Cutting through the Fog – Corporate Secrets and Beneficial Ownership

David Cameron promised last week at the Open Government Partnership Summit that companies registered in the UK would be obliged to reveal their ultimate ownership and that the public would have access to those records.

This was a major statement of intent: evidence that the UK was not going to condone the opacity of companies or owners that could possibly be engaged in criminal dealings or those who are perfectly innocent but choose to inhabit the same smog-bound territory of corporate secrecy.

Why the secrets?

More accountability is a hard-won struggle in an era where our secrets are open to secret services like the NSA and where government secrecy is hard to lessen, Through all this opening up, companies (and Trusts) operating on an international level have reatained an unwelcome ability to shield themselves from public view. At a time of real debate about privacy (Snowden, The Guardian, the NSA, Angela Merkel’s mobile), companies that seek privacy have remained relatively immune.

Companies are treated as individuals under the laws of most countries yet have the ability to hide their ownership and deal with their taxation (if operating multi-nationally) wherever they choose. This means, of course, that they usually choose what is right for them not for the wider society in which they operate. That is their remit. The recent shake-down of Starbucks, Google and others over taxation – which, to date, has yielded not much more than the voluntary promise of payment of a few tens of millions by Starbucks – was a tip of the iceberg moment. With corporate taxation in the UK heading downwards, the current government coalition seems determined to accept the Institute of Directors’ call for companies not to be taxed on their profits at all!

However, one thing about tax is that we can all see how much a large corporate pays in the UK (about a year after the event when it publishes its accounts). What we don’t see easily is where a company has overseas affiliates with which it “trades” – such as paying royalties for the use of its name – in secret jurisdictions where tax is often negligible.

This nonsense of transfer payments and royalties (which HMRC showed last week to the Public Account Committee it has no real understanding over) shifts massive amount offshore and out of the country where real business was done to tax havens.

The fear often cited that proper taxation would force companies out of the UK is nonsense. They do real and profitable business here – the UK is the world’s seventh biggest economy (or thereabouts). Why on earth does anyone believe that they would move away from doing business here? Can anyone imagine that Apple would close its Covent Garden store if they had to pay real tax in the UK rather than shift profits to where the name “Apple” is deemed by a tax expert to reside? Being afforded the space to sell its (excellent) products in the UK, to use our roads, lights, take on people educated here and all the other benefits of selling in the UK (which includes the iconic area of Covent Garden in London) are well worth the entrance fee of corporate taxation.

Offshoring the owners

However, David Cameron’s speech was not specifically about offshoring taxation – it concerned beneficial ownership issues and these are, of course, linked to taxation in a major way but it is much more than that.

The fog of hidden beneficial ownership means that companies are set up which can channel profits or simply flows of revenue to places where tax does not apply and where no-one knows the beneficiary. This is a typical and easy-to-organise ruse of the criminal world. For many years, criminal networks have laundered their revenues offshore – it used to be through the transportation of suitcases full of notes; these days, it is a little easier. This not just saves tax – it transforms illegal earnings into clean money that can then be brought back again into the real economies via the normal banking system.

With the improved ease of transmission of money across the world, it just takes complicit banks to enable the movement (along with some accountants and lawyers to get things under way) and, hey presto, money surfaces wherever it is wanted without anyone knowing.

Just watch the antics of Breaking Bad attorney Saul Goodman – now getting his own series. The essence of monetary manipulation is built around secrecy and contacts. Governments cannot easily stop the development of the latter, but they can do much to stop the former – making beneficial ownership transparent.

Lining Up for Secrecy – the Fog of War

To the vast majority of us, this is obvious, but to many it is a declaration of war. Many secrecy-led jurisdictions are concerned about their future. It is not just Cyprus where the dominance of “financial services” is far too big for the country – Cyprus became completely over-dependent on banking, Russia and lack of due diligence. According to the Tax Justice Network there are 73 secrecy jurisdictions around the world that they analyse.

