Who Gets To See What

On 22 November 2022 the European Court of Justice (ECJ) released a judgment that surprised many transparency advocates.[i] 

Until then, Luxembourg native Patrick Hansen had been best known as the CEO of a private aircraft company that had flown VIPs such as King Charles III and members of the Belgian royal family.

But Hansen’s lawsuit against Luxembourg’s business registry brought him rapidly into the public eye. His claim pushed back against new EU anti-money laundering rules, which required all companies to publicly disclose their owners. He said that his safety could be put at risk if the public learned which companies he owned.

The Court of Justice of the European Union ruled in his favour, saying in its ruling:

“…the general public’s access to information on beneficial ownership constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data…”

Soon after, publicly accessible beneficial ownership registers were being closed down to the public not only in Luxembourg, but all over Europe.

For many transparency campaigners, the European Union (EU) had appeared to be their biggest ally. Yet here was an EU court determining that an EU transparency directive had breached the European Convention on Human Rights. 

The consequences of this decision are yet to be fully determined. However, the EU is proceeding with a transparency agenda. On 14 February, the European Council added the British Virgin Islands (BVI), Costa Rica, the Marshall Islands and Russia to its list of “non-cooperative jurisdictions for tax purposes”.[ii] 

While the EU has the right to voice concerns about transparency, there does appear to be an element of cherry picking in its approach. When will the (notoriously opaque) US state of Delaware appear on the European Commission’s list, for example? It is extremely difficult to access beneficial ownership information in both this and various other US states. While the US has sought to address some concerns via its new Corporate Transparency Act (coming into force on 1 January 2024),[iii] the American Bankers Association has recently called the legislation “fatally flawed”.

What about Switzerland, too, where Article 271 of the Swiss Criminal Code has been widely interpreted to prevent persons investigating insolvencies from being able to access crucial information regarding the affairs of a company in a timely manner?

Or then there is Dubai, which the Organized Crime and Corruption Reporting Project (OCCRP) has described as “a top destination for illicit cash, and a preferred hub for money laundering, often through real estate.”[iv]

Luxembourg, the EU’s own onshore/offshore marketplace, was exposed by a whistleblower in 2016 who revealed that the country did tax deals with large corporations that cost EU countries billions in lost revenue.[v]

In the UK, which is soon to issue its second Economic Crime Plan, the Department for Business has said it will continue to keep Companies House as an open corporate register.[vi] This was welcomed by transparency campaigner and MP, Dame Margaret Hodge, who noted:

“Knowing the identity of people who own and control companies is the first and most important step towards a stronger economy. Sunlight is the best disinfectant to keep fraudsters, human traffickers, kleptocrats and oligarchs at bay.”

Yet it is often the case that fraudsters will use nominees to disguise their ownership of an asset, often using layered international structures, which can be difficult to pierce. This often renders unverified open registers useless as a means of identifying the corrupt, as those who comply are usually the honest anyway.

In the UK, owners of around 50,000 UK properties held by foreign companies remain hidden from public view, despite new transparency laws. The Register of Overseas Entities, launched in August 2022, was meant to reveal who ultimately owns UK property. But recent analysis by BBC News and Transparency International found almost half of firms required to declare who was behind them had failed to do so. In fact, companies owned through trusts (circa 4,000) are exempt from having their beneficial owner information made public on the register.

In the BVI, there is a duty on BVI-registered agents to verify the information they hold on file. Access to beneficial ownership information can be sought via the courts; alternatively, law enforcement and other authorities (including those overseas who have signed agreements with the territory), have access to beneficial ownership information via the BVI Beneficial Ownership Secure Search (BOSS), which came into force in 2017. This means that while the public may not have unrestricted access to beneficial ownership information in the BVI, when it is obtained it is likely to be accurate.

Conversely, despite the championing of the open register system in England and Wales, very little verification is currently done. Take the example of Spypriest Ltd, a company which has changed its name several times in quick succession, including to Scr00ge War Ltd and Zurvanism Ltd. The person of significant control is listed as Lord Truman Michael Spypriest and the company secretary was, at one point in time, Adolf Tooth Fairy Hitler.[vii] Lord Sikka, a Labour peer in the House of Lords, has also questioned the accuracy of the information of this entity[viii]:

“…what checks were made by Companies House to establish the authenticity of a director of Spypriest Limited who registered his name as "Lord Truman Michael Spypriest", and who listed a succession of implausible occupations in association with his registration; and whether they have taken any action against this individual for filing incorrect information.”

Companies House in the UK is currently a clear example of an open corporate register not fit for purpose. This system relies solely on the honesty of the person inputting the data. No person seeking to evade tax or defraud others is going to provide that information.

While the UK government has outlined plans to make the verification process more thorough via its forthcoming Economic Crime and Corporate Transparency Bill, it is unlikely to be sufficient unless the cost of incorporation is raised into the hundreds, if not thousands, of pounds. We have seen that the UK government often introduces well-meaning legislation, such as Unexplained Wealth Orders (which allow the authorities to seize suspected corruptly-obtained assets), but often these powers cannot be utilised due to a lack of funding.

