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GUEST ARTICLE: Criminal Finances: Is A Public Register The Most Effective Weapon?

Geoff Cook

5 July 2017

In April, the Criminal Finances Act became the latest piece of legislation to be enacted to tackle terrorist financing, money laundering, corruption, and the recovery of the proceeds of crime. 

Among its provisions, the new legislation commits the UK Government to reviewing the effectiveness of the arrangements it has in place with each of the Crown Dependencies and Overseas Territories (CDOTs) for the sharing of information on the ultimate beneficial owners of registered entities. Between July 2017 and December 2018, the UK will investigate the variety of methods used, and a report will be submitted to Parliament in the first half of 2019.

Jersey has a well-established and robust regime in place, so the UK’s review is not seen as a threat but rather as an opportunity for Jersey to demonstrate that it meets international standards and to contribute to a sensible debate on beneficial ownership. In particular, it is a chance to challenge the misconception that registers have to be public in order to combat financial crime effectively.

Public registers

Since the Panama Papers were published in April 2016, a number of pressure groups and sections of the media have argued that the only effective method of combatting financial crime would be to make registers publicly accessible. Proponents argue that it would enable investigative journalists, non-governmental organisations, and members of the public to act as watchdogs, sifting through the data on the ultimate beneficial owners of companies and identifying those whose wealth had been obtained illegally. 

Yet there are compelling arguments against making registers totally transparent. Academics and authorities have questioned the legality and efficacy of public registers in combatting financial crime, and the degree to which they intrude into personal privacy. 

In October 2016, the French Supreme Court published a decision that challenged the legality of the government’s public register of trusts and in December the same court declared the public aspect of country-by-country reporting to be unconstitutional.

The international standards for combatting criminal financing do not require jurisdictions to provide public access to their registry. The Financial Action Task Force (FATF) simply requires competent authorities to be able to obtain adequate, accurate and current information on the beneficial ownership of legal persons created in the country. 

The European Union has produced a set of proposals aimed at bringing member states’ anti-money laundering and counter terrorist financing legislation in line with those FATF recommendations. Set out in the Fourth Money Laundering Directive (4MLD), the proposals included legislation which would give the public access to beneficial ownership information and tax authorities access to anti-money laundering information. The European Data Protection Supervisor (EDPS), however, believes that giving the public access to beneficial ownership information carries “significant and unnecessary risks for the individual rights to privacy and data protection”.

With such clear concern for the impact that public registers could have, it is questionable whether they will become obligatory across the EU. It’s significant that, so far, the UK is one of just a handful of jurisdictions to have committed to establishing a public register while several major economies, notably the US, Hong Kong and Singapore, have shown little interest in adopting it. 

Alternatives

Research into the relative merits of different forms of collecting and sharing information on beneficial ownership has shown that there are alternatives to public registers – alternatives which have received less attention but which are more effective.

One alternative is a central register containing information which has been supplied by regulated trust and company service providers (TCSPs) who apply strict and robust methods of validation before passing on the information. It is the model used by Jersey and it has been recognised by international standard setters, and in academic research, as effective at collecting, managing and sharing information. It enables Jersey to have with adequate, accurate and current data on the beneficial ownership of Jersey companies. 

Jersey’s central register, however, is not public. Only those with a legitimate interest, such as tax and law enforcement authorities, can access the information. 

Of more importance in the fight against financial crime, and of more relevance to the UK Government’s review, Jersey can, as from June this year, supply information to law enforcement authorities within an hour if urgent, and within 24 hours if non-urgent. 

The Jersey model has been endorsed by authorities including the OECD, World Bank, and MONEYVAL who, following a review of Jersey’s regulatory framework last year, noted that Jersey is “in a leading position in meeting standards of beneficial ownership transparency”. It would be surprising if the UK’s review did not do the same.

Academic Evidence

Is this model any better than the UK’s? Discussing his paper Solving the Beneficial Ownership Conundrum: Central Registries and Licenced Intermediaries (2016) at last year’s Jersey Finance London Private Wealth Conference, Jason Sharman, professor of international relations at Cambridge University, claimed that it was “demonstrably wrong” to say that public registers were the only way of achieving corporate transparency and that “a beneficial ownership regime based on licensed corporate service providers (CSPs) is a better solution”.

One reason was that public registers required companies to submit their own information on beneficial ownership while not coming up against many, if any, checks and balances to ensure information was accurate.

Academics have also warned against the tide of popular opinion leading to public registers becoming an end in their own right, rather than a means of combatting financial crime. Earlier this year in her working paper Beneficial Openness: weighing the costs and benefits of financial transparency, Maya Forstater concluded that “universal central public registers of beneficial ownership are neither the only nor the best solution”. The paper also highlighted that other options should be considered: 

“For complex problems to gain political and public momentum, it is helpful to be able to point to simple, clear solutions. Public registers of beneficial ownership and country-by-country reporting have played this role for the issues of illicit financial flows and profit shifting. But there is a danger both for governments and civil society that iconic transparency measures provide ‘form’ rather than the ‘function’ in seeking to solve these problems.”

Speaking again at this year’s Jersey Finance London Private Wealth Conference, Professor Sharman suggested there was a mismatch between the expense of solutions being proposed to counter financial crime, like public registers, and the effect they are having. He encouraged policy makers to pause, take a breath, stop introducing new rules and spend more time finding out whether current ones are working.

Against the backdrop of the UK’s Criminal Finances Act, this is timely and sage advice indeed. For Jersey, the UK Government’s review is an opportunity to throw some much-needed light on registers and to demonstrate that public registers are not the only option.