Is the UK Ending Corporate Secrecy? More Spin Than Substance

The UK has one of the most laissez-faire business regimes in the world. Anyone over the age of 16 whether resident in the UK or abroad, with some minor exceptions, can become a company director.

The UK has one of the most laissez-faire business regimes in the world. Anyone over the age of 16 whether resident in the UK or abroad, with some minor exceptions, can become a company director. Companies can be bought off the shelf for just a few pounds and the identity of their owners can be concealed behind a labyrinth of nominee shareholders and other devices. Nominee directors often act as post-boxes and take their instructions from the real owners, but their identity is concealed. Around 154,000 to 273,000 of UK companies may have nominee directors and some individuals hold around 1,000 company directorships.

Under the UK Companies Act, public companies must have at least two directors, but only one of these needs to be natural person. The other can be a legal person, or another company, even though it is registered in a tax haven which guarantees complete anonymity to all the owners and controllers. Another impenetrable layer of opaqueness is provided by trusts. The trusts in essence are vehicles where A appoints B to manage his/her assets; C, D and E receive the income; F, G and H might receive the ultimate proceeds. There is no public register of these vehicles and the taxman is left chasing shadows.

Unsurprisingly, anonymous shell companies and trusts provide the secrecy necessary for tax avoidance, money laundering, corruption and a variety of anti-social activities. Following considerable media exposure, the European Parliament has voted to introduce measures to throw a bit of sunlight on these shady entities. This has now been followed by an announcement that the UK will enact legislation, but all is not what it seems and is a long way away from ushering in a new era of corporate transparency and accountability.

The UK government is proposing the creation of a public register that would contain the name, date of birth and nationality of any individual with an interest in more than 25 per cent of shares or voting rights in a company, or who otherwise control the way a company is run. This would extend to control of companies through trusts. In addition, there may be restrictions on the use of corporate directors, subject to discussion with big business.

In due course, the above will be translated into legislation, but the proposals have serious deficiencies. The 25% threshold leaves plenty of scope of creative games to conceal the identity of owners. There are no curbs on the use of nominee shareholders. Some companies participating in the Private Finance Initiative (PFI) have been known to secure taxpayer funded contracts, but then shift them to havens. Banks act as nominee shareholders and conceal the identity of the real owners, thus obscuring public accountability. Such strategies also enable them to avoid taxes.

There are no curbs on the use of nominee directors either. So these paid puppets would continue to front companies and shield the real controllers. At the very least, they should be required to identify the human parties that they act for. It is all very well for the government to say that it will get tough on rogue company directors, but the directors don't have to live in the UK. So how is the government going to bring them to book? There is generally poor enforcement of corporate law in the UK. Companies House, a government agency, merely receives information and files it. It does not check for accuracy of anything as it lacks resources. One item of research has shown that nearly 4,000 directors of British companies appear on international watchlists of alleged fraudsters, money launderers, terror financiers and corrupt officials.

The government has succumbed to pressure from corporate interests and companies will continue to be directors of other companies, albeit with some restrictions. There is virtually no reform of trusts. At the very least, there should be a publicly available register providing names of all the parties to a trust, and the assets and resources involved.

Then there is the problem of the UK sponsored tax havens. These include Crown Dependencies, such as Jersey, Guernsey and the Isle of Man; and Overseas Territories, such as Bermuda, British Virgin Islands (BVI), Cayman Islands, Gibraltar and Turks and Caicos. They are the byword for secrecy and sleaze. One building in the Cayman Islands is the address of some 19,000 companies. BVI, with a population of 31,000, accounts for more foreign direct investment flows than the combined total for India and Brazil, but has warranted no investigation from the UK government. The UK has a legal and moral responsibility for good governance of its satellites. The UK protects the economic interests of Crown Dependencies through a deal with the European Union (EU), which effectively enables the Crown Dependencies to trade with the EU without any of the obligations accepted by member states. In the name of good governance, the UK deposed the elected government of Turks and Caicos. However, it claims curious impotence when it comes to curbing the tax dodging and money laundering activities facilitated by these island states. Even the minimalist reform proposals outlined above will not apply to any of the Crown Dependencies or Overseas Territories. So the circuits of illicit practices will continue to thrive.

There should be a complete ban on corporate directorships and nominee shareholders so that the public knows who it is transacting with. Shareholders enjoy enormous privileges, such as the benefit of limited liability which enables them to dump losses in to the rest of society. A simple disclosure of their identity is not an unreasonable requirement. Nominee directors should identify their puppet masters. The kindest thing that can be said about the UK reform proposals is that secrecy and opaqueness is on the political agenda. However, the details are disappointing and will hardly worry those using corporate secrecy for their selfish games.


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