Flaws in transparency drive appease the wealthy and big business
The UK is hosting the 2016 Anti-Corruption Summit and Prime Minister David Cameron claims to be leading the world in curbing corruption and the flow of illicit funds.
The Panama Papers once again show that opaque shell corporations enable some to conceal the beneficiaries of money laundering, tax avoidance, tax evasion and corrupt practices.
Law enforcement agencies are thwarted because the veil of incorporation provides secrecy about the beneficial ownership of shares and the identity of directors.
The UK government’s response has been to create a public register of beneficial ownership of UK-registered companies which, in the words of the prime minister, will ‘show who really owns and controls every company’.
The information is to be made publicly available through Companies House. David Cameron wants this to be adopted by other countries and particularly by UK sponsored tax havens.
However, the public register is not some fountain of transparency and does not identify who really owns and controls every company.
Under the legislation introduced by the government the information on the public register only relates to individuals with an interest in more than 25 per cent of shares or voting rights in a company, or who otherwise control the way a company is run. So those wishing to avoid transparency can simply hold 24.99 per cent of shares.
Shareholders can also conceal their identity by holding shares through nominees. Numerous accountants, lawyers, banks and others provide this service.
Companies can also have nominee (or sham) directors who act as fronts for others. Such serial directors take their instructions from someone else and play no part in the management of the company – all for a fee, of course.
One person was thought to be director of 1,200 companies. A UK government consultation paper noted that around 6,150 people are the directors of more than 20 companies, with instances of up to 1,000, and this could mean that between 154,000 and 273,000 companies have directors that might be neglecting management and being controlled by someone else.
The Companies Act 2006 requires UK public companies to have at least two directors. One of these needs to be a natural person who need not be resident in the UK or the European Union.
The other can be a company, even a company registered in Jersey, Cayman, British Virgin Islands, Belize, the Seychelles or any other secretive places that do not require companies to publish accounts, or reveal full details of share owners or the identity of directors.
The government promised to ‘prohibit use of corporate directors’ but so far no action has been taken.
It acknowledges that there are around 67,000 corporate directors registered at Companies House, though the numbers registered outside the UK are not known.
One study established that more than 175,000 UK-registered companies have directors with addresses in offshore jurisdictions. Of course, the UK writ does not run in other countries, and directors resident in other countries can’t easily be held to account.
This is also the case with foreign companies owning property in the UK or securing procurement contracts. With armies of accountants, lawyers and finance experts, the UK has become a magnet for dirty money.
The proceeds of corruption have fuelled the boom in property prices, often making a house purchase beyond the reach of most Britons.
Law enforcement agencies estimate that 75 per cent of properties owned by people under criminal investigation for corruption are held through secret offshore companies.
Corrupt and secretive organisations can also secure public contracts. So the government’s response has been to require foreign companies to provide information on their beneficial ownership before buying land or property in England or Wales or enter into public procurement contracts in England.
However, the resulting registers will only be accessible to public authorities and law enforcement, and not the wider public.
Even worse, the information in the register will be modelled on existing laws which as argued above would enable shareholders and directors to conceal their identity.
The much hyped claims about enhancing transparency of corporate ownership have little substance because the UK still permits nominee shareholdings, nominee directors and anonymous corporations to be directors of other companies.
Then there are also exceptions. Google, Starbucks, Apple, Microsoft and others have used wholly owned subsidiaries to shift profits to offshore places.
But the UK legislation requires that such entities only need to provide information about their parent company, rather than about their parent company’s beneficial ownership.
Such concessions appease wealthy elites and big business but do little to empower people so that they know who they are transacting with.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
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