4Beneficial owners
94.This chapter examines the definition of “registrable beneficial owner” laid out in the draft Bill. It considers ‘Condition 4’ of the draft Bill, which includes within the definition of beneficial owner anyone who has the right to, or actually exercises, “significant influence or control” over an overseas entity. It then assesses whether further guidance on this definition is required. Finally, it examines the provisions of the draft Bill which either except or exempt beneficial owners from registration, and considers the delegated powers which some of these provisions confer on the Secretary of State.
Beneficial owners: an overview
95.The draft Bill requires registrable overseas entities to identify their beneficial owner or owners. A registrable beneficial owner can be an individual, a legal entity, or a government or public authority.
96.Schedule 2 of the draft Bill sets out what is meant by a beneficial owner:
Beneficial owners
6. A person (“X”) is a “beneficial owner” of an overseas entity or other legal entity (“Y”) if one or more of the following conditions are met.
Ownership of shares
Condition 1 is that X holds, directly or indirectly, more than 25% of the shares in Y.
Voting rights
Condition 2 is that X holds, directly or indirectly, more than 25% of the voting rights in Y.
Right to appoint or remove directors
Condition 3 is that X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
Significant influence or control
Condition 4 is that X has the right to exercise, or actually exercises, significant influence or control over Y.
Trusts, partnerships, etc
Condition 5 is that—
(a) the trustees of a trust, or the members of a partnership, unincorporated association or other entity, which is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to Y, and
(b) X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.106
97.‘Condition 5’ refers to the trustees of a trust. Trustees might, under the draft Bill, be beneficial owners of an overseas entity, even though trusts could not be overseas entities.107
‘Conditions’ 1 and 2: the 25 per cent threshold
98.If a beneficial owner holds more than 25 per cent of the shares or voting rights in an overseas entity owning UK land, they will fall under the draft Bill’s definition of a registrable beneficial owner. Throughout this report we refer to the definition of a beneficial owner based on percentage ownership as a “threshold”.
99.Some witnesses challenged the adequacy of a 25 per cent threshold in shares or voting rights as a definition of beneficial ownership. Ms Lee from Global Witness told us:
“We are particularly concerned by the 25 per cent minimum threshold. If I was a criminal using the UK property market to launder money right now, I would simply use the 18-month transitional period to restructure my ownership. I would get five companies, each of which owned 20 per cent of my property, and then I would not be covered by the register. That loophole is easy to exploit, and it is not just hypothetical. Global Witness has shown that corruption can flourish through shareholdings as small as five per cent.”108
Alex Cobham from the Tax Justice Network agreed: “I would strongly favour low or no thresholds.”109
100.In general, enforcement agencies were more concerned with ensuring that overseas entities registered than with the exact percentage of ownership. Mr Thompson of the SFO said:
“For me it is about forcing somebody to go on the record. If they do that correctly, happy days, we get the information. If they do not and someone else has had to lie for them, it will have introduced an extra layer of dishonesty.”110
101.When asked whether she would be prepared to consider a change in the proposed percentage threshold, the Minister, Ms Tolhurst suggested that it might be possible to do so: “We can play around with the thresholds.”111
102.Schedule 2, paragraph 25 of the draft Bill gives the Secretary of State the power to amend the thresholds defining a beneficial owner. This power is designed to give flexibility if domestic or international regulations governing anti-money laundering change; or if new, more complex ownership and control structures emerge:
“Changes to conditions [may] be needed to ensure that Schedule 2 adequately covers scenarios involving, for example, more complex corporate structures—particularly as new corporate structures develop or individuals seek new ways to evade the disclosure requirements.”112
The Government’s delegated powers memorandum acknowledges that this ability to change the definition of beneficial owner “could have a material impact on the efficacy of the policy”; the draft Bill therefore makes this power subject to the affirmative resolution procedure.113
103.We were convinced by the view of witnesses, particularly those campaigning for greater transparency in land transactions, that a 25 per cent ownership and voting threshold for the definition of beneficial ownership could undermine the draft Bill’s aim to capture the true beneficial owners of overseas entities. We therefore urge the Government seriously to consider the case for lowering the 25 per cent ownership and voting rights thresholds. In its response to this report, it should outline in detail the rationale for its ultimate decision on thresholds.
