.
Just a few weeks have passed since the biggest ever data leak—the Panama Papers—revealed what had been largely understood for some time: there is a hidden universe available for the super rich and super powerful to conceal the proceeds of tax abuses, criminal activities, corruption, and trade fraud, which goes well beyond the Panamanian borders. But unlike previous scandals that exposed similar practices of financial secrecy such as the Lux Leaks or the HSBC scandal, we are seeing real momentum growing and increasing political capital to curb and prevent the creation of anonymous shell companies. Crucially, it is the realization that addressing the global ills demonstrated by the Panama Papers goes beyond tax abuses. Providing such secrecy undermines democracy and limits broad, economic growth in developing countries; the solution is for governments to make these secret companies illegal.
The alarming lesson learned from Mossack Fonseca's operations is that the formation of anonymous companies is legal in many jurisdictions, because there is simply no robust legislation governing beneficial ownership and the creation of shell companies on a global scale. While these practices are in many cases legally justified, the lack of regulation or due diligence requesting information on the identity of individuals exacerbates such pervasive anonymity and invites tax abuses, government corruption, and criminal activity to persist.
Is this the turning point that the international community needed to finally crackdown on global financial secrecy? The answer is still uncertain, and will depend in large part on how political will is increased and maintained in the long run. Various G20 governments such as Australia, Germany, France, Italy, Spain, and the UK have taken steps to go beyond international commitments and engage in actual implementation and enforcement at a national level to request information on the beneficial owners.
The most promising steps have been taken by the UK, which is not only one of the major financial centers of the world, but also one the largest providers of financial services to non-residents. From June onward, the UK government will have the mechanisms in place to require the public disclosure of beneficial owners. According to business secretary Vince Cable, the registry will hold information on individuals with an interest in more than 25% of shares or voting rights in a company, or who otherwise control the way a company is run. Companies will need to supply these details to Companies House when starting up, and update them at least once every 12 months. This will include details such as the name, date of birth and nationality.
Denmark, Netherlands, Slovenia, and more recently Australia, will be following in the UK’s footsteps. The Australian assistant treasurer Kelly O’Dwyer confirmed that a public register revealing the identities of the beneficial owners of shell companies will be created. Details about how much information or how frequently it must be provided is yet to be confirmed. Nevertheless, the announcement comes at a strategically crucial time ahead of the upcoming London tax summit, which will be held in May. In this sense the fact that both the UK and Australia are taking the lead in creating public registries provides more leverage for other countries to follow suit.
A recent letter to the G20 from the Finance Ministers from Germany, France, Italy, Spain, and the UK explained the government’s commitment to “establishing as soon as possible registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administration and enforcement authorities.”
While such information will not be made public, efforts are being made to launch a pan-European mechanism for the automatic exchange of information on beneficial ownership that will “give tax and other relevant authorities full knowledge on vast amounts of information and help them track the complex offshore trails used by criminals,” the letter said. Beneficial ownership ought to be available for public consumption, but access for investigators is constructive progress. The fact that information will not be kept solely by national tax authorities and provided only upon request is also a significant advancement. GFI and other transparency advocates will continue to push for this information to later be opened up for public access.
But in order to do so, some key issues must be addressed. First, loopholes identifying who are the beneficial owners, the frequency, and quantity of information provided—whether public or private—must be tightened to eliminate any room for interpretation.
Second, the effectiveness of beneficial ownership rules needs to go hand in hand with a linking of national registers that is built upon a strengthened monitoring mechanism for the automatic exchange of information. The efforts of Australia and the UK will be in vain if they remain in isolation. Last, the 25% interest provision should be eliminated and all company beneficiaries, regardless of percentage ownership, should be publicly available.
A central element merging all these pieces together is political will. Without this ingredient to transform commitments into implementation and enforcement, Panama Papers risks losing the traction that it is currently gaining. In particular, the U.S. needs to take steps to require the identification of beneficial owners across all states. The fact that it is lagging behind in beneficial ownership transparency and that the Incorporation Transparency and Law Enforcement Assistance Act is still being discussed years after being introduced and re-introduced is a testament to this.
