Public registry of ‘beneficial owners’ and the consequences for Cayman

Establishing a centralized register of beneficial ownership would be a step away from making such information public, ultimately resulting in damaging consequences for this jurisdiction, according to Grant Stein, chairman of the International Financial Centres Forum, a multi-jurisdictional private sector organization with members operating across a number of British Crown Dependencies and Overseas Territories.  

  

Cayman already has the proper supervision in place for corporate service providers as a means of conducting effective data collection and, in particular, verifying client identity, says IFC chairman Grant Stein.  

The U.K. – whose business secretary is pressing for a new public register on company ownership to track the ultimate owners of U.K. companies – would do well to take a leaf from Cayman’s book when it comes to such procedures, he says. Grant maintains that Cayman’s practices are far superior to the U.K.’s current or proposed set up.  

The push for a centralized public record of beneficial ownership, says Stein, originates from pressure from nongovernmental organizations, typically charities such as Oxfam and Christian Aid, some of which allocate up to 10 percent to 15 percent of their revenues to their political agendas. They believe that tax structures employed by multinational corporations have a direct negative impact on people in Africa, he says.  

In 2011 the Jersey Evening Post wrote under the headline: “Tax system ‘is starving world’s poorer countries’:  

“Jersey is at the heart of an ‘epidemic’ of tax evasion which is starving poor developing countries of vital income, a major UK anti-poverty charity has claimed. Actionaid has accused the Island of allowing hundreds of huge corporations to operate tax-free from the offices of law firms and other finance houses… The charity made the allegations in a report …. in which it says that finance centres like Jersey are costing the UK Treasury £18 billion a year in lost tax revenue.” 

Global Witness, a U.K.-based anti-corruption organization, is also campaigning to put an end to anonymous companies. Its co-founder and director, Charmian Gooch, was recently awarded the 2014 TED Prize, (awarded to “an individual with a creative and bold vision to spark global change”). Her wish was to know who owns and controls companies “so they can no longer be used anonymously against the public good.” 

Gooch is calling for governments around the world to pass laws to create registries that list the true owners of companies, and that are open to the public – with no loopholes. 

“At the moment, anonymous companies are aiding and abetting tax evaders, drugs cartels, and arms traders, and helping keep millions of poor people around the world permanently stuck in desperate poverty,” she claims. “How? Because it is easy and legal for criminals to set up an anonymous company, and then use it to hide their identity. This very simple problem is having devastating consequences for communities around the globe.” 

 

Other side of the argument  

Stein says these allegations are completely unfounded and are promulgated by entities with a specific and well-funded political agenda, showing a fundamental misunderstanding of how offshore centers facilitate the movement of capital around the world. In many cases, this increased flow of capital has greatly improved life for Third World countries, he says. 

“A case in point was the Bioko Island Malaria Control Project in Equatorial Guinea, which was the result of an innovative partnership involving the government of Equatorial Guinea, a large MNC [multinational corporation] and Medical Care Development International,” he says. Marathon Oil was also involved.  

“At the outset, the percentage chance of a foreigner contracting malaria within the first six months of arrival was 100 percent. The MNC funded the project through subsidiaries in Cayman to the extent of over $18 million, resulting in a 95 percent reduction in malarial mosquitos on Bioko Island, with a similar reduction in the incidence of the disease, which is probably the major cause of child death in sub-Saharan Africa.”  

 

Information sharing  

Stein points out that such aid agencies do, however, have the ear of G8 countries, some of which have undertaken to create a central registry of beneficial ownership in the hope that they might then identify the “true” owners of companies and thereby use the information to chase tax evaders. 

Supporters of the new system also argue that the current information regime allows for information to be available in principle at the service provider level, but inquirers need to have a specific reason (such as being a creditor or for criminal investigation purposes) and must go through lengthy and costly layers of administration in order to gain the necessary information. As a result, most people are deterred from the outset, they believe, sometimes requiring multiple court applications. 

Stein notes that where an overseas regulatory authority makes an application to the Cayman Islands Monetary Authority for information, CIMA must respond within 72 hours, and no application to the court is required. Multiple court applications are also not required, he says, even in multi-jurisdictional cases.  

He further notes that Section 6 of the Cayman Islands Monetary Authority Law (2013 Revision) states that one of the principal functions of CIMA is the provision of assistance to overseas regulatory authorities.  

He adds: “Furthermore, there are other gateways for international cooperation. These include Financial Intelligence Unit (FIU) to FIU under the Proceeds of Crime Law 2008, police to police under the Confidential Relationships (Preservation) Law (2009) and Attorney-General to Attorney-General under the Criminal Justice (International Co-Operation) Law (2010 Revision) and tax authority to tax authority under the Tax Information Authority Law (2013 Revision).”  

