At the recently concluded G8 Summit at Lough Erne, Northern Ireland, leaders of the G8 economies agreed new measures to clamp down on money-laundering, tax evasion and tax avoidance, including the G8 Action Plan to prevent the misuse of companies and legal arrangements (the "Action Plan").
The Action Plan
The agreed Action Plan sets out eight core principles designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities. Those core principles are that:
- companies should know who ultimately owns and controls them and that information should be adequate, accurate, and current;
- beneficial ownership information should be accessible onshore to law enforcement and tax authorities;
- trustees of express trusts should understand the beneficial ownership of the trust;
- authorities should understand the risks to which their anti-money laundering and anti-terrorism financing regimes are exposed and implement effective and proportionate measures to target those risks;
- the misuse of financial instruments and of certain shareholding structures which may obstruct transparency, such as bearer shares and nominee shareholders and directors, should be prevented;
- financial institutions and designated non-financial businesses and professions should be subject to effective anti-money laundering and anti-terrorist financing obligations and be required to identify and verify the beneficial ownership of their customers;
- effective, proportionate and dissuasive sanctions should be available for companies, financial institutions and other regulated businesses that do not comply with their respective obligations, including those regarding customer due diligence; and
- national authorities should cooperate effectively to combat the abuse of companies and legal arrangements for illicit activity.
Many of the principles repeat measures or initiatives already in force or under way, particularly in Europe under the Money Laundering Directives. Principles 1, 3 and 5 are however of particular note: if implemented, aspects of these may result in new and material changes to the way corporate structures are administered in many jurisdictions.
- The first principle requires that the beneficial ownership information held by companies is "adequate, accurate, and current". This is in line with a draft of a 4th European Anti-Money Laundering Directive. Indeed, European companies are already familiar with the requirement to demonstrate beneficial ownership in the context of existing anti money-laundering (AML) checks required when opening bank accounts or engaging professionals. In addition, listed companies in developed markets will typically have a program to ascertain beneficial ownership so as to be engaged with their owners for corporate governance reasons. However the requirement that the information be kept "current" will impose practical difficulties (and entail perhaps considerable expense). Regulators will also have to decide how hard companies must press if they reach an entity organized in a jurisdiction where the information is not available and what the consequences for shareholders will be for non-disclosure.
- The third principle requires that trustees of express trusts should understand the beneficial ownership of the trust. This sounds simple in practice but difficulties may arise where there are sub-trusts. Changes in the law may be required to compel disclosure by beneficiaries of such arrangements.
- The fifth principle appears on its face to say that the use of nominee shareholders and nominee directors should be prevented. It is common, and indeed necessary for ease of transferability of widely held equity and debt issues (both in the US and Europe), for listed companies to have large numbers of nominee shareholders on their registers. Retail holdings in particular are often held this way to reduce the costs of investment through pooled registered shareholdings. If all personal and corporate shareholdings (of whatever size) are required to be individually registered there are obvious implications both in terms of the administrative burden placed on companies, the likely increased cost to shareholders and the efficient operation of securities markets and timely completion of market transactions.
The experience of the UK government with the tax disclosure treaties with Lichtenstein and Switzerland suggests that substantial amounts of money have been hidden from tax authorities through complex "offshore" arrangements (tax evasion), and some of that money may have been "earned" illicitly (money-laundering). The issue is whether the measures announced by the G8 will be any more effective in countering either tax evasion or money-laundering than the existing FATF arrangements against money-laundering, and the existing exchange of tax information treaties.
Questions also arise as to the interaction between the G8 measures and the legitimate rights of citizens to privacy (for example under the European Convention on Human Rights), particularly if the information on the registers of beneficial ownerships are to become publically available.
Building on the agreed principles, the UK Government has announced that it intends to introduce new rules requiring UK companies to obtain and hold information on who ultimately owns and controls them. This information is to be held in a central registry maintained by Companies House, where it will be accessible to law enforcement agencies and tax authorities. A consultation on the detailed scope and implementation of the new rules, including whether the ultimate beneficial ownership information should be publicly available, will be published by the UK Department for Business, Innovation and Skills later in the summer.
In advance of the G8 agreement the UK secured agreement from the British Overseas Territories and Crown Dependencies (including Jersey, Guernsey, the Isle of Man; and Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands) to action plans of their own.
U.S. implementation will be difficult given the inconsistent and often very limited state standards for requiring and verifying beneficial ownership at incorporation. State secretaries of state and other authorities responsible for the process of corporate and other business organization formation have limited budgets and resources and generally accept filings that meet the facial requirements of short, standard forms. The lack of reliable, accessible beneficial ownership information has been an obstacle to finalizing the pending U.S. Treasury AML regulatory initiative to require banks and certain other financial institutions to obtain beneficial ownership information for legal entity customers as part of the customer due diligence process.
Legislation to require consistent state standards and access to beneficial ownership information by government authorities has been introduced in the U.S. Congress by Senator Levin and others as early as 2008 in response to money-laundering enforcement concerns. While supported by the Administration, this legislation has not progressed beyond the committee hearing stage because of opposition from various quarters, including the United States Chamber of Commerce, the American Bar Association, participants in the securities markets and state secretaries of state and other state governmental officials. It has been argued that detailed beneficial ownership determination and reporting requirements would deter new business organization and capital formation and market efficiency in the United States and would represent an intrusion by the federal government on the long tradition of state government primacy with respect to the regulation of business organization formation and governance.
On June 18, 2013, the White House issued its G-8 Action Plan for Transparency of Company Ownership and Control. Key to the plan are advocacy of comprehensive legislation to require "identification and verification of beneficial ownership information at the time a company is formed" and finalizing the Treasury regulations that clarify and strengthen the customer due diligence obligations for U.S. financial institutions and will include the requirement "to identify beneficial owners." Enacting legislation is likely to continue to be an uphill battle, and even if legislation were enacted, it is anticipated that it would be several years before consistent standards were implemented by the states and systems were in place to access the information.
France and Germany were signatories to the Action Plan but no specifics have yet been published on how the principles will be implemented. It is worth noting that both French and German law already includes a number of provisions aimed at identifying ultimate beneficial owners; in France including a national register of French trusts, which identifies beneficial owners and is accessible to tax authorities.