104.We welcome the flexibility given to the Secretary of State by Schedule 2, paragraph 25 of the draft Bill to account for the emergence of new and more complex ownership and control structures. Given the Government’s stated concerns about the effect that such powers could have on the efficacy of the Bill, we agree that the affirmative resolution procedure is appropriate.
Congruence with the People with Significant Control Register
105.The thresholds for beneficial ownership proposed in the draft Bill are broadly the same as those under the PSC register for UK companies.114 We discuss the PSC provisions in paragraphs 107-114 below. The Explanatory Notes to the draft Bill state: “The information aspects of the Register will mirror as far as possible the regime currently in place for UK entities subject to the PSC regime.”115 The Law Society of Scotland believed that “aligning the definition of beneficial owner to the PSC regime should help to ensure coherence between the PSC regime and the proposed regime for overseas entities.”116 Indeed, Ms Lee from Global Witness told us that the thresholds for the PSC register should be decreased to match any reduction in the ownership thresholds of the Register of Overseas Entities.117
106.While we are restricted in our consideration to the provisions of the draft Bill, we feel strongly that the problems identified with the proposed thresholds for the Register of Overseas Entities apply equally to the People with Significant Control register. Consideration regarding thresholds should therefore also be extended to the PSC register. To avoid unnecessary administrative burdens on interested parties, and to promote the coherence and efficacy of the two registers, whatever ownership or voting threshold is determined for the Register of Overseas Entities should be mirrored by the People with Significant Control register.
‘Condition 4’: “Significant influence or control”
107.‘Condition 4’ of the draft Bill—the exercise of “significant influence or control”—is designed to encompass those beneficial owners who do not meet the percentage criteria, but who may still be beneficiaries. Ms Griffiths, policy lead on the draft Bill, explained that this provision was designed “specifically to capture somebody who owns five per cent of the shares but who for historical reasons—they may be the patriarch or matriarch of the family—makes all the decisions”.118 The Minister told us: “We have deliberately tried to keep it flexible—to capture the individuals who are beneficiaries of the entities. That is why the significant influence and control condition is in there.”119 She added:
“The whole point of having a very wide, broad-scoping definition of beneficial owner is to make sure that we capture anybody who has any control of that entity. It does not necessarily equate to the position of share ownership. It could even be somebody who does not control voting rights—who does not have a 25 per cent or even a five per cent share. This is about making sure that we keep the definition as wide as we can: to catch […] anybody that has a significant degree of control.”120
108.The Companies Act 2006 obliged the Government to produce statutory guidance about the definition of “significant influence or control” under the People with Significant Control (PSC) regime.121 The guidance explains the meaning of “significant influence or control”:
“In the context of a company, a person may hold a right to exercise significant influence or control as a result of a variety of circumstances including the provisions of a company’s constitution, the rights attached to the shares or securities which a person holds, a shareholders’ agreement, some other agreement or otherwise.”122
109.If a similar definition were applied to the provisions of the draft Bill, many beneficiaries who were not otherwise covered by the voting and shareholding thresholds would come under the “significant influence or control” condition. While the draft Bill makes no provision for similar guidance, the Minister told us: “The intention is to work on guidance on ‘significant influence or control’ and make sure that we keep up to date with it.”123
110.Witnesses highlighted what they felt was the nebulous nature of this Condition in the draft Bill. Mr Sinclair from the Law Society of Scotland said:
“On its own […] [“significant influence or control”] is a difficult concept […] at present I anticipate that the idea of either having the right to or actually exercising significant control is one of the areas which our members will have difficulty knowing whether or not, or how, to test if they are required to do so.”124
His organisation questioned the utility of further Government guidance, without defining the Condition more clearly:
“We do not consider it to be satisfactory that the question of whether a criminal offence has been committed under the draft Bill’s proposals should depend on the precise meaning of this undefined phrase. Even if guidance were to be given, this might not be sufficient to give the level of clarity necessary where a person may find themselves guilty of a criminal offence.”125
111.The definition of beneficial ownership encompassed by ‘Condition 4’ in the draft Bill (a person having “significant influence or control” over a legal entity) will be crucial in ensuring that beneficiaries who may not otherwise meet the proposed ownership or voting thresholds of beneficial ownership fall within the scope of the draft Bill.
