to most companies and shareholders as
  no changes after initial declaration (single box
  tick compliance).

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Public Order Exemption

• Threat from extremists (AQ, animal rights).
• Need to focus on threats to life (Rushdie).
• Simple stand alone PC system for rest.

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Effects of Non-Compliance

• Need for resilient system.
• Non-compliance allowed for in sensitivity
  analysis by reducing order of economy.
• Hits closed register options hardest.
• See Handout 5.

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Recommendations

• Strict CBA Option 3 Open
• Functionality Option 5 Open
• Resilience Options 3 or 2 (Open)
• Camels Nose Option 2
• Meet OECD Option 3
• Look at semi open system before going to closed
  system.

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OUTCOME

• REVENGE
• OF THE COUNTERFACTUAL