Of these, a staggering 35 have some substantive connection with the UK. One of those is Jersey and Jersey Finance’s CEO, Geoff Cook, voiced his concern on Friday when he heard David Cameron’s pitch. In his blog he refers to the public register:

It is not yet clear what will be on such a register but unless this is adopted by the G20, I would confidently predict that  Mr Cameron is likely to have lots of friends in the AID world and insufficient food on the table at home.
Protecting business interests, trade secrets, safeguarding personnel from fringe, sometimes violent campaigning groups, from corrupt political elites and from criminals are all real and weighty concerns.  It is telling that the NGO community are happy to  subject those who have worked hard and done the right thing to a much greater degree of scrutiny than almost any other constituency in society.
There is little difference from opening up the private company arrangements of business owners to the public glare of NGOs, journalists, cyber criminals and the assorted flotsam and jetsam of the worldwide web, than for ordinary bank accounts. If the logic holds good do we not need to know the balance publicly of all personal bank accounts so that all can be sure we came by our cash by legitimate means?
We have nothing to hide in Jersey and we have been active supporters of government to government information exchange. However, the voyeuristic tendencies of politically correct elites should not be indulged and indeed will not be by the vast majority of countries, leaving the UK out on an uncompetitive, uncomfortable and potentially impoverished limb.

It is extraordinary that arguments for secrecy over beneficial ownership are now wrapped up in screams about safety from “violent” campaigning groups and cyber criminals. These are the words of fear – fear for a future that may have been predicated on the Cyprus model and lack of such due diligence.

Secrecy over beneficial ownership allows vast amounts of money to be electronically channeled out of not just the UK developing nations. That cannot afford the losses. Huge amounts of wealth properly owned by citizens of countries such as Guinea, DRC, Angola and others are secretly moved and laundered – often with the help of banks (who are now in the firing line of authorities especially in the USA). As TJN itself states:

Secrecy jurisdictions facilitate illicit financial flows.

Illicit financial flows stem from three major sources: bribery (corruption in its narrow sense), criminal activity and cross-border tax evasion. In doing so, secrecy jurisdictions and the secrecy providers operating through them play not only a major role in preventing the poorest countries from developing out of a state of dependency and poverty, but they help creating a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of breaking the law.

The crimes that are facilitated and whose financial reward is secured by financial opacity and the resulting secrecy comprise, but are not limited to: tax evasion, aggressive tax avoidance, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, non-payment of alimonies, counterfeiting, insider dealing, embezzlement, fleeing of bankruptcy orders, illicit intelligence operations, insider dealing, all sorts of fraud, and many more.

Clearing the Fog

David Cameron has made a real commitment but there are real obstacles to further progress.

The first is implementation.

Those involved in celebrating the introduction of the Bribery Act in 2011 are rightly concerned that its implementation is suspect. As Jack Straw, then Minister of Justice, said in the original White Paper, there was unlikely to be many cases brought before judges as a result of the Act. This has been borne out in practice along with insufficient funding of investigations, low numbers of court actions and Bribery Act guidance that was aimed at stifling the Act’s powers. Proper and funded implementation of real transparency and public availability of that information is now key to ending secret beneficial ownership for UK-registered companies.

The second issue is around Trusts. These are not covered by the PM’s statement or commitment yet Trusts are a key secrecy weapon for criminal activity across the globe.

The third issue is that the commitment only applies to the UK. This will serve some purpose in helping to clear money laundering from this country but the UK should now use its leadership wherever it has influence. This is direct in the 35 secrecy jurisdictions mentioned above but also in other forums where the UK has any influence – such as the G20, EU, FATF (Financial Action Task Force).

The fog remains but the UK is beginning to spy a way through – taking a lead on an issue on which millions of lives depend outside the UK. It is not the problems of those in Jersey’s Finance Ministry we should most be concerned with but the problems of those in countries where massive corruption by those in power is facilitated by banks and secrecy jurisdictions – resulting in billions leaving the countries (far higher than Aid going in) and that means millions having to survive on a $ a day with no medical facilities let alone schools or economic opportunities.

