Business secretary Vince Cable has announced his intention to create a public register of UK company ownership in a bid to tackle tax evasion and money laundering by shady corporate bodies. But don’t believe the hype just yet. The “tax efficiency” industry will simply see this as the latest loophole to be exploited.
It is about time the issue of unclear company ownership was addressed, at least. Some years ago, I co-authored a paper on money laundering in which a well known UK accountancy firm was complicit. The case involved political skulduggery and a series of shell companies registered in London and elsewhere.
These companies did not trade, but lots of money passed through their bank accounts. After a few transactions, the companies were liquidated and new ones were formed to obscure the money trail. For a fee, accountants and lawyers acted as nominee shareholders and stooge directors to conceal the identity of the owners and economic beneficiaries.
The above case is by no means unique, as the illicit use of shell companies and trusts has continued and can no longer be ignored. For example, an anonymous UK shell company part-owned the former Ukrainian president’s opulent palace. The same anonymous entities facilitate bribery, tax avoidance, drug trafficking and terrorist finance.
The battle against such practices is not aided by UK laws. Sixteen-year-olds can’t purchase alcohol and cigarettes, but they can become company directors. People who live outside the UK qualify too, making it very difficult to take action against errant directors. The checks are fairly superficial. Some 4,000 individuals appearing on international lists of alleged fraudsters, money launderers, terror financiers and corrupt officials were directors of UK registered companies in 2008 (the most recent data).
Humans and shells
Public companies in the UK, as defined by the Companies Act 2006, need to have at least two directors. One of these needs to be a “natural person” – a real human being – who can be a nominee or a stooge; the other director can be a company. This company need not be in the UK and can indeed be in a tax haven that does not reveal the names of shareholders and directors or require companies to publish any accounts. So the public has no way of knowing who it is dealing with.
Trusts are another cause for concern. Trusts generally refer to arrangements where A appoints B to manage his or her assets; C, D and E receive the income; F, G and H might receive the ultimate proceeds. There is no public register of these vehicles anywhere in the world and tax authorities are frequently left chasing shadows.
Trusts were most used by Baroness Thatcher, former UK prime minister, allegedly to avoid inheritance tax. Baron Elie de Rothschild, the guardian of the French branch of the famed Rothschild banking dynasty, built a complex network of offshore trusts and shell companies to stash away a fortune. Trusts have become the vehicles to enable companies to avoid asbestos-related liabilities.
Public register of company ownership
The key proposal is the creation of a public register that will identify the name, date of birth and nationality of individuals who ultimately own or control more than 25% of a company’s shares or voting rights in a company. This would extend to control of companies through trusts. In addition the government, subject to discussions with business, is considering prohibiting the use of one company as the director of another company, but with specific exemptions where the use of corporate directors is of higher value and lower risk.
Despite the government spin, the reforms are certainly not going to usher in some new era of corporate transparency and accountability. The 25% threshold can easily be bypassed through careful shareholding arrangements. It would be far simpler to say that all shareholders would be identified. Companies will still continue to act as directors of other companies, albeit with some restrictions. There will be plenty of loopholes for continuing with the shady business.
The government says it will be tough on rogue directors, but it has not allocated any additional resources for staffing regulatory agencies. The government has shied away from controlling the use of nominee or “front” directors who won’t even be required to name the parties pulling the strings. There will be no central register and no identification of the parties, assets, incomes and resources behind it.
The UK also has a legal and moral responsibility for its network of tax havens – Jersey, Cayman, British Virgin Islands and so on. But these places ask no questions and hold no useful information about their registered companies, their shareholders and directors. The UK government protects the economic interests of these territories, but the reforms mentioned above will not apply to them.
The UK proposals won’t worry anyone engaged in shady practices, but the establishment is worried in case political parties start listening to ordinary people. The Law Society, for instance, claims:
[The] proposals may damage the attractiveness and competitiveness of the UK as a jurisdiction for the incorporation of companies. We believe that the effect of introducing the proposals will be to drive investors to form companies outside the UK and that the UK could therefore lose a considerable amount of business as a result.
A partner from accountancy firm Deloitte chipped in with the claim that a public register would discourage foreign investors in UK property and “over-expose the financial position of potentially vulnerable individuals such as children who are the beneficiaries of trusts, or indeed any beneficial owner who has valid reasons to want to protect their privacy”.
These quotes represent a new low, as economic elites invoke the interests of children to defend the privileges of their wealthy clients. How about sparing a thought for millions of children who go without food, healthcare, education, shelter and clean water because corporations and wealthy individuals use shell companies and trusts to avoid taxes?
It would have been more honest to say that they don’t like any improvement in public accountability because it would make it difficult to sell tax avoidance, opaqueness and regulatory arbitrage and thus result in lower profits for accountants and lawyers.