The future’s bright, the future’s transparent

The Futures Bright

There are powerful forces at work to make transparency in beneficial ownership a key priority. This stems primarily from the beneficial ownership policy adopted by the G20 summit in Brisbane, Australia in 2014, work undertaken by the Financial Action Taskforce (FATF) and the European 4th and 5th Money Laundering Directive. Beneficial ownership policy is now being introduced in many Countries around the World this including open access to public registers of beneficial ownership. The Law Library of the US Congress has noted from surveys undertaken that ‘Countries that have beneficial ownership registration laws in place view public beneficial ownership registration as an anti-money laundering tool that works in alignment with other legal mechanisms, such as access to company information, risk assessment, government monitoring and law enforcement’.

So on the face of it there seems to be a rolling tide towards public disclosure of beneficial ownership. However the key question is whether this will actually make a difference to the estimated USD two trillion a year of value that is ascribed to the Global Money laundering problem, which represents some 2.5% of Global GDP. A consideration of some headline statistics would suggest that public disclosure really would make a difference in a way that CRS (the exchange of information process between Governments established by the Global Forum) currently cannot.

The OECD reported to the G20 in 2017 that the CRS process had raised approximately USD 85 billion to date. There will be substantially greater value to be raised through CRS taking effect in many more Countries in 2018 and beyond but this sum – whilst in itself a large number – is less than 0.2% of Global GDP and is only approximately 4% of the Global Money Laundering problem. The OECD reported on the other hand that approximately USD 193 billion was lost in the EU in 2017 through VAT fraud. These facts are consistent with a conclusion that over the last 10 years or so the cross-border loss of taxation through money laundering activities is now substantially less than the loss of taxation through ‘in Country’ money laundering activities.

Essentially the developed Countries around the World have been very successful with their own national Taxation Authorities, often through their own CFC legislation, in enforcing cross border tax compliance and attention should now be more focused in the developed World on VAT and ‘in Country’ tax fraud.

So where exactly is the Global money laundering gap? and going back to the original question: how does this gap relate to the International debate on public beneficial ownership registration?

This is where the work conducted by organisations such as the Extractive Industries Transparency Initiative (‘EITI’) is worth looking at. The EITI is a Norwegian Organisation that is the global standard to promote open and accountable management of oil, gas and mineral resources. The EITI has 52 Countries as Members including many in the EU and Africa. The EITI seeks to address the key governance issues of the oil, gas and mining sectors and has chosen as its policy centre piece, the public disclosure of beneficial ownership. The EITI is important also because for most developing countries, natural resources are by far the most important assets of these Countries and corrupt exploitation of natural resources will perpetuate poverty and prevent a path to happiness and prosperity for the people in developing Countries.

The EITI has noted that developing Countries lose USD 1 trillion each year ‘as a result of corrupt or illegal deals, many of which involve anonymous companies. In 2013, the Africa Progress Panel suggested that the Democratic Republic of Congo (DRC) in the period 2010–2012 lost at least USD 1.36 billion from five mining deals hidden behind a structure of complex and secret company ownership. According to DRC’s EITI Reports, this is about the same as the country’s average annual revenue from oil, gas and mining in the same time period.’

So the USD one trillion lost annually by the developing Countries through money laundering activities represents probably the single largest contributor to the Global money laundering problem. The EITI have noted that disclosure of beneficial ownership ‘will help lower the risk of financial misconduct, help improve the investment climate, reduce reputational and financial risks, prevent corruption and illicit flows, improve the rule of law, increase trust and accountability and enhance revenue collection.’

If disclosure of beneficial ownership was introduced it would then be very interesting to discover where this business is being managed from, by whom and using what type of corporate entity. It would be extremely unlikely if any of this money laundering business from the developing Countries would be found in Jersey or the Crown Dependencies. Jersey for example has very detailed money laundering Legislation that has been in place for almost 20 years. Consequently it is not surprising that Jersey and other Crown Dependencies have been at the forefront in the global war against financial crime and Jersey has been rated by the Global Forum as being fully ‘Compliant,’ one of only 22 Countries in the World to so far receive this rating. So where is this dirty business? Only public disclosure of beneficial ownership will reveal these secrets.

The money laundering problems of the developing Countries has also been acknowledged by the Global Forum who noted in it’s 2017 annual report that it would take several years for the less developed Countries to join the CRS system. This would primarily be due to poor financial infrastructure in these Countries and corruption within Government. Consequently the main tool that would seem to be currently available to combat the USD two trillion global money laundering problem is not CRS that has been much heralded by the OECD and implemented in developed Countries, but instead the public disclosure of corporate information that would disclose the corrupt beneficial owners living in Countries not within the CRS network. The other main tool would be a tightening up by the Central Banks of the Banking system to more thoroughly vet and monitor Banks operating in non CRS Countries.

In conclusion, based both on the statistical evidence and the research and views expressed by organisations and bodies such as the EITI, the single most positive contribution that can be made to the Global money laundering problem would be to introduce global public disclosure of beneficial ownership in a manner that has been prescribed very carefully by organisations such as EITI. But then as originally pronounced by the British Prime Minister Benjamin Disraeli and later made popular by Mark Twain, ‘there are lies, damned lies and statistics’. I don’t think the global money laundering statistics are lying on this occasion and if the Global Forum, that is the definitive authority on this subject, decrees that beneficial ownership should be made public then in my view – the future’s bright, the future’s transparent.

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image credit: Martin Widenka @widenka