Cracking the shells

By M.V.

CORPORATE secrecy has shot up the global political agenda over the past couple of years. Non-governmental organisations (NGOs) have been kicking up a stink about the liberal use of anonymous shell companies—which exist on paper only, with no real employees or offices—by corrupt officials, money launderers and other financial ne’er-do-wells. For proof of the economic harm this can cause, look no further than the billions of dollars siphoned out of Ukraine through shady shells by Viktor Yanukovich and his cronies.

New legislation in the European Union, agreed on December 16th, marks a big step forward in the fight to curb such shenanigans, by centralising and shedding more light on information about who owns and controls companies. Under the new rules, countries will have to set up central registers of companies’ “beneficial” owners—that is, the real people behind firms or the ownership structures that sit atop them. Access to this information will have to be made available to law enforcement and relevant government agencies, such as tax authorities, and also to journalists and NGOs that can prove a “legitimate interest”. Information on trusts will also be collected in national registers, but this will be available only to government agencies. Member states will have two years to pass the new standards into law.

This is a remarkable victory for those who have campaigned to prise open ownership of the world’s millions of private firms and corporate structures. Just a few years ago, the idea was widely seen as a pipe dream. But that does not mean that anti-corruption activists are completely happy. “A system which limits access is likely to be more cumbersome, expensive and could be used as an excuse to deny meaningful public access. It remains unclear how countries will assess who has a ‘legitimate interest’,” said Carl Dolan of Transparency International, a campaigning group. “The compromise may end up replacing one big loophole with many small loopholes.”

Campaigners are also frustrated that there will be no public access to information on trusts, a private financial structure that holds assets for a beneficiary. Britain, which is home to many of these, had pushed for them to be more shielded from transparency than companies on the ground that they are private legal arrangements and thus more deserving of privacy than limited-liability corporate structures.

Countries can go further than the EU's new standards if they choose, and some have already said they plan to do so. Britain, France and Denmark, for instance, will offer full public disclosure of company owners—which the European Parliament voted overwhelmingly in favour of earlier this year. Ukraine plans to do the same. Others may soon feel obliged to follow suit.

Europe’s move is a setback for those—including, but not limited to, practitioners and regulators in offshore financial centres—who say that central, publicly accessible registers are a bad idea. Their arguments span issues of financial privacy, the complexity of beneficial ownership (defining “control” is not always straightforward) and concerns that owners of dodgy companies will provide false or out-of-date information to registries.

A group of offshore financial regulators is pushing for an alternative approach, whereby the onus would be on the lawyers and other service providers that register companies to collect ownership information and to hand it over to the relevant authorities when presented with legitimate requests. Such an approach would work if these sorts of professionals are subject to proper regulation and harsh penalties for non-compliance, as they already are in some offshore centres. But campaign groups are strongly opposed because the proposal offers no public access.

Thanks to the EU's new rules, European law enforcers should soon find it easier to track the money flows of organised crime, bribe-takers and the like. That will help to push up detection rates for illicit funds, which are estimated to be as low as 1% worldwide, with a seizure rate of just 0.2%, according to the United Nations Office on Drugs and Crime. But the global picture remains patchy. Eyes will now turn back to America, where company registration is in the hands of individual states. There, corporate anonymity—and thus abuse—remains rife.