About the author: Daniel Neale is a Research Fellow at Global Financial Integrity, a Washington, DC-based research and government advisory organization.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
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Panama Papers: A Catalyst for Change
May 3, 2016
Just a few weeks have passed since the biggest ever data leak—the Panama Papers—revealed what had been largely understood for some time: there is a hidden universe available for the super rich and super powerful to conceal the proceeds of tax abuses, criminal activities, corruption, and trade fraud, which goes well beyond the Panamanian borders. But unlike previous scandals that exposed similar practices of financial secrecy such as the Lux Leaks or the HSBC scandal, we are seeing real momentum growing and increasing political capital to curb and prevent the creation of anonymous shell companies. Crucially, it is the realization that addressing the global ills demonstrated by the Panama Papers goes beyond tax abuses. Providing such secrecy undermines democracy and limits broad, economic growth in developing countries; the solution is for governments to make these secret companies illegal.
The alarming lesson learned from Mossack Fonseca's operations is that the formation of anonymous companies is legal in many jurisdictions, because there is simply no robust legislation governing beneficial ownership and the creation of shell companies on a global scale. While these practices are in many cases legally justified, the lack of regulation or due diligence requesting information on the identity of individuals exacerbates such pervasive anonymity and invites tax abuses, government corruption, and criminal activity to persist.
Is this the turning point that the international community needed to finally crackdown on global financial secrecy? The answer is still uncertain, and will depend in large part on how political will is increased and maintained in the long run. Various G20 governments such as Australia, Germany, France, Italy, Spain, and the UK have taken steps to go beyond international commitments and engage in actual implementation and enforcement at a national level to request information on the beneficial owners.
The most promising steps have been taken by the UK, which is not only one of the major financial centers of the world, but also one the largest providers of financial services to non-residents. From June onward, the UK government will have the mechanisms in place to require the public disclosure of beneficial owners. According to business secretary Vince Cable, the registry will hold information on individuals with an interest in more than 25% of shares or voting rights in a company, or who otherwise control the way a company is run. Companies will need to supply these details to Companies House when starting up, and update them at least once every 12 months. This will include details such as the name, date of birth and nationality.
Denmark, Netherlands, Slovenia, and more recently Australia, will be following in the UK’s footsteps. The Australian assistant treasurer Kelly O’Dwyer confirmed that a public register revealing the identities of the beneficial owners of shell companies will be created. Details about how much information or how frequently it must be provided is yet to be confirmed. Nevertheless, the announcement comes at a strategically crucial time ahead of the upcoming London tax summit, which will be held in May. In this sense the fact that both the UK and Australia are taking the lead in creating public registries provides more leverage for other countries to follow suit.
A recent letter to the G20 from the Finance Ministers from Germany, France, Italy, Spain, and the UK explained the government’s commitment to “establishing as soon as possible registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administration and enforcement authorities.”
While such information will not be made public, efforts are being made to launch a pan-European mechanism for the automatic exchange of information on beneficial ownership that will “give tax and other relevant authorities full knowledge on vast amounts of information and help them track the complex offshore trails used by criminals,” the letter said. Beneficial ownership ought to be available for public consumption, but access for investigators is constructive progress. The fact that information will not be kept solely by national tax authorities and provided only upon request is also a significant advancement. GFI and other transparency advocates will continue to push for this information to later be opened up for public access.
But in order to do so, some key issues must be addressed. First, loopholes identifying who are the beneficial owners, the frequency, and quantity of information provided—whether public or private—must be tightened to eliminate any room for interpretation.
Second, the effectiveness of beneficial ownership rules needs to go hand in hand with a linking of national registers that is built upon a strengthened monitoring mechanism for the automatic exchange of information. The efforts of Australia and the UK will be in vain if they remain in isolation. Last, the 25% interest provision should be eliminated and all company beneficiaries, regardless of percentage ownership, should be publicly available.
A central element merging all these pieces together is political will. Without this ingredient to transform commitments into implementation and enforcement, Panama Papers risks losing the traction that it is currently gaining. In particular, the U.S. needs to take steps to require the identification of beneficial owners across all states. The fact that it is lagging behind in beneficial ownership transparency and that the Incorporation Transparency and Law Enforcement Assistance Act is still being discussed years after being introduced and re-introduced is a testament to this.
About the author: Daniel Neale is a Research Fellow at Global Financial Integrity, a Washington, DC-based research and government advisory organization.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
