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End of offshore secrecy?

It was only at the turn of the century and around the time Musharraf regime took hold of Pakistan that the UAE became the favourite financial haven for our rich – those that habitually loot the exchequer of its taxes, siphon off public money through commissions, kickbacks and plunder private resources through black marketing and hoarding.

The UK and the territories under its jurisdiction, however, had remained the most favoured locations for these rich Pakistanis for stashing their ill-gotten wealth since the very inception of Pakistan. According to not very reliable estimates in some years not only Pakistanis have been recorded as the most foreigners to have visited the UK but they have also estimated to have spent the most in Britain compared to the spending of all foreign tourists in that particular year.

So, for these Pakistanis the bad news is, an amendment has recently been passed in the UK laws under which the government has been empowered to ask for unveiling of the identity of the real owners of the assets camouflaged under layers of secrecy in these territories.

The new amendment has enabled the UK to renew its efforts to combat tax avoidance and evasion and money laundering and as such it has issued strict instructions early this month to companies in its territories to join public registers.

The amendment forces UK’s 14 overseas territories to create the public registers by 2020 or have the UK government impose them. The territories had previously only had to reveal the information on these companies’ ownership if authorities ask.

The registers are expected to prevent criminals from exploiting UK’s secret regime, hiding their toxic wealth and laundering money into the legitimate system, often for nefarious purposes.

With open registers, the government would know who owns what and where, and it will also be able to see where the money flows. This, it is believed, would better equip the UK government to root out dirty money and deal with the issues that arise from that.

The current registers have been found to be insufficient and hopefully public registers would allow reporting and discussion of these matters by the media and civil society as was demonstrated by debate that followed the leak of the Panama Papers.

Over half of shell companies included in the Panama Papers were set up in the British Virgin Islands, Transparency International found.

The amendment does not apply to the Channel Islands and the Island of Man since the UK government does not have the right to impose laws on them, though parliament is investigating how to align these crown dependencies with the amendment.

This means that companies based in places like Bermuda, the Cayman Islands, Turks and Caicos and the British Virgin Islands will soon have to reveal the identity of the real individuals behind companies – the beneficial owners.

This is being termed as a major victory in the fight against cross-border corruption.

Registers of beneficial ownership are said to be essential for effectively fighting money laundering, corruption and tax evasion as these registers would enable authorities to trace dirty money. This means having timely access to sufficient, accurate and up-to-date information about companies and the people who ultimately own and benefit from them.

Obstacles to accessing this information or delays in transferring it to authorities make it harder to follow the money back to its source. This increases the likelihood that people who have engaged in corrupt or illegal acts will get away with their crimes. Public registers of beneficial ownership make getting this information a lot easier.

When conducting investigations into company ownership, authorities often rely on company registers and information recorded by financial institutions.

New research into beneficial ownership transparency in G20 member countries and guest countries found that in 15 of the 23 countries assessed, investigators rely almost solely on the information collected by financial institutions and so-called “designated non-financial businesses and professions” (or DNFPBs), such as lawyers and accountants, to identify the beneficial owner of companies.

But these sources are said to be often not enough, and investigators that depend on them alone face significant obstacles when it comes to identifying, tracking and tracing illicit activities.

Company registers around the world record a range of information, but most do not actually include beneficial ownership information. Some of them (such as those in the state of Delaware in the United States) do not even include information on shareholders.

Even with information on shareholders, authorities will not necessarily be able to fully understand the control and ownership structure of a company and identify the individuals profiting from it. For example, the shareholders might be another domestic legal entity, a foreign company, or even a nominee – that is, someone who “rents” their name but acts according to instructions of the real owner, who chooses to remain hidden.

If a shareholder of a company is a foreign company registered offshore, it might take investigators years to find out who the real beneficial owner is. In that case, they would need to formally request information and depend on the cooperation of officials in the jurisdiction where the company is registered. Worse, while all this is going on, the company might be tipped off that is under investigation and have time to move its assets elsewhere.

Relying on information collected by financial institutions and DNFBPs brings its own set of challenges. In some countries, authorities can only access an online database that shows who holds an account at a particular financial institution after receiving a court order. In other countries, authorities need to know the name of the bank holding a company’s accounts in order to request information – and finding the bank’s name is not always straightforward.

A further issue is that financial institutions and DNFBPs often record the beneficial ownership information exactly as their customers provide it. This information might not necessarily be accurate, or the bank could be complicit in recording false information, as many recent corruption cases have demonstrated.

A company might also be incorporated in one place and have bank accounts in another, which makes it harder for the authorities to access information.

Research by Transparency International UK shows that 90 per cent of UK firms involved in a scheme that moved £63 billion of illicit wealth out of Russia had bank accounts in Latvia or Estonia.

In the Azerbaijani Laundromat scheme, shell companies incorporated in the United Kingdom but owned by other offshore companies used bank accounts at the Estonian branch of the Danske Bank to disguise payments allegedly made by Azerbaijani officials to launder the country’s reputation in Europe.

A public, central register is said to be the most effective and practical way to record information on beneficial ownership and facilitate access for the authorities.

A central register also supports the harmonisation of the country’s legal framework, avoiding double standards, and facilitates cross-border investigations and international cooperation.

Even with the adoption of beneficial ownership registers, however, the reliability of information is likely to remain an issue. The authorities responsible for maintaining such registers often do not have the capacity or the mandate to verify the information provided. Registers should be adequately resourced so they can verify the accuracy of information provided by companies. Making the register publicly available can help minimise the risk of false information, as external watchdogs and even obliged entities (financial institutions and DNFBPs) could help monitor the information provided.

The fast-paced developments in digital technology are also opening the doors for eliminating in a more enduring manner corrupt practices such as evasion and avoidance of taxes, underhand commissions, kickbacks and above all money laundering.

The latest technology that facilitates the elimination of such corrupt practices is called Blockchain.

Rather than data being stored on one central server (register), it is simultaneously stored on nodes in a system where each node communicates with the others to record and verify each transaction.

Information is publicly recorded in ‘blocks’. Blocks are simply collections of data and can store any type of data. Blocks contain not only the data that was recently stored in them, but all previous data points. This makes it possible to link one block to its previous block, creating a chain of information. This is why the underlying technology is referred to as a blockchain.

As of now, blockchain is not typically used as a specific anti-corruption tool, but the permanence of data recorded in blockchains makes it resilient to manipulation for fraudulent purposes.

There are already some promising applications for blockchain technology in government services such as land registries and voting systems, and private applications such as financial transactions, supply chain management and contracting.

One of the most cited blockchain applications are smart contracts. These are contracts written in code instead of text and are signed by digital signatures and automatically implemented.

Audits and safeguards can be coded into a smart contract and cannot be altered without consent, which could in theory limit the scope for fraud and corruption.

This makes smart contracts potentially applicable to several areas of government contracting, especially with regards to limiting manipulation during public procurement processes. Like other blockchain transactions, the process cuts out the middlemen.

M Ziauddin, "End of offshore secrecy?," Business Recorder. 2018-05-16.
Keywords: Private resources , Public registers , Tax evasion , Danske Bank , Financial institutions , International cooperation , DNFBP , UK , UAE