112.However, we were concerned by evidence outlining how an inexact definition of “significant influence or control” might hinder the utility of this Condition in the draft Bill. We therefore welcome the Minister’s intention to produce such guidance.
113.To underline how integral this Condition will be to the Bill’s stated purpose of encompassing the true range of beneficial ownership of overseas entities, the Government should include within the Bill a requirement for the Secretary of State to produce guidance on interpreting the meaning of “significant influence or control” for the purposes of this legislation.
114.To avoid any duplication or contradiction, the Government should ensure that this guidance tallies as far as possible with equivalent guidance on the meaning of “significant influence or control” under the People with Significant Control regime.
Beneficial owners exempt from registering
115.Under the draft Bill, an individual or legal entity that is a beneficial owner is registrable unless they are “exempt from being registered” by virtue of Schedule 2, Part 4.
116.Witnesses considered that reasons for exempting beneficial owners should be laid out on the face of the Bill.126 Global Witness wrote:
“The grounds on which an exemption can be granted under the draft Bill should:
- be articulated expressly in the Bill or in its guidance;
- not go beyond the grounds allowed under the PSC regime;
- be granted only on a case-by-case basis; and
- be subject to the same reporting requirements as under the PSC regime (i.e. with the number of successful applications published annually by Companies House).”127
Clause 16
117.Clause 16 gives the Secretary of State the power to exempt a person from some of the requirements of the Bill. The effect of an exemption would be that the exempt person did not count as a registrable beneficial owner in relation to any overseas entity for the purposes of the Bill.128
118.The Minister told us that this power “would be used very rarely and on the basis of national security or something like that”.129 A written answer on an equivalent power applying to the PSC Register stated that as of January 2016, no similar exemptions to that register had been made. Exemptions can also be granted in very limited circumstances: in the interests of national security, the economic wellbeing of the UK, or in the support or prevention or detection of serious crime.130
119.The draft Bill restricts the Secretary of State in their use of this power. They may only exempt a person under Clause 16 “if satisfied that, having regard to any undertaking given by the person, there are special reasons why that person should be exempted”.131
120.Provided that the Government gives further assurance that the power provided by Clause 16 of the draft Bill to exempt a beneficial owner from the requirement to register would be used only sparingly, and that it would be used only in the interests of—for instance—national security, we would be content with the inclusion of this power in the draft Bill. The Government’s response to each of these points will merit close attention when the Bill is introduced to Parliament.
121.However, the draft Bill proposes only that “special reasons” will justify exemptions. This is a very broad term. Given the envisaged lack of parliamentary scrutiny of this power to exempt, our preference would be that the possible reasons for exemptions under this section should be set out on the face of the Bill.
Protection of information
122.Clause 22 of the draft Bill enables the Secretary of State, by regulations, to provide that an individual’s information should not appear on the public Register.132 The Explanatory Notes suggest that such protection would be appropriate where, “for example, if the activities of the overseas entity meant that the public disclosure of information relating to the individual would put that individual at risk of physical harm”.133 Individuals could make an application to prevent their information from being made public. However, the information, while unavailable to the public, would still be known to the Government. Ms Griffiths told us:
“The protection regime is that under which a beneficial owner who would otherwise appear on the public register can apply to the Secretary of State saying, ‘I am at risk for these reasons’. That does not prevent them from giving the information […] but it will be suppressed in the public register.”134
123.Transparency International was comfortable with this exemption, drawing parallels with existing exemptions under the PSC regime:
“The exemptions provided under legislation surrounding the existing PSC register allow those with legitimate security concerns to have their information removed from the public-facing aspect of the register, although it remains on file at Companies House. A similar process should be implemented with this Register, to ensure those with security concerns can apply for exemptions.”135
124.Yet the organisation also argued that such exemptions should be “granted only on a case-by-case basis with oversight by law enforcement agencies”.136 The Solicitors Regulation Authority considered that these provisions should be “used sparingly and kept under review to make sure they are being used appropriately”.137
125.OpenCorporates thought that it should be possible for the public to appeal the suppression of information from public disclosure under these exemptions. They stated: “This way civil society organisations, journalists and companies with anti-money laundering duties can test that such a suppression outweighs the public interest reasons for disclosure.”138
126.We note the suggestion by OpenCorporates that it should be possible to challenge the suppression of information from public disclosure. It is our assessment that the draft legislation would not prevent interested parties from appealing through the Courts the suppression of information—or the suppression rules themselves—if the Government’s decisions were seen to be unlawful.
127.We believe that consideration should be given to some form of procedure for challenging a decision on the suppression of information. The Government should include a detailed analysis of this proposal when it responds to this report.
128.The Joint Committee on Human Rights (JCHR) was concerned that protecting information only where disclosure put individuals at risk of “physical harm” might be too stringent a requirement, and could render the draft Bill non-compliant with Article 8 of the European Convention on Human Rights (ECHR). Article 8 enshrines the right to respect for private and family life. The JCHR suggested that applications for exemptions should be possible to protect family members, and to protect against a “lesser, yet still serious, level of harassment, threat or harm”.139 The Government is likely to base the relevant secondary legislation on what is currently in place for the PSC regime.140 Those regulations allow application to protect “a person living with” the individual, and where there is a risk of “violence or intimidation”. If the regulations indeed follow the PSC regime, the JCHR’s concerns are likely to be answered.141
129.We are persuaded that, if individuals are at risk of harm should their beneficial ownership information be made public, it would be appropriate for the Secretary of State to restrict publication of that information. We therefore agree with the powers provided for in Clause 22 of the draft Bill.
130.Though the effect of Clause 22 will be to restrict information being made public, it is in the Government’s interests to promote as great a degree of transparency as possible. We therefore recommend, as we proposed for Clause 16, that the Government should outline on the face of the Bill the circumstances under which the powers in Clause 22 may be exercised, or at least publish draft regulations to that effect at the same time as introducing the Bill. To mirror the PSC regulations, such regulations could, for example, protect those living with an applicant, and should allow applications for exemption where there was any serious risk of violence or intimidation.
131.In addition, we call on the Government to publish in an annual Written Statement the number of occasions on which it uses Clauses 16 and 22 of the draft Bill.
106 Draft Registration of Overseas Entities Bill, Schedule 2, Paragraph 6.
107 See paragraph 76.
114 The thresholds for a person with significant control can be found in the Companies Act 2006, Schedule 1A
121 Companies Act 2006, Schedule 1A, Paragraph 24(1)
122 Department for Business, Energy & Industrial Strategy, Statutory guidance on the meaning of “significant influence or control” over companies in the context of the Register of People with Significant Control, (June 2017): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/675104/psc-statutory-guidance-companies.pdf [accessed 12 April 2019]
128 Draft Registration of Overseas Entities Bill, Schedule 2, Paragraph 8, Clause 16(2)
131 Draft Registration of Overseas Entities Bill, Clause 16(3)
132 Draft Registration of Overseas Entities Bill, Clause 22
141 The Register of People with Significant Control Regulations 2016 (SI 2016 No 339), Reg 36(2)