The lack of consequences for financial criminals is evidenced by just how little financial crime is pursued by cash-strapped police forces. This has resulted in a rise of private criminal prosecutions. While this is a “hot topic” in asset recovery circles, unfortunately it is an option only open to the relatively wealthy.

I would suggest that proper verification of beneficial ownership information has more benefits than unverified open registers. Verification of beneficial ownership places enough of a spotlight that many fraudsters will be deterred from incorporating in a jurisdiction where it occurs.

My concern with the current political winds is that determined fraudsters will head to jurisdictions where the legal process for victims is not as helpful or as readily available as it might be “here”. This is a byproduct of our global economy, with value easily transferred via elements such as cryptocurrencies.

Could the proposed verified open corporate register of Companies House be a template for the future? Without adequate funding, I fear it will not be robust enough. Yet the recent overseas register of property, for all its current gaps, is a positive step in the UK. For too long, property ownership in the UK, especially in London, has been a murky world.

In London, it is likely that a percentage of properties have been purchased, in part, with undeclared or stolen sums, with structures used to disguise the true owner from relevant authorities (whether in the UK or abroad). There may have been multiple offences committed in the course of the purchase of these properties (such as the proceeds of crime and tax evasion) that affect multiple persons, companies and governments. Such economic crimes have an effect on everyone, not least in the form of lost tax receipts that require the rest of us to fill the gap via higher taxation.

However, I still don’t see why the public should have access to beneficial ownership information without limit, since there may be legitimate reasons for a corporate entity to own a property. I also have concerns about data leaks that expose personal financial affairs to the wider public. If privileged information is “leaked” and those behind the leaks (which may take place with stolen information) can do so without any consequences, does it set a dangerous precedent for the future? Do any of us have a right to privacy in such cases? The European Court of Justice seems to think so.

Some may see the moral dilemma that all practitioners in my field face. A search on the leaked databases at the heart of investigations such as the Panama or Pandora Papers is often a starting point for investigators of frauds, even if some of the information is historic or may now be inaccurate. 

So what is the solution? There doesn’t appear to be an answer that satisfies both those who wish to protect the right to privacy and the ferocious passion of those who believe that transparency is the best disinfectant for fraud and corruption (and may not stop at opening up corporate registers). The truth is that a balance needs to be found. 

I would advocate for a system where beneficial ownership information is properly verified, and necessarily backed by a small increase in incorporation costs to pay for it. I would also create a legislative framework that allows members of the public to apply for beneficial ownership information if certain criteria are met. That criteria might include having a judgment against a person they believe to be the UBO of a company and they are seeking to pierce the corporate veil for justifiable reasons.

Having an application process like this should be cheaper than a court process and would allow those seeking such information to be recorded by a central register (in case such requests are later to be deemed malicious). There must be some tangible reason for individual privacy rights to be discarded.

An alternative, though highly unlikely solution, would be to go to the route of the problem – harmonising the variable corporate and taxation rates between jurisdictions. Having a tax-neutral jurisdiction has benefits for joint ventures or startup companies who can reinvest profits and accelerate growth, and employ more people. But a worldwide corporate and personal tax rate is very unlikely to happen. Even if agreed, there will be issues of variable reviewing procedures and enforcement.

Footnotes:

[i] https://curia.europa.eu/jcms/upload/docs/application/pdf/2022-11/cp220188en.pdf

[ii] https://www.consilium.europa.eu/en/press/press-releases/2023/02/14/taxation-british-virgin-islands-costa-rica-marshall-islands-and-russia-added-to-eu-list-of-non-cooperative-jurisdictions-for-tax-purposes/

[iii] www.jdsupra.com/legalnews/the-corporate-transparency-act-4993770/

[iv] https://www.occrp.org/en/investigations/dubai-uncovered-data-leak-exposes-how-criminals-officials-and-sanctioned-politicians-poured-money-into-dubai-real-estate

[v] https://taxjustice.net/press/luxembourgs-intimidation-of-whistleblower-ruled-a-human-right-violation/

[vi] https://www.msn.com/en-gb/money/other/government-refuses-to-adopt-controversial-european-court-ruling-that-risks-playing-into-hands-of-tax-evaders/ar-AA17F0Ak

[vii] https://find-and-update.company-information.service.gov.uk/company/12411673/officers

[viii] https://questions-statements.parliament.uk/written-questions/detail/2022-01-26/hl5716

Shaun Reardon-John
Shaun has particular expertise in cross-border insolvencies, fraud, asset recovery and commercial dispute resolution. He recently acted on behalf of the joint liquidators in relation to two cross-border insolvencies that involved international investigations where investors lost in excess $50 million. Shaun also worked as part of a team in relation to an international Ponzi scheme involving a failed financial institution. In addition, Shaun has commercial arbitration experience involving two corporate parties regarding a breach of contract. He has also been instructed in relation to the enforcement of arbitration awards. Shaun studied at Cardiff University before training with the National Health Service and qualifying as a solicitor in England and Wales in 2008. Upon qualifying, he then moved to Eversheds where he gained a wealth of experience with fraud and commercial litigation. In 2012, he relocated to the British Virgin Islands where he worked for Martin Kenney & Co (MKS) until April 2019, when he returned to the UK. In August 2019 Shaun became a consultant solicitor for MKS from his base in England, where he continues to work for his clients on offshore commercial litigation.