Regulating Beneficial Ownership Learning from History Ex ante

Regulating Beneficial Ownership Learning from History Ex ante analysis in UK 2002 John Howell & Co Ltd UK www. jh-co. com Utrecht 2007 John Howell & Co Ltd

Structure of Talk 1. The 2002 Study. 2. Scoping the EU Study. 3. Lessons learned. NB: These slides only cover Part 1 Utrecht 2007 John Howell & Co Ltd 2

Origins of UK Interest • UK Performance and innovation unit study (June 2002). • “Recovering the Proceeds of Crime”, use of disclosures and abuse of ease of incorporation. • Asset Recovery Agency established. • Misuse of Corporate Vehicles OECD 2001. • FATF et al. Utrecht 2007 John Howell & Co Ltd 3

2002 - The Mischief (1) • Companies play a useful role as limiting liability encourages enterprise • But criminals exploit anonymity and ease of incorporation • Able to keep real ownership secret • Better disclosure regime needed to tackle (especially) serious organised crime gangs Utrecht 2007 John Howell & Co Ltd 4

2002 The Mischief (2) • Criminals can control companies without owning them (legally or beneficially). • Shadow directorship rules ineffective. • Disclosure regime neither supports inquiries into ownership, nor produces data that are complete, current or avoid tipping off. • Poor data and search systems. Utrecht 2007 John Howell & Co Ltd 5

UK Proposals • Five + Two cumulative options identified. • Small company details (for LE only) to all company real time data (fully public). • “Variables soon multiply”. • Substantial effort just to define the initial categories (good early work by HMT) and. . . • . . complex iterative process to get to watertight options. Utrecht 2007 John Howell & Co Ltd 6

Hand Out 1 Summary of Options Utrecht 2007 John Howell & Co Ltd 7

Base Case 1 - Context • Lots of types of companies with lots of special legal characteristics (for perfectly good reasons) which create weak spots. • UK company formation very easy, quick and cheap (online, immediately for £ 35). • Good for UK plc and UK lawyers (40% of international contracts under UK law). • Favourable tax regime. Utrecht 2007 John Howell & Co Ltd 8

Base Case 2 – Why UK Ltd? • Company formation agents there to help – 10% of companies owned by overseas interests. • Don’t have to be registered as a business in UK to do business, though you must comply with rules of doing business (data, tax). • UK obligations usually not extraterritorial. Utrecht 2007 John Howell & Co Ltd 9

Base Case 3 - Ownership • Legal owners are the members and the legal owner of a share is the shareholder or warrant holder. • Natural or legal, holding in full or in part. • Shareholding under contract by “nominee”. • Legal and beneficial ownership often separated. • Beneficial ownership is not a “share class” • Legal definition: a person who holds or is entitled to a beneficial or equitable interest in property, such as a person for whom a trust is created. Utrecht 2007 John Howell & Co Ltd 10

Base Case 4 - Control • Control is arguably more important than ownership of whatever type (smokescreens). • Inland Revenue, FSA, Take Over Code all dwell on control, but study followed fact and degree of changes in ownership in percentage terms. • Did not determine way to define “beneficial control” but highlighted key role of directors, including nominee directors. • Influential beneficial owners are shadow directors. Utrecht 2007 John Howell & Co Ltd 11

Base Case 5 - Disclosures • Duty to (i) disclose to Companies House (ii) keep a register, with respect to both shareholding and director events. De facto disclosure via stock transfer forms. • No Section 212 powers as with PLCs. • Companies House a registry – checks a filing is made but little content analysis. • Prosecutions rare and very public. Utrecht 2007 John Howell & Co Ltd 12

Base Case 6 – Searching Data • Companies House Data publicly available for a fee online. • Includes director disqualifications. • Substantial data bases in UK – Experian, D&B. • Used by LE but not linked (though intelligence might be doing so). Utrecht 2007 John Howell & Co Ltd 13

Base Case 7 – Investigative Powers • Ownership and control investigation powers mainly in CA 1985 S 442, S 444. • S 2 CJA 1987. • NCIS, National and Regional Crime Squad, 53 constabularies, HMCE, IR, DWP, FSA. • PACE 1984, Terrorism Act 2000. • Civil Powers – Anton Pillar order. Utrecht 2007 John Howell & Co Ltd 14

Story So Far… • • No gatekeepers, no due diligence. Automatic incorporation without ID. S 352 ignored – nothing to pinpoint control. Tipping off risk, offshore trails problem. Open record creates public order risk (HLS). Tracing BO takes up vast amount of time. Lack of FIs. Poor data. Utrecht 2007 John Howell & Co Ltd 15

