What is corporate ownership?
Having ownership or control over a company comes with rights and responsibilities to customers, shareholders, governments, regulators, and other businesses. Beneficial owners, the real owners of companies that can influence decision and directions of the company, are defined as the natural person who can be found at the end of an ownership chain. Such ownership can be legal, where ownership gives certain legal rights, or practical where via different arrangements the natural person can control the company sometimes even without legal influence.
Traditional state of corporate ownership transparency
Transparency requirements for company ownership have previously focused on legal ownership or the level ownership immediately above a company. This means that true beneficial owners are not usually reported or known. Knowing the beneficial owner of a company is important because it allows the identification of who should be held accountable for various company actions.
UK introduces the Economic Crime and Corporate Transparency Bill
On September 22, 2022, the UK government introduced the Economic Crime and Corporate Transparency Bill which proposes that new and existing registered company directors, people with significant control and those delivering documents to the Registrar in Britain have to verify their identity. In effect, this mandates beneficial ownership disclosure for every company. It also proposes to broaden the Registrar of Companies House’s powers to become a more active gatekeeper over company creation and a custodian of more reliable data.
The bill aims to prevent UK-registered firms from acting as a front for international money laundering networks and fraudsters.
Switzerland makes plans to create a central registry housing beneficial ownership data
Similarly, the Swiss government is planning to create a central registry (but only accessible to authorities and not the public) to track who owns legal entities to fight money-laundering via shell companies. The finance ministry has been asked by the cabinet to draft specific proposals by mid-2023 to make it easier to identify corporate owners and consider steps to tighten anti-money laundering rules e.g. widening their scope to include legal professions
The Swiss government says the move aims “to strengthen the prevention and prosecution of financial crime and thus the integrity and reputation of (Switzerland as a) financial centre and business location”.
How shell companies can mask beneficial ownership
Shell companies, or post-box companies, is a term used to describe companies which do not have any real operations or employees. They exist on paper so that they can become a legal person who can have legal ownership over one or more companies. Usually its purpose is to hold and move assets on behalf of individuals or other businesses. As a legal person, they have the capacity to open bank accounts and engage in financial transactions, buy assets, own copyrights and royalties.
A shell company can be set up by a law firm in a foreign country or hire a nominee director to register the corporation under their name, anonymizing the beneficial owner. Therefore, in the scenario that stolen or illicit assets are transferred to or from this company, financial authorities will find it difficult to track where the money ultimately ends up if the company owners are anonymous and incorrect.
How shell companies facilitate organized crime, corruption and tax evasion
Multiple shell companies can be set up in multiple jurisdictions to make it harder to track the flow of money involved in organized crime, corruption and tax evasion. As disclosure and tax laws vary per jurisdiction, people can choose to move the money through shell companies from the jurisdiction which has laws to meet their needs. The result is usually a complicated series of transactions involving multiple shell companies. According to World Bank data, “70% of grand corruption cases studied involved the use of anonymously owned companies”. If beneficial ownership reporting was mandatory in all jurisdictions, the authorities would be able to track the natural persons responsible.
