By Matthew Smith, General Counsel
As discussion in some jurisdictions moves towards greater transparency of ownership and the establishment of registers of beneficial owners, we investigate the position in a number of jurisdictions, including those in which Southpac Group operates, and look at the balance which needs to be struck between privacy and openness.
The recent release of the Paradise Papers has thrown questions of privacy, transparency and the identification of beneficial owners of offshore trusts and companies back into the public spotlight. Behind the scenes, however, these issues have already been on the table for several years (predating even the release of the Panama Papers in May 2016) for countries throughout the world seeking to maintain compliance not just with recommendations put forward by the intergovernmental Financial Action Task Force (“FATF”), but with the Common Reporting Standard (“CRS”) developed by the OECD in 2014 to combat tax evasion.
The European position
In Europe, for example, sweeping changes to anti-money laundering legislation with significant consequences for the privacy of beneficial owners were ushered in by the European Union’s 4th Anti-Money Laundering Directive (the “Directive”) in 2015. The deadline for EU member states to implement the provisions of this Directive passed in June 2017, and the majority of EU members now have the necessary provisions on their statute books. One of the most striking (although potentially alarming) features of the Directive is that it requires member states to establish registers of beneficial ownership in relation to certain entities. For these purposes, the definition of ‘beneficial owner’ is aligned with the FATF definition: a natural person who ultimately controls an entity and/or on whose behalf transactions or activities are conducted and/or who has ownership of more than 25% of an entity.
The registers envisaged by the Directive are intended to be accessible to any person that can show ‘a legitimate interest’. So while they are not publicly available per se, individual states may make their own provision for what constitutes ‘a legitimate interest’, and may, if they wish, provide for registers of beneficial ownership to be publicly accessible.
That said, it seems to be the case so far that no member state has adopted a publicly accessible register of beneficial ownership. In the UK, for example (the UK being – for the time being at least – one of the EU’s member states), the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which were brought into force on 26 June 2017 to implement the Directive, provide for the establishment of a register of beneficial owners of any taxable trust with a UK connection. This register may be inspected by law enforcement authorities and financial intelligence units, but is not accessible to the public. Interestingly, the Regulations include certain beneficiaries within the scope of the definition of ‘beneficial owner’.
The Southpac Jurisdictions
Turning to the Southpac jurisdictions by contrast, while the Cook Islands has no register of beneficial ownership in place, registered agents and trustee companies operating in the Cook Islands are nonetheless required to identify and gather information on the beneficial owner (referred to in local legislation as the ‘ultimate principal’), to retain such information throughout the business relationship and for six years afterwards and provide it to the Cook Islands Financial Information Unit if requested to do so, in the course of any investigation into a serious offence, including one which is being investigated by a counterpart agency in another jurisdiction. Sufficient information must be provided and retained to verify the name, residential address, date and place of birth, tax identification number and source of wealth of any beneficial owner.
The position in Nevis is, broadly speaking, the same as in the Cook Islands. There is no register of beneficial ownership in place, but trustee companies and registered agents are required to gather and retain information about beneficial owners, albeit that the exact documentary requirements differ slightly from those in place in the Cook Islands – for example, two original reference letters for each beneficial owner from a recognised banking institution and a member of a recognised professional body must be maintained. Legislative changes are currently underway in Nevis, with replacement Ordinances regarding trusts, LLCs and international companies due to be brought into force any time now. However, it is not envisaged that any kind of register of beneficial ownership will be introduced as a result of these changes.
In New Zealand, a register of New Zealand Foreign Trusts was introduced earlier this year. While this was guided in part by CRS and FATF requirements, the New Zealand government was also influenced to an extent by a report on foreign trust disclosure rules which was commissioned in the wake of the Panama Papers and wanted to be seen to be doing something to address the public disapproval that sprang from the publication of that information. To its credit, however, it resisted calls from trade unions and journalists to make the register open to the public, with the result that the contents of the register may be made available only to law enforcement and financial intelligence agencies.
A move towards publicly accessible registers?
There are many throughout the world who, for varying reasons, would like to see more publicly accessible registers of beneficial ownership of entities. It is perhaps surprising, given that it has been ruled by a Conservative-led government since 2010, that the UK leads the way in terms of such public registers. In June 2016, it introduced a public register of People with Significant Control which contains the name, month and year of birth, nationality and details of interest of all persons holding more than 25% of the shares or voting interests in any UK company or limited liability partnership, or who otherwise exercises significant interest and control over the entity. The register has been made publicly available ostensibly to help to increase transparency over who owns and controls UK companies and to provide better information to investors who are considering investing in them. Another stated purpose is that of supporting law enforcement agencies in money laundering investigations.
A second public register of ownership has also been proposed by the UK Government and is currently under consultation. This register, which would be the first of its kind in the world, would contain information on the beneficial owners of all overseas legal entities that own or purchase property in the UK or participate in government procurement. No doubt the new government in New Zealand, which was elected in part on a pledge of reducing foreign ownership of New Zealand property, will be keeping a close eye on the consultation.
A publicly available register of beneficial ownership of trusts was introduced in France for a brief period, but was ruled unconstitutional by the French Supreme Court in October 2016 on the ground that it created a disproportionate breach of privacy rights of individuals involved in trust arrangements.
Purpose and proportionality
The primary purpose behind the registers of beneficial ownership that have been introduced in various jurisdictions – namely the elimination of money laundering, financing of terrorism and tax evasion – is undoubtedly a noble one which deserves the support of all. However, whether the establishment of a register is the most effective and proportionate way of achieving these legitimate aims is debatable. Jurisdictions such as the Cook Islands have managed to find a way to comply with CRS and FATF recommendations by ensuring that information on beneficial owners is collected and can be made available to investigative authorities when needed, but has not seen the need to include this information in a register of all beneficial owners. Given the secrecy provisions in various Cook Islands statutes which provide that it is an offence for a person to disclose information about the beneficial ownership of a trust or company in all but a small selection of circumstances (which cover investigations by competent authorities), one can safely assume that a public register of Cook Islands beneficial owners is not in the pipeline.
While those in support of public registers may trot out the old adage ‘if you’ve nothing to hide, you’ve nothing to fear’, many persons would rather their names and dates of birth and connection with a certain entity were not in the public domain for very legitimate reasons. Those living in countries where kidnap and ransom of the publicly wealthy is rife, for example, certainly have something to fear from the publication of their personal information, and may not trust government officials in certain countries to keep their personal information private in cases where a register is supposedly closed to the public. The establishment of public registers risks stoking witch hunts and the politics of envy against those who use offshore structures. It is also of concern that a private register may become subject to ‘mission creep’ and made public by a future government wanting to be seen to be doing something to appease an electorate which perceives all those who use offshore structures as acting illegally, immorally and somehow cheating the system whenever the next cache of information stolen from a law firm with offshore clients is reported (although as an aside, it is at least encouraging to note that the Paradise Papers appear to have been met with a global shrug of shoulders and a recognition that, in the absence of any illegal activity, there is nothing to see here).
The public/private debate will no doubt continue into the future. As it does so, it is to be hoped that governments wishing to pursue the legitimate aims of countering tax evasion, money laundering and the financing of terrorism do not throw the baby out with the bathwater by acting disproportionately as far as informational privacy is concerned as the effect of this may be to discourage the legal and legitimate establishment of offshore structures.