What is beneficial ownership?
Beneficial owners are individuals who ultimately control a company or benefit from it.
Beneficial owners are distinct from legal owners, for example service providers that act as nominee directors, who may appear on legal documents as the representatives of the company. Such service providers may have signature authority and other legal rights, but the ultimate control over the corporate entity rests with the beneficial owner.
Beneficial owners are always natural persons. In cases where a company is owned by another legal entity, for example another company, the beneficial owner is the owner of the holding company.
In jurisdictions like Panama, the same corporate registration agents can appear as the directors of several hundred companies in the company register and sometimes serve as little more than front men.
How is a beneficial owner defined?
There are various definitions of beneficial owners, but typically it is anyone with a minimum shareholding of 10 percent to 25 percent in a company.
The British register of persons with significant control over U.K. companies forces U.K. companies from April 2016 to maintain a register of persons having control of more than 25 percent of the company or controlling more than 25 percent of the voting rights of the company.
Why is transparency of beneficial owners important?
Knowledge of the beneficial owners of a company is important when corporate entities are established for illegal purposes, such as fraud, corruption or tax evasion. In these cases corporate vehicles can provide anonymity to the perpetrators of financial crime in their transactions or when obtaining bank accounts.
Transparency of beneficial ownership information can prevent this misuse and help law enforcement tackle financial and other crime.
Is there evidence of this illegal activity?
In 2011 the World Bank released a report, “The Puppet Masters – How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It,” which analyzed 150 grand corruption cases in the United States. It found that in most cases a corporate vehicle was misused to hide the money trail and that the corporate vehicle was established or managed by a professional intermediary, which provided a level of anonymity.
How is beneficial ownership determined?
Corporate service providers that establish a company or set up bank accounts and provide other services for companies have to ensure that they know who the beneficial owners are. They do this by requesting documents such as a register of shareholders and constitutional documents, identity documents or trust-related documents.
In Cayman, corporate service providers, for example company formation agents, collect and maintain up-to-date beneficial ownership information.
So if beneficial ownership information is already collected, what is the problem?
Depending on the jurisdiction there are different levels of access to beneficial ownership information. In Cayman there is no register that could be accessed online by law enforcement, tax authorities or the public.
Service providers who disclose the information unlawfully are potentially committing a criminal offense because the information is considered private under Cayman Law.
There are established mechanisms for law enforcement and tax authorities, which can request the information on the basis of bilateral agreements such as Tax Information Exchange Agreements or Mutual Legal Assistance Treaties.
Why have a register?
The U.K. has called in its Overseas Territories for a centralized register of beneficial owners, or alternatively a system that is as effective to support law enforcement and tax authorities.
Essentially, the U.K. is seeking direct access to this kind of information for its authorities. The current system is based on bilateral treaties that govern the process of requesting and exchanging beneficial ownership information. It is slower, and as far as tax information is concerned, it has been challenged in the courts. Being able to access the information online would be faster and more efficient.
What are the arguments against a register?
The Cayman Islands government has rejected the proposal, arguing that its existing system, whereby beneficial ownership information is collected and maintained by corporate service providers, is working well and that a centralized register would cause security and privacy issues.
The government has said it would only support a centralized register if it becomes a worldwide standard adopted by all countries. Otherwise, even legitimate business would move elsewhere if it perceived the register as an undue invasion of privacy.