Time to see above the fog.

Supporting entrepreneurs in developing nations

Top-down or bottom-up economics?

Sunday Times (6th October, 2013) reports:

 

“The London-listed miner founded by former England cricketer Phil Edmonds has won a breakthrough export licence in Guinea after appointing to its board a businessman with close ties to the president.”*

*Nb. refers to Sable Mining Africa – a British Virgin Islands incorporated, AIM-registered company

 

Market economics has achieved substantial results worldwide – mainly because of huge success in China (and, to an extent, India), the percentage of those deemed at the worst stage of poverty (those living on less than $1.25 per day) according to the World Bank has fallen dramatically in the last ten years, from over half in the developing world to 21%.

Despite this, around 1.2 billion people are still impacted by extreme poverty and many areas of the world remain blighted by lack of economic progress.

Forget GDP per capita numbers – it is irrelevant where all the proceeds go to 0.1% of the population. Equatorial Guinea has a per capita GDP of nearly $20,000 – yet, the vast majority of the population live in conditions of extreme poverty.

In post-conflict states and many others where there is poor access to economic opportunities for the majority of the population, extreme poverty stubbornly persists. There are many reasons for economies to be mired in lack of progress. As Dani Rodrik states in his “The Globalization Paradox”, “the most pressing problem could be a shortage of finance; it could be government practices (such as high taxes or corruption) that depress private profits; it could be high inflation or public debt that increases risk; it could be learning spillovers associated with infant industries that prevent private entrepreneurs from reaping the full social value of investments.”

Macro, Top-down attempts at change

Normally, the response has been for nations to work to remedy this on a macro-economic basis by implementing major, nationwide changes – often hand-in-hand with the IMF or similar. Countries in Latin America were good examples of this in the 1980’s. This led countries like Argentina to see rapid growth through the dramatic reduction in capital controls, for example, and then to debilitating recessions. The WTO model – opening up to huge changes quickly through the freeing of capital and exchange controls – relies heavily on the nation’s capability for being up to the job – overnight. The problem is that the rapidity of the change is usually too much, too soon. It often leads to rapid increases in fund flows – maybe inward as the search for investment grows and maybe outward as the indigenous population (maybe the top 1%) find better investment opportunities elsewhere – and upheaval.

While it is important that positive (and well thought-through) macro-economic change happens, Rodrik shows how important it is for states to nurture their manufacturing, design, distribution and other industries. China is held up as a prime example of this. It did not join the WTO until its economy was healthy and competitive.  The same is true about Taiwan or South Korea.

Micro revitalisation– tunneling through the transaction costs

The problem in many countries is that while there may be an appetite for economic progress at government level (where an understanding of economics may be poor to non-existent and the “appetite” may be for quick profits, legally or corruptly gained), it is bound up with difficulties. These often include entrenched positioning of those in power –  an elite that has vested interests in the status quo. This is clearly seen in resource-rich countries – where small elite groups manage to take over the profits of a country’s natural resources and the mass of the population sees no economic improvement. Countries like Angola have gone way beyond corruption – the dos Santos family now owns the country’s natural resources and the companies (like Sonangol) which manage their energy wealth; or in the Democratic Republic of the Congo – see Dan Snow Wednesday 9pm BBC2; or government and business collusion (such as alleged in the Sunday Times article mentioned at the start of this post. Guinea has just has just had elections – and is a country rife with corruption as noted recently by the Economist.

Of course, some wealth filters down into the wider country, but only so that the elite (and those associated with them) becomes fatter. This remains a tiny proportion of society.

In such countries, there remains a massive desire for economic advancement through their own efforts amongst the people despite all the problems put in their way.

Organisations like the World Bank, GEM, GEDI and others are researching, for example, these obstacles to entrepreneurship and economic advancement worldwide. All show the huge desire of people to fend for themselves and not to rely on handouts from top-down aid.

