Small Business, Enterprise and Employment Bill

Written evidence submitted by the International Financial Centres Forum (SB 43)

1. INTRODUCTION

1.1 The International Financial Centres Forum ("the Forum") is a member-funded, not-for-profit organisation. The Forum advocates responsible cross-border financial intermediation in support of trade and investment as a means of promoting economic growth and enhancing development prospects. Members of the Forum include professional service firms and businesses headquartered in Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey and Jersey with offices in a number of the other leading IFCs. [1]

1.2 The Forum notes the UK’s G8 Action Plan published on 18 June 2013, in which the UK commits to introducing new rules requiring private companies to obtain and hold "adequate, accurate and current" information on who owns and controls them and to implement a central registry of company beneficial ownership maintained by Companies House. It also notes draft legislation on company transparency and filing requirements contained in the Small Business, Enterprise and Employment Bill published on 25 June 2014.

1.3 We note G8 and G20 policy provides that tax, regulatory and law enforcement agencies should have access to complete and (critically) accurate information in a timely fashion and be able to disseminate the data internationally through recognised gateways. We accordingly support United Kingdom efforts to develop an effective system to track beneficial ownership of companies. All else, including a public register of beneficial ownership, is essentially collateral.

1.4 Forum member firms are in jurisdictions which have substantially implemented corporate transparency standards promulgated by the Financial Action Task Force (FATF) and accordingly have relevant experience with corporate transparency protocols and an interest in UK efforts to ensure that such standards are applied in the UK and globally.

1.5 The Forum has been engaged in the UK consultation process including meeting with Dr Vince Cable and his officials bilaterally. We attach our correspondence with Dr Cable as Appendix A [2] and suggest review of IFC Forum’s letter dated 30 September 2014 which includes submissions designed to make UK plans more effective. We have also participated in Department of Business Innovation and Skills (BIS) roundtable discussions and provided a submission dated 16 September 2013 to the BIS consultation on Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business (the "BIS Consultation") (submission attached as Appendix B). [3] We have also liaised with HMT and the Cabinet Office dating back to meetings in advance of the G8 meeting in June 2013.

1.6 The Forum has also discussed beneficial ownership registers with the European Commission, White House officials and US Secretaries of State (responsible for company supervision in the US). We also liaise regularly with governments in British offshore centres in respect of corporate data tracking policy.

1.7 The Forum welcomes the opportunity to submit comments to the House of Commons Public Bill Committee on the Bill. Given Forum member experience, comments focus on part VII of the Bill relating to company transparency.

2 SUMMARY

2.1 UK proposals for a model urged by NGOs has led to a confused plan to publish asset ownership by law abiding persons at the expense of accurate data collection to expose the dishonest. The failure of the UK model to meet the core FATF requirements in the most effective manner means it has little or no prospect of gaining traction as an international standard. As the UK has claimed leadership in this area, others not sharing in the approach would be visible and therefore politically embarrassing. We urge you to reconsider the defective self-reporting model proposed by the Bill.

2.2 Third party verification is required to meet FATF objectives but provision for this is absent in the Bill.

2.3 Public registers are unprecedented and not required by the FATF. Furthermore, public registers are likely to be counterproductive in securing information for law enforcement purposes as they may degrade reporting candour.

2.4 UK proposals are likely to impair investment appetite for the UK particularly from strategically important investors in China and other emerging markets. Publication of asset ownership is anathema to such investors from both a business and cultural perspective.

2.5 Proposals are very costly for business. The Impact Assessment that accompanied the Bill estimated costs at nearly £1.1bn with only £2m of that cost allocated to government.

2.6 Public registers are a poor allocation of resources. The Impact Assessment estimates benefits at £0 given "little quantified data about the benefits resulting from this policy proposal".

2.7 UK proposals are unlikely to produce benefit for the business community which is frequently cited to justify data publication (we note the survey conducted for BIS reported in the Impact Assessment showing that "only 10% of respondents indicated that the proposed reform would ensure they know with whom they are doing business" - https://www.gov.uk/government/publications/company-ownership-transparency-and-trust-impact-assessments).

2.8 We recommend that:

2.8.1 data verification be conducted by third parties subject to government supervision as foreshadowed in paragraph 6 of the UK G8 Action Plan;

2.8.2 the UK examine other alternative models for data collection including the regulated corporate service provider regime that has operated in the British Crown Dependencies and Overseas Territories for more than a decade and is regarded by the World Bank as the most effective approach;

2.8.3 the requirement to publish beneficial ownership data be removed from Part VIII of the Bill. This is inconsistent with Part VII of the Bill which provides that beneficial ownership information be available at the registered office only upon showing of proper purpose. If this is not accepted, we would propose that provisions requiring publication are not made operational until after the report on the functioning of the PSC regime from the Secretary of State (within 3 years, pursuant to section 71 of the Bill); and

2.8.4 the UK drop plans to make ownership information available at the registered office. Should that proposal not find favour we propose to shift the burden of taking court action when a request for information is declined, from the company to the requesting party.

3 IMPACT ON UK COMPETITIVENESS AND FOREIGN INVESTMENT

3.1 The UK aims to be the most appealing investment destination in G7. In particular, it seeks to attract business from strategically important emerging markets, including China. Publication of asset ownership is anathema to such investors from both a business and cultural perspective. UK proposals for publication of asset ownership will be seen as disproportionate and will materially damage UK efforts to attract such investment.

3.2 Of the approximately 300 responses to the BIS Consultation, a significant number raised concerns about its impact on the competitiveness of affected firms and its impact on, inward investment. The Forum shares these concerns.

4 COST/BENEFIT

4.1 Recent policy direction in the UK and international companies legislation has sought to reduce the administrative burden imposed on business. Benefits of new regulations must be properly balanced against compliance costs for UK business.

4.2 The Final Stage Impact Assessment (IA) prepared by the Department for Business, Innovation and Skills estimates costs of the collection and publication of beneficial ownership data at £1088.2 million. Benefits are estimated at £0 given "little quantified data about the benefits resulting from this policy proposal" (paragraph 104). As to the intended benefit to the business community, paragraph 106 of the IA notes a survey conducted for BIS disclosing that "only 10% of respondents indicated that the proposed reform would ensure they know with whom they are doing business".

4.3 The IA conclusions proceed from the usual (but implausible) assumption of 100% compliance. Persons establishing a company for criminal purposes will not self-report fully and accurately to a corporate registrar with little effective enforcement capability. If the system is to be made fit for purpose costs already forecast at nearly £1.1bn will need to rise significantly to include proper means for third party verification.

4.4 Registered ownership is simple, empirical and easily ascertained. Determining beneficial ownership or persons with significant control, by contrast, is not so. Assume, for example, two persons own shares in a company which together exceed a 25% interest. They usually vote those shares similarly, but are not obliged to do so. Should each shareholder be seen as holding a disclosable shareholding, or not? Costly expert input will be invariably be required to properly comply in any complex situation. Even investors not deterred by UK plans to create a national public register of their assets in this country will baulk at the extra cost and time imposed by the proposed regime.

4.5 The vast majority of UK businesses are compliant. Dishonest persons and criminals are unlikely to self-report accurately ownership of companies established for fraudulent purposes. The plan will result in substantially increased costs (quantified in the IA at nearly £1.1bn borne by compliant business with little improvement in the behaviour it is actually intended to address. Furthermore, making the register public could in fact mislead investors and stakeholders if data provided is inaccurate.

5 GLOBAL ADOPTION OF UK PLANS UNLIKELY

5.1 We agree with the comments made in the research paper prepared by the House of Commons Library on the Bill dated 10 July 2014 that "[i]t is generally accepted that any commitment to improve the transparency of ownership and control of corporations, if it is to be effective, needs to be a worldwide effort." [4]

5.2 No public registry of beneficial ownership data yet exists anywhere. To date, only one other G8 country (France) has committed to the establishment of public registers.

5.3 There are a number of overlapping and potentially duplicative initiatives underway on collection and access to beneficial ownership data. At this stage there are no settled outcomes on any of the plans. Key initiatives, outlined in summary form in Appendix C [5] , include:

· UK proposals for a public central register of beneficial ownership;

· EU plans in the context of the 4th Anti-Money Laundering Directive;

· FATCA and the OECD Common Reporting Standard (CRS);

· US proposals for data collection through the IRS; and

· FATF guidance regarding recommendations 24 and 25.

5.4 European Union policy on beneficial ownership registers is split. The EU Parliament favours beneficial ownership data readily accessible by the general public. However, the EU Commission seeks to ensure that EU Parliamentary proposals comply with EU data protection standards by restricting register access to governments and "obliged entities" where permitted at national level. The EU outcome is yet to be determined. A briefing on the EU position is attached as Appendix D. [6]

5.5 Current US proposals do not contemplate public registers of beneficial ownership.

5.6 FATCA and the OECD CRS program will lead to bank verified identity data and financial accounts, exchanged annually. For government purposes, at least, plans for registers of beneficial ownership are arguably now superseded by the FATCA and CRS projects.

6 ESTABLISHING A UK SYSTEM FIT FOR PURPOSE

6.1 The main purpose of the various international initiatives underway in this area must be that regulatory, legal and tax enforcement agencies have access to "adequate, accurate and timely information on the beneficial ownership and control of legal persons", as required by FATF Recommendation 24. This requirement is widely agreed as the international standard. All else, including a public register of beneficial ownership, is essentially collateral.

6.2 UK proposals are inferior to the corporate service provider model deployed in the Crown Dependencies and Overseas Territories. Any moves to replace those systems with the UK model would degrade current standards in the British offshore centres.

6.3 Systematic verification: an effective mechanism for verification of data is essential to ensure the key objective of collection of accurate data is met. The UK suggested regime is based upon "self-reporting". There is no provision for verification of data, omitting a basic requirement for an effective system. Penalties and public scrutiny will not achieve accuracy for reasons as follows:

· the notion of separate interests between company and shareholder (which underpins the proposed model) does not exist, as a practical matter, in most private companies;

· the criminally minded will not be deterred by the prospect of additional penalties arising from a failure to self-declare their dishonest activity; and

· sporadic error spotting by the general public has no prospect of being regarded by FATF as a credible means of discharging the obligation to collect accurate data.

6.4 Exemption for Foreign Entities: The Impact Assessment accompanying the Bill indicates it is not intended to include "foreign entities" in scope. This will undermine the policy objective of the UK draft legislation by permitting persons to carry on business in the UK with a full branch presence of a foreign (e.g. US) corporation with no disclosure obligations in the UK. It will prompt a migration from UK to foreign companies for investment in the UK. US, Hong Kong and Singapore companies are all substantially free of tax in their home jurisdictions where used for international investment.

7 THE REGULATED "GATEKEEPER" APPROACH

7.1 The British offshore centres operate a model which provides for systematic verification of beneficial ownership for companies and trusts (in accordance with FATF requirements) by regulated and supervised corporate service providers (CSPs) and have done so for over a decade. A briefing on the CSP regime is attached as Appendix E. [7]

7.2 The Forum does not represent this system as infallible. However, it is regarded by the World Bank and other expert studies as the best means of collecting accurate data on beneficial owners. The table attached as Appendix F [8] confirms that, in practice, this system has led to world leading compliance levels by our member jurisdictions with FATF requirements. [9]

7.3 Article 29 of the proposed EU Council model (available at register.consilium.europa.eu/.../srv?l...f=ST%2010970%202014%20INI) appears to accommodate this regime.

7.4 The UK G8 Action Plan [10] tabled at the conclusion of the Lough Erne Summit promised review of the supervision of CSPs. We understand there is an intention to look at the regimes in place in other jurisdictions. The Forum has urged this in meetings with HMT and BIS from an early stage and welcomes this plan. As the Bill has already been drafted and has gone though second reading, we question how this plan will be accommodated in the current process?

7.5 The Forum notes plans for this to be considered as a part of the National Risk Assessment. We have pursued this point assiduously in dialogue with all of HMT, BIS and HMRC. Our inquiries have generated concern that the reference to the NRA process reflects a government desire to skirt or defer the Action Plan commitment so as to shift (nearly) the full cost of data collection to the private sector. If the UK is to implement a credible system to collect accurate data, HMG must resource the process with more than the minimal £2m forecast in the IA. The £1.1bn cost must be properly shared between public and private sector else the entire investment will produce a model that no responsible jurisdiction could adopt.

7.6 The Forum encourages consideration by the UK and other jurisdictions of a model which includes provision for data verification, and comprehensive application. Forum members have considerable experience in this area and would be happy to contribute to the development of an effective model.

8 PUBLIC ACCESS: DOES IT HELP OR HAMPER UK OBJECTIVES?

8.1 We note the intention to make data public which PM Cameron has acknowledged is unprecedented internationally. Making the data public is not required for law and tax enforcement purposes and may even be counterproductive degrading candour and data accuracy. Shareholder and private sector confidence in data integrity and safety underpins truthfulness required in reporting information to government authorities. In the tax context, the OECD describes data security as a "cornerstone" of tax systems:

Confidentiality of taxpayer information has always been a fundamental cornerstone of tax systems. In order to have confidence in their tax system and comply with their obligations under the law, taxpayers need to have confidence that the often sensitive financial information is not disclosed inappropriately, whether intentionally or by accident. [11]

8.2 Public registration of share ownership amounts to public registration of ownership of substantive assets given the widespread use of the corporate form to hold assets. A public register is unnecessary and a disproportionate intrusion on an individual’s right to privacy. Some examples of the Forum’s concerns:

· information collected may be exploited by criminals, particularly those engaged in identity theft and cybercrime;

· individuals or extremist groups may object to legitimate business activity making the beneficial owners targets; and

· privacy may be sought by companies seeking to invest in possible acquisition targets or by investors concerned their interest in a company may trigger market speculation.

9 PROPOSED AMENDMENTS TO THE BILL

9.1 The Forum has considered amendments to the Bill and recommends:

9.1.1 Public filing of PSC Data in the Corporate Registry (Part VIII of the Bill): We propose deletion of 853I in section 80 (part VIII of the Bill) which requires public filing of persons with significant control in the corporate register together with consequential changes. This provision is puzzling given Part VII of the Bill ensures that access is, at minimum, limited to those with a "proper purpose". If this is not accepted, we suggest that the requirement for public filing is not operational until Parliament receives the report on the functioning of the PSC regime from the Secretary of State (within 3 years, pursuant to section 71 of the Bill). This will allow time to determine if the UK system is operating properly before data is made public and gauge prospects for a level playing field (to better assess UK competitive concerns).

9.1.2 Requests for share ownership data from the registered office (Part VII of the Bill): We also recommend that the UK drop plans to make ownership information available at the registered office. Public disclosure of beneficial ownership is not required by FATF or other international standards. We also note that the Final Stage Impact Assessment for the Bill notes (at paragraph 106) that "only 10% of respondents indicated that the proposed reform would ensure they know with whom they are doing business", so the "transparency" benefits promoted by the NGOs are not valued by business interests and disproportionately outweighed by privacy concerns.

Should that proposal not find favour given the political intentions already announced, we propose to shift the burden of taking court action when a request for information is declined, from the company to the requesting party, on the basis that the company is required to have regard to whether the request is founded on a "proper purpose", a term which is not defined in the legislation. Also, a five day period is too short for an application to the court in the event of refusal; if the company carries the burden of application to the court it would need to proceed to their solicitors nearly immediately on receipt of a request if it is to be declined.

The IFC Forum thanks the House of Commons Public Bill Committee for the opportunity to comment and would be happy to meet to discuss these comments. Please direct any questions to IFC Forum counsel, Richard Hay at rhay@stikeman.com or 020 7367 0189.


[1] Members are professional services firms and financial institutions including Appleby, Attride-Stirling & Woloniecki (ASW), Bedell Group, Butterfield Group, Conyers Dill & Pearman, Harneys, Maples and Calder, Mourant Ozannes, Ogier, Rawlinson & Hunter and Walkers. The Forum is advised by Canadian and international lawyers Stikeman Elliott (London) LLP and public affairs agency Lansons.

[2] Not published

[3] Not published

[4] House of Commons Library research paper 14/39 on Small Business, Enterprise and Employment Bill (Bill 11 of 2014/15) dated 10 July 2014 at page 55.

[5] Not published

[6] Not published

[7] Not published

[8] Not published

[9] Professor Jason Sharman, co-author of the World Bank "Puppet Masters" report (the leading global study on shareholder data collection) worked with two other academics to empirically test the effectiveness of the three approaches identified by the OECD, including strong investigative powers, data tracking in corporate registries (as proposed by the UK) and collection by corporate service provider. He concluded as follows:

[9] "the first two suggestions [investigative powers and corporate registries] are not feasible and in practice corporate service providers afford the only reliable (though certainly not infallible) route to the real owner."

[9] Michael G. Findley, Daniel L. Nielson and J.C. Sharman, Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism, Cambridge Studies in International Relations, 2014, p. 45.

[10] UK Action Plan to prevent misuse of companies and legal arrangements, Published 18 June 2013. See https://www.gov.uk/government/publications/uk-action-plan-to-prevent-misuse-of-companies-and-legal-arrangements/uk-action-plan-to-prevent-misuse-of-companies-and-legal-arrangements, Point 6.

[11] See "OECD Guide on the Protection of Confidentiality of Information Exchanged for Tax Purposes", 2012, p.5.

Prepared 22nd October 2014