Making the Options Workable • Need to ensure the options could have intended effect – intense discussion. • Duty to declare that they are not BO or else nominate “Next in Line” – not end BO. • Compare disclosures to spot discrepancies. • Practical smurf-proof percentage threshold. • Movements both ways. Utrecht 2007 John Howell & Co Ltd 16

Lesser Options • One line certification. • When thresholds passed - 3% absolute (and movements of 1% for Option 1 c). • Disclosure made to company (Option 1) or to Companies House (Option 2) via Annual Return. • Option 3 requires timely disclosures to Companies House. Utrecht 2007 John Howell & Co Ltd 17

Greater Options • • Option 4 Database with ownership look-up. Option 5 Adds directorship data. Both available to LE on inquiry. Open Register – At company (Option 1) or Co. Ho. (others). • Information campaign. • Appropriate enforcement regime. Utrecht 2007 John Howell & Co Ltd 18

Establishing Benefits and Beneficiaries • • • Who would benefit and how? Δ Value of data and access by option. Effects and preconditions for effects. Criminal and civil initiative. Secondary (wider crime reduction) effects and their sensitivities. • Wide range of beneficiaries. Utrecht 2007 John Howell & Co Ltd 19

Confirming Benefits • Everybody thought the proposals would help by increasing capacity. • More, and more complex, investigations. • More success: time frame, evidence quality. • More data – leads, evidence. • Data mix ‘n’ match: proactive policing. • Secondary effects: deter advisers, press lesser charge, intelligence led approach. Utrecht 2007 John Howell & Co Ltd 20

Benefits to Industry • • • Open Register on balance more useful. Safer environment from data sharing. Small, vulnerable companies. Cost savings from standardised data, CDD. Maximising shareholder returns. NB some LE wanted closed register to preserve illusion of data advantage and public order (dubious given other powers). Utrecht 2007 John Howell & Co Ltd 21

Serious Arrestable Offence • Little chance of automatic detection of false reporting. • Deterrent effect of potential arrest, search especially on advisers. • Increased willingness to point finger. • Light touch regime for petty infringement. • Serious consequences where intent involved. • Sanctions regime key in getting to benefits. Utrecht 2007 John Howell & Co Ltd 22

Judging Benefits - 1 • • Too complex to get to precise values. Hierarchy of benefits and common factors. User estimates of orders of economy. First Order (10%) – basic efficiency gains. Second Order (15 -25%) – complexity/scope Third Order (30 -50) – strategic change. See Handouts 2 and 3 Utrecht 2007 John Howell & Co Ltd 23

Judging Benefits - 2 • Identify areas where benefits accrue. • Intelligence, investigation, evidence gathering, deterrence. • How would industry use open system? • Small changes in large numbers. • Stop migration from petty to serious crime. • Sensitivity to tax regime, data quality. Utrecht 2007 John Howell & Co Ltd 24

Costs • Direct, compliance, effect on sales, competition, unfair costs. • Easier in that many of them “simple” transaction processing costs. • Many variables to cost and combine. • Model based on Companies House costs. • Key point – how many BOs? • See Handout 4. Utrecht 2007 John Howell & Co Ltd 25

Beneficial Owners • • • 1. 1 million companies have capital < £ 100. 3. 5 shareholders per company. Most companies are husband wife. 300, 000 at risk (5 – 20% chance). 125, 000 beneficial owners. Few costs to most companies and shareholders as no changes after initial declaration (single box tick compliance). Utrecht 2007 John Howell & Co Ltd 26

Public Order Exemption • Threat from extremists (AQ, animal rights). • Need to focus on threats to life (Rushdie). • Simple stand alone PC system for rest. Utrecht 2007 John Howell & Co Ltd 27

Effects of Non-Compliance • Need for resilient system. • Non-compliance allowed for in sensitivity analysis by reducing order of economy. • Hits closed register options hardest. • See Handout 5. Utrecht 2007 John Howell & Co Ltd 28

Recommendations • • • Strict CBA: Option 3 Open Functionality: Option 5 Open Resilience: Options 3 or 2 (Open) Camel’s Nose: Option 2 Meet OECD: Option 3 Look at semi open system before going to closed system. Utrecht 2007 John Howell & Co Ltd 29

OUTCOME REVENGE OF THE COUNTERFACTUAL Utrecht 2007 John Howell & Co Ltd 30