Ownership of privately-held companies: privacy versus transparency


Beginning in 2016, corporations in the United Kingdom will have to disclose the identity of their beneficial owners.

It started with executive salaries. Once thought to be a matter of great privacy, many countries now require disclosure of corporate salaries for executives at publicly-traded companies. Today no one, except perhaps the anachronistic leaders at soccer’s ruling body, FIFA, finds that strange.

Next up? Ownership of privately-held companies. Beginning in 2016, corporations in the United Kingdom will have to disclose the identity of their beneficial owners. This is Prime Minister Cameron delivering on his 2013 promise at the G8 Summit to tackle tax evasion and corruption. Many are raising privacy – and even security – concerns, but business people are hoping to see lower risks and better insight into the transactions they contemplate. The UK law is being mirrored elsewhere in Europe, and many smaller companies are getting out in front of the change by voluntarily identifying their beneficial owners. This is one more trend toward transparency that we’re not likely to see reversed.

Elsewhere in the world, owners of private companies can continue to keep that information hidden from public view. While many argue that this is a fundamental principle of financial privacy, it has also permitted extreme abuses by criminals and kleptocrats. The ability to launder illicit funds has made it more difficult to ensure accountability. A World Bank report that looked at over 200 grand corruption cases spanning three decades found that fully 70 per cent involved accounting fictions to hide beneficial ownership and the true source of funds. As David Cameron put it bluntly at the time of the G8 Summit, “[i]t’s a world where, regrettably, corrupt government officials in some countries and some corporations run rings around the letter and the spirit of the law to rip off hard working people and to plunder their natural resources.”

The UK will require companies to record their beneficial owners in a public central registry maintained by the government. Companies with securities listed on a UK-regulated market (or another market subject to similar disclosure requirements) are exempt from the requirement. In total, an estimated 3,190,000 UK companies will need to register their beneficial owners by early 2016; a reported 2,960,000 of these have fewer than four shareholders.

The new UK law defines “beneficial owner” broadly, and includes any individual who ultimately owns and controls the company, whether by directly or indirectly holding more than 25 per cent of the company’s shares or voting rights, or by otherwise exercising control over the company’s management. That means that it’s not just so-called “shadow directors” who are being dragged into the light; indirect minority shareholders who may not even realize that they have sufficient controlling interest in a company to be considered a “beneficial owner” also fall within the scope of these laws.

The European Union’s parliament passed its 4th Money Laundering Directive in June, requiring member states to enact similar corporate disclosure laws within the next two years: Norway and Denmark have also already done so. Bipartisan legislation with the same goal has been introduced several times in both the U.S. House of Representatives and Senate, although those efforts have stalled. They have been opposed by lobbyists arguing that such a registry would be too costly to administer, whereas in Delaware, one of the states best known for shielding shell corporations, half the state legislature has written to their congressional delegation urging them to support the bill. In spite of privacy concerns, many in the business world support the new requirements. Sunshine laws make it easier for companies to conduct due diligence on their partners. Knowing who actually owns and controls a business partner is already a requirement for many well-governed companies under money-laundering, terrorist-financing and anti-bribery laws. Shifting the burden to the individual company to disclose its own beneficial owners is expected to simplify compliance in international business and improve investor confidence.

Forty years ago the US Congress passed the first anti-bribery legislation over the same sorts of protests we’re hearing from some quarters now. In time the UK and the EU followed the US lead. It is unfortunate today that the US seems to be bringing up the rear amongst countries working toward greater transparency in this respect. Even a paralyzed Congress should be able to act on an issue with so much connection not only to good business practices, but also to tracking down and blocking the financing of terrorism.

Alexandra Wrage is the president of TRACE, an anti-bribery organization. TRACE has collected beneficial ownership information on thousands of entities for 15 years and the sky hasn’t fallen. This article originally appeared in Forbes.

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