GEM (Global Entrepreneurship Monitor – http://www.gemconsortium.org/) produces an annual assessment of global entrepreneurship activity; GEDI (The Global Entrepreneurship and Development Institute) also ranks countries by their ability to be entrepreneurial and works on a macro basis to provide ideas on improving economic performance. GEDI works with large multi-nationals and claims that:

“Entrepreneurship-focused support not only improves the business environment, creating economic value, it kicks off virtuous cycles that create waves of social value.”

The World Bank itself produces rankings in its global “Doing Business” listings. Along with such as Transparency International’s Corruption Perception Index and countless economists, it is a continuous process to develop new macro-economic methodologies.

Rodrik himself was asked by the South African Government in 2007 to address the problem of unemployment and developed significant opportunities for real improvements in “social value” – which benefits the many not the few.

In many countries, though, macroeconomic policies do not work. William Easterly strongly makes the case that it is not the “planners” (with their top-down policies) that work for poor nations but the “searchers” – those providing bottom-up opportunities. Indeed, the annual studies show that entrepreneurialism is higher in poor countries than the rich ones. This is partly due to less opportunity to find employment but is also down to the natural and instinctive ability of humans to fend for themselves exists throughout, when the incentives are apparent and not made impossible.

Micro-economic incentives and opportunity provision are always required. These incentives may be financial or they may be educational or they may be motivational. They may be needed to provide networks and distribution facilities. There may be the need for leadership skills training or the development of manufacturing or design skills. Each nation or region or even city may well be different.

If the natural tendency to trade (so common in all countries) is allied to the skills and abilities needed to create, develop and manufacture together with some motivation and belief in the future, then real progress can be made – allied to the profit motive that underpins the market economy.

Fighting through the mayhem

The big question is how? There are a number of ways to do this – but, all rely on somehow creating the entrepreneurial business ethic and safe passage through the morass of so-called “transaction costs” which are often traumatic in countries where wealth is uneven or normally unobtainable. It also requires the desire to build an economy that is wider than an elite – where trading does not just enrich a tiny bunch.

The transaction costs may be how long it takes to register a company or gain permission to sell products or find the training and skill-up or find staff or understand royalty and tax issues or accounting problems. It may be that there is rampant corruption that stifles progress or downright intimidation. It may be that women are not allowed to participate.

All these and many more factors are grouped together to dramatically hinder progress. To resolve them takes a bottom-up approach – which has to be allied to changes on a national / macro scale. These changes must focus on, for example, eradicating corruption, developing proper taxation systems, ensuring that tax is collected and used for public good.

The bottom-up approach can be successfully done by the hardest working acting on their own – and there, of course, are examples of businesses that progress despite all the problems thrown at them.

It may, though, be provided with external help – but, this is generally through business arrangements where companies operating from developed nations see opportunity – again, mining in Guinea is an example. This is often where natural resource recovery takes place – where the Chinese now dominate throughout Africa – but where the mass of local populations doesn’t benefit. This is the case for energy and other natural resources like wood and minerals or gold.

There is another way just beginning. This is where organisations from the economically developed world (some may be social enterprises, some may be charities) that have business ability and seek out those bursting to improve their economic lives that also show some capability. By analyzing the obstacles in their way and providing an “economic tunnel” through the mayhem – for example, through training, networking, distribution channels, financing, motivation, skill development – small pockets of entrepreneurialism can be assisted to grow.

This “micro-economic tunnel” will be different in each country or region or city, but there are already examples where social entrepreneurs are providing enablement into countries that face the harshest of obstacles – like Afghanistan. Recently, two, different examples have been shown in that country – both encouraging the development of inherent capability in different ways – one through perfume, one, Future Brilliance, through jewellery design and distribution into the global marketplace.

With examples provided on a daily basis that show how lack of economic opportunity provide incentives for corruption and even terrorism, more needs to be done at the micro-level where real people with real capability and drive can be provided with the tools and incentives to thrive and provide social value. The days of top-down aid and macro-focused solutions may not be at an end, but bottom-up opportunity is the lifeblood of a nation’s success and needs to be nurtured.