 

Push to an open registry  

Last July, the U.K. government’s Department of Business, Innovation and Skills published a paper on “Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business”. The paper discusses the U.K.-chaired G8 Summit in June 2013, at which the U.K. committed to introduce new rules requiring companies to obtain and hold information on who owns and controls them and implement a central registry of company beneficial ownership information.  

In April, the department issued its response to the consultation on public registers of corporate beneficial ownership, which outlined that U.K. companies and LLPs will be required to identify and report their significant (25 percent or more) beneficial owners to Companies House, updated annually.  

Individuals with a significant beneficial interest in a U.K. company will be required to disclose this to the company. Details kept on the register will include the beneficial owners’ names, date of birth, nationality, country or state of usual residence, residential address, service address, date on which they acquired the beneficial interest in the company and details of that beneficial interest and how it is held. This information will be available for public inspection, with the exception of residential addresses and full dates of birth.  

Robust response 

The Cayman Islands government, under pressure from the U.K. to create a similar central registry, issued a consultation paper this year to local service providers for submissions. All the other British Overseas Territories and Crown Dependencies, under similar pressure, also decided to consult their local financial sectors. 

“The IFC Forum wrote its response to the paper and gave it to the Cayman Islands government,” Stein says. “Industry groups, including the Cayman Islands Law Society, made submissions of a similar nature, which broadly support the Forum’s position with respect to Cayman.” 

The IFC Forum, Stein explains, is a not-for-profit organization advocating responsible cross-border financial intermediation in support of trade and investment as a means of promoting economic growth and enhancing development prospects. Members of the Forum include professional service firms and businesses headquartered in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Mauritius. 

Believing Cayman’s system of data verification to be far more robust than that of the U.K.’s, the IFC Forum responded: “We urge the Cayman Islands government to robustly push back any pressure to adopt a central register, particularly while the U.K. declines to invest any practical resources in their system to ensure that data is properly verified.” 
 

Grant-Stein.jpg  Stein expands further:  

“The Financial Action Task Force recommendations are the benchmark for internationally agreed standards on tracking client identity. The FATF standards are invariably, and logically, linked to verification requirements,” he says. “We believe that the proposed U.K. system, which appears likely to be designed around self-reporting, lowers the standard.  

“If U.K. plans were adopted in the Cayman Islands, this would degrade the current efficacy of the Cayman Islands system given that the U.K. proposal lacks systematic and effective means for data verification.” 

The Cayman Islands Chamber of Commerce also weighed in on the consultation sought by the Ministry of Financial Services. 

“It is disturbing and regrettable that Cayman is being put under political pressure by competing jurisdictions and political leaders to go one step further than everyone else, which draws the inference that we are doing something wrong and should be the only ones to make such a change to improve that perception,” the Chamber offered. 

“The additional irony is that despite all the changes we have made, particularly since 2000, the negative perception has not changed in the mainstream media and among the political leaders in the G8 countries. To date the Cayman Islands is the only jurisdiction to have undergone a full due diligence remediation exercise on its existing book of business as of 2003, to bring all know your customer (“KYC”) files up to current anti-money laundering standards.  

“The proposal for a publicly accessible register will ultimately undermine competition and innovation, is costly, and will likely have disastrous consequences on global capital markets and the ability to secure financing. It is based on these factors that the Chamber Council urges the Ministry of Financial Services, Commerce & Environment and the Cayman Islands Government to oppose vigorously any attempt to introduce a public register of beneficial ownership information.” 

 

‘Significant flaws’  

Stein says the system proposed by the U.K. Department of Business, Innovation and Skills shows “significant flaws,” such as the requirement to self-report. 

“Criminals rarely self-report,” he says. “The fact that their proposed system has no requirement for verification means it doesn’t comply with FATF recommendations. Conversely, the system employed by the Cayman Islands requires beneficial ownership to be ascertained by the service provider, which is in turn licensed and inspected by the Cayman Islands Monetary Authority. In addition, the service provider must obtain, keep and update verification information.”  

 

Consequences for Cayman  

If a central registry were to be required in the Cayman Islands (a precursor to a public register), Stein says further negative implications would include the cost to government of running such a registry; the transfer of information to a central registry could diminish individual responsibility; and ultimately it brings the risk of a public registry closer, a worse system than that which is already in place. 

If a public register were to be required, Stein says it could result in loss of competitiveness for this jurisdiction, the possibility of extremist groups objecting to legitimate business activities (e.g. animal rights activists objecting to science research, anti-abortionists objecting to abortion clinics, etc.), as well as the real possibility of threats from data hackers and cyber criminals, not to mention the loss of privacy for clients with a genuine need, such as residents living in countries with a high risk of kidnapping. 

Charmian-Gooch

Charmian Gooch, co-founder of Global Witness, a U.K.-based anti-corruption organization, is campaigning to put an end to anonymous companies. Gooch was recently awarded the 2014 TED Prize for her efforts.
James Duncan Davidson

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