In early 2015, confidential documents were leaked to Süddeutsche Zeitung, a German newspaper. The documents leaked came from the internal database of Mossack Fonseca, a Panamanian law firm. Working with the International Consortium of Investigative Journalists and media organizations from around the world, the documents (which became known as the ‘Panama Papers’) were analysed and, on the 3 April 2016, media organizations around the world published their findings. It was alleged that Mossack Fonseca had provided services to wealthy persons, including prominent public officials, that allowed them to use offshore companies and other investment vehicles to engage in criminal activities (such as tax evasion, money laundering, and evading sanctions), as well as lawful, but morally-questionable, activities (such as tax avoidance). Many of the tax havens in which these companies were based have passed laws that make it extremely difficult to discover who actually owns and controls companies incorporated there, making such offshore companies ideal vehicles for potentially criminal activity. It also means that, had the Panama Papers not been leaked, this activity might never have come to light. Understandably, attention focused on how to make the ownership and control of offshore companies more transparent.
By a coincidence of timing, three days later, UK reforms came into force that were designed to implement the EU’s Fourth Anti-Money Laundering Directive by promoting greater transparency in terms of who owns and controls UK companies. The requirement upon UK companies to keep a register of members and a register of directors means that we now know who legally owns and controls a company. However, UK law does allow a person to register shares in the name of another person, as well as allowing persons to appoint nominee directors to act on their behalf. The result is that persons who appear to be the legal owners and controllers of the company may in fact be acting on behalf of others (such persons are known as ‘beneficial owners’), and this will not be reflected in the statutory registers. As the Department of Business Innovation & Skills stated in April 2014, in a prescient passage that describes perfectly the alleged activity uncovered by the Panama Papers: “This provides scope for opacity of company ownership and control. This opacity can facilitate the misuse of the company for illicit activity – and hinder law enforcement’s ability to identify and sanction the individuals really responsible.”
Parliament passed the Small Business, Enterprise and Employment Act 2015, which introduced a new Part 21A into the Companies Act 2006. Part 21A requires certain companies to take steps to identify persons who exercise significant control over the company, and then provide specified details about such persons in a PSC register, which can be inspected by anyone free of charge (public inspection is not a requirement of the Directive), and must also be provided to Companies House. The Act’s definition of a person with significant control includes persons who (i) hold, directly or indirectly, more than 25% of shares or voting rights in that company, or; (ii) hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of that company, or; (iii) have the right to exercise, or actually exercise, significant influence or control over that company.
Clearly, the aim behind Part 21A is to provide greater transparency in terms of who actually controls and exercises influence over a company. However, in light of the Panama Papers, a notable problem arises. The alleged activities disclosed in the Panama Papers occurred in relation to companies, the majority of which were registered in UK Overseas Territories (such as the British Virgin Islands, and the Bahamas) and Crown Dependencies (such as the Isle of Man, and the Bailiwick of Jersey). This is not an especially surprising revelation – that UK Overseas Territories and Crown Dependencies are an extremely popular forum for those who engage in corruption was noted in a 2011 report published by the World Bank. The problem that exists is that UK legislation does not usually apply to Overseas Territories and Crown Dependencies, and companies incorporated in such places are not currently subject to the 2006 Act’s rules relating to the PSC register. In 2013, the Prime Minister wrote to a number of Overseas Territories and Crown Dependencies, urging them to “get their house in order” and pass laws requiring companies to maintain public registers of beneficial share ownership similar to the UK’s PSC register. Monserrat has agreed to create a public central register (albeit not one that is available to access free-of-charge) and Gibraltar, being regarded as part of the EU Member State of the UK, has agreed to comply with the EU standard found in the Fourth Anti-Money Laundering Directive. Unfortunately, most Overseas Territories and Crown Dependencies have refused to pass laws providing for the creation of a central public register (although some countries, such as Bermuda, provide for a central register, they have, to date, refused to allow public access and only provide access to relevant domestic and international authorities).
The question that arises is can the UK Parliament compel Overseas Territories and Crown Dependencies to implement a public register of beneficial ownership. Whilst legislation deriving from the UK Parliament does not usually apply to Overseas Territories and Crown Dependencies, Parliament could exercise direct rule over these countries and compel them to implement a central public register of beneficial ownership. Indeed, the UK Parliament did something similar in 2009 after a Foreign Office inquiry revealed widespread government corruption in the Turks and Caicos Islands. Parliament passed the Turks and Caicos Islands Constitution (Interim Amendment) Order 2009, which provided that key governmental offices would be vacated, the Cabinet would cease to exist, and the House of Assembly would be dissolved. In their place, an Advisory Council, headed by a UK-appointed Governor, was put in place, acting under instructions from the UK government. The 2009 Order was revoked and home rule restored in 2012, by which time, a substantial reform programme was put into place (including provisions relating to the sharing of information on tax matters).
Sir Eric Pickles, the government’s ‘Anti-Corruption Champion’, has indicated that legislative compulsion is one solution that the government is considering, although many believe that this is unlikely. What is likely is that the government will seek to apply more pressure to Overseas Territories and Crown Dependencies to increase transparency but, to date, such pressure has provided only limited reform. Whether the fallout from the allegations contained within the Panama Papers (which, at the time of writing, has already forced the resignation of one head of government, namely the Prime Minister of Iceland) will place more pressure on tax havens to improve transparency remains to be seen. It should also be noted that Mossack Fonseca is not the largest law firm providing these sorts of offshore services – it is the world’s fourth largest. Accordingly, the information contained within the Panama Papers could merely provide a hint at the true scale of the problem.
This post was originally published in April 2016 as part of the OUP Blog.
Featured image credit: Messages between a Süddeutsche Zeitung journalist and a whistleblower regarding leaking the Panama Papers by unknown author. Public domain via Wikimedia Commons.