 

1.2bn people still attempt to live on less than $1.25 per day. 

 

“Entrepreneurship-focused support not only improves the business environment, creating economic value, it kicks off virtuous cycles that create waves of social value.”

Jeff Kaye is a Director of Future Brilliance http://www.futurebrilliance.net

 

 

Middle East – repression and rigor mortis

Four Franciscan monks shouted in al-Aqsa that “Mohammad was a libertine, murderer, glutton,” who believed in “whoring”! The qadi offered them the chance to recant. When they refused, they were tortured and beaten almost to death. A bonfire was built in the courtyard of the Church where “almost drunk with rage” the mob hacked them into pieces “so that not even a human shape remained”.

Simon Sebag Montefiore, “Jerusalem”

The assault on the American consulate in Libya consisted of two separate attacks that forced the Americans from the consulate and then besieged them in a second building in a gun battle that lasted four and half hours, according to a detailed timeline from a senior administration official.

The bloody offensive by extremists killed Ambassador Christopher Stevens and three other Americans. In addition, three more U.S. personnel were wounded.

ABC NEWS

We know that the second quote above happened just days ago. The first was in 1391 – 621 years ago.

The first was direct – but, even then, the four monks were given a chance to repent and were the instigators of the attacks themselves.

The second was the result of a second-rate short film that was made by people totally unconnected to those that died in the US Embassy in Libya.

621 years separates the two examples – 621 years of great technological and wealth advancements across the world. But, 621 years where, in some places, there has been regression, not progress, and where repression (of freedom, freedom of thought, of economic progress and education) has left in its wake a mind-system that is mired in the 14th Century or before.

Lessons unlearned

The break-up of Yugoslavia (a state held together under the iron-grip of Tito) provided lessons that we ignore to today.  Thousand-year-old conflicts and hatreds which had been suppressed since communism’s rule came to the surface and yielded to bloodshed and ethnic cleansing.

So, the Arab Spring has erupted in tensions coming to the surface in the one location that has, for many years, been seen as the powder keg of the world. No surprise, surely?

Repression in the Middle East has been there for thousands of years. We don’t expect democracy and freedom of thought to suddenly erupt in China (or most don’t) but a few despots are overthrown in Tunisia and Libya and rejoicing takes place. We ignore the simmering tensions that such societies have endured for centuries as we assume that democracy will fix everything.  The West kept many regimes in place, drew many of the borders ourselves (often, borders which made no sense and instilled more tensions – such as in Sudan), sought oil supplies and the propping up of regimes to see to it that our energy supplies continued, tolerated the bribery and corruption and power that elites gave to themselves and enabled companies to make those bribes for the last 100 years.

Tony Blair was on BBC Radio 4’s Today programme earlier today. He said that he had travelled 87 times in the last few years to the Middle East and that it would “take a generation” for countries to settle into new institutions and systems that would prevent such tensions. While he has enormous knowledge of this area, a “generation” is no time at all – but, while a lot can be done in that time, the tensions are not just on the surface but deep.

Education and opportunity

The Middle East and North Africa have not just opened up to our version of the 21st Century. In our new global economy, we have focused our attention on to the newly developing nations of China, India, Brazil and others and have tended to ignore these deeply repressed regions. War and repression have characterized them for two thousand years. Elites have conquered their way to glory and wealth where religion has been used as an excuse. Religious extremism has been embedded for so long that we see it as the core issue. But, extremism in Christianity was common in the thirteenth Century and before – the Crusades were rooted in violence and death.

The changes that took place in Christianity (which was, in its earlier days, not wedded to the “turn the other cheek” dictum) have been profound but took centuries as first rulers broke away from theocracies, began to rule on behalf of their subjects (rather than being above the law) and allowed the dissemination of justice and then economic progress to be shared amongst the population. As this happened, the repression of one’s own subjects ceased to be the norm (although fascism, Nazi-ism and Stalinