HAS THE RIGHT TO PRIVACY BECOME A CASUALTY OF THE FIGHT AGAINST MONEY LAUNDERING?
BY MATTHEW SMITH, GENERAL COUNSEL
Back in 2017, I wrote here of the growing trend for beneficial ownership registers which were being considered or introduced in a number of jurisdictions throughout the world. At that time, the primary focus was on Europe where the EU had recently introduced non-publicly available beneficial ownership registers under the 4th Anti Money Laundering Directive (‘4AMLD’).
At the time it would have been regarded as far-fetched to think that the established offshore jurisdictions, many of which are renowned for their privacy and confidentiality laws, would open their beneficial ownership records up to public inspection, or that beneficial ownership registers would be seriously contemplated in the USA.
How things have changed.
In January 2021, it was announced that, at the behest of the British Government, the governments of all British Overseas Territories (‘BOTs’) had committed to introducing publicly accessible registers of beneficial ownership by the end of 2023. The BOTs include among their number some of the most popular offshore company and trust jurisdictions on the planet, most notably the British Virgin Islands (estimated to have some 500,000 registered companies) and the Cayman Islands (with approximately 100,000). Other well-known British Overseas Territories include Anguilla, Bermuda, Gibraltar and the Turks and Caicos Islands.
It is perhaps premature to speculate that the introduction of such registers in these jurisdictions will constitute a final nail in the coffin for their financial service industries. But coming hot on the heels of the enforced introduction of economic substance requirements coupled with increasing pressure from the EU to abolish preferential/zero taxation regimes (which led to the Cayman Islands’ inclusion on the EU blacklist of non-cooperative tax jurisdictions for much of 2020), these proposals will undoubtedly have thousands of company owners considering their options and looking at re-domiciling to other jurisdictions. That said, much can happen in the next three years. Certain jurisdictions may decide that the benefits conferred by BOT status are outweighed by the wish to pass and determine their own legislation, and may conceivably secede from the UK – BVI has previously made thinly veiled threats along such lines. It may be time to cut the apron strings.
Over in Europe, 4AMLD was implemented in June 2017 and required all member states to introduce central registers of company beneficial ownership, which were to be accessible by persons with a ‘legitimate interest’. While member states were not required to make these registers accessible to the public, they were allowed and, arguably, encouraged to do so by the EU, and there was wide concern that 4AMLD was the thin end of the wedge.
So it proved. 4AMLD was swiftly followed by 5AMLD, which came into force on 10 January 2020 and is currently undergoing implementation across the EU’s member states. 5AMLD requires the beneficial ownership registers set up under its predecessor to be made available to all, not just to persons with a ‘legitimate interest’. In addition, 5AMLD will herald the introduction of beneficial ownership registers for trusts (albeit not publicly accessible ones – for now) and enhanced interconnectivity between national registers to allow a much greater flow of beneficial ownership information between EU member states.
Finally, in a move that would have been unthinkable just two or three years ago, in December 2020 the US Government passed into law the Corporate Transparency Act, which requires a report to be filed with the Financial Crimes Enforcement Network (‘FinCEN’) identifying each beneficial owner of an applicant forming a reporting company. A ‘reporting company’ includes corporations, partnerships and LLCs which are formed in the US (or which are non-US entities registered to do business in the US) and which employ 20 or fewer people full-time, have a gross prior year income of US$5m or under, and do not have a physical office in the US. The Act is retroactive and applies to existing companies as well as to newly incorporated ones, although it is not immediately effective as regulations regarding implementation and enforcement are not due until the end of 2021. Beneficial ownership information held by the registry which is to be created by FinCEN will not be publicly available at this time, but for obvious reasons there are concerns that the creation of a ‘limited access’ registry is just a stepping stone to publicly accessible registers.
The collection of beneficial owner information is nothing new. In many jurisdictions, the Cook Islands and Nevis among them, collection and retention of this information by trust and company service providers has been required by law for many years. And unarguably, this is an appropriate measure in the global fight against money laundering, terrorism, financial crime and tax evasion. It is one which enables service providers to effectively identify and vet ultimate beneficial owners, to carry out appropriate background checks to ensure entities are not being set up for nefarious purposes, and to be held to account by regulators for any failures to do so.
But the rise of centrally controlled registers of beneficial ownership is of more concern. Where those registers are available to the public, the reasons for concern are self-evident. For example, a beneficial owner of a successful company whose identity becomes public knowledge faces substantial risks: of having their name dragged through the mud by media outlets on a slow news day; of frivolous lawsuits brought by unscrupulous plaintiffs who regard a listing in a beneficial ownership register as being tantamount to a sign saying ‘I’m wealthy! Sue me!’; and at worst, the spectre of serious criminal activity such as kidnap and extortion.
Even where registers are not publicly available, the extent and sensitive nature of the information retained centrally still remains cause for great concern. Hacks and thefts of information from similar centrally-maintained databases, while few and far between, have taken place and are a real threat, and the resources placed into data security may vary enormously between jurisdictions.
As far as the Cook Islands and Nevis are concerned, the position there as regards the gathering and recording of beneficial ownership information is unchanged from 2017. Unauthorised disclosure of beneficial owner information to third parties remains a criminal offence and while such information must be collected by trustees and registered agents and made available to the Regulators and certain other government agencies with legitimate reasons for accessing it, that information is retained by the service providers concerned and is not placed on any central register.
Beneficial owners of companies registered in jurisdictions where central ownership registers are either in place or under contemplation may wish to consider re-domiciling their entities to jurisdictions such as Nevis or the Cook Islands which have managed to more effectively strike a balance between the obligation to gather beneficial ownership information and the rights of beneficial owners to manage their legal affairs with an appropriate degree of privacy or confidentiality. Those who may soon – or already – appear on public registers of beneficial ownership may wish to consider mitigating against the attendant risks by setting up an asset protection structure to guard against spurious legal claims. In either of these cases, Southpac can help.
For more information or to open up a discussion with a member of our team, please Contact Us.
Disclaimer: the above contains the opinion of the author and is for information purposes only. It is not intended to constitute legal or tax advice. If you are considering establishing an offshore structure, please consult with legal and tax professionals in your jurisdictions of residence, domicile and tax residence beforehand.
 According to the internationally recognised definition adopted by multinational bodies such as FATF and the OECD, a ‘beneficial owner’ is 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.