Andres Knobel, Technology and Online Beneficial Ownership Registries: Easier to Create Companies and Better at Preventing Financial Crimes (June 1, 2017). Available at SSRN
The Panama Papers showed that financial crimes such as money laundering, corruption or tax evasion are alive and kicking. They flourish thanks to secrecy that allows criminals to hide behind opaque companies and trusts. For example, some countries allow bearer shares or they do not require all types of entities to register in a commercial register for them to legally exist. Or, even if all entities have to register, not all types of shareholders and members have to be disclosed. This means that entities may operate in the economy (e.g. opening a bank account) even if their full ownership information is not available in a commercial register.
In most countries, however, most legal entities (e.g. companies, but not trusts) do have to register in a commercial register. Nevertheless, they generally only have to disclose their legal owners (e.g. a nominee or an offshore company), but not their beneficial owners (BOs), meaning the individual ultimately owning or controlling the entity. The process to incorporate an entity is usually done in person and on paper at the commercial register.
Two current – but opposing – trends are changing this.
The negative trend is that commercial registries are moving online, making it easier and faster to create companies remotely via the internet, where very little legal ownership information is required, if any. This increases secrecy levels around companies and facilitates financial crimes even further.
The positive – but still insufficient – trend is that some countries, especially in Europe, are starting to “upgrade” their commercial registries to require legal entities (and some trusts) to also register their BOs. However, this positive trend is not good enough because it is still simple to provide false or inaccurate BO information when registering the entity.
Civil society organisations are therefore calling for a more effective combination of both trends: in other words, to upgrade all commercial registries so that they do require BO information of companies and trusts, and to have this information digital and in open data format to make it easier to search for it and check its accuracy and truthfulness.
In order to reduce the options for those who would want to provide false or inaccurate BO information, this paper proposes that the same technology already available and deployed in the private sector (e.g. cross-checking, big data and artificial intelligence used by credit card companies to prevent fraudulent online purchases) should also be used in these digital commercial registries.
In addition, access to this BO information must be public and in open data format, in order to create a deterrent effect. Even once this technology is applied, if access to digitalised BO information is restricted to authorities, it is less likely to ensure the accuracy of the information since neither civil society nor journalists can use their resources to check the information. We have to consider the possibility that authorities may also be corrupt and choose to protect businesspeople or politicians and no one would ever find out about it, unless another leak like the Panama Papers takes place.
It makes good sense that public BO online registers should apply the technology mentioned above. Restricted online registers, and those that require disclosure of legal ownership only, if any ownership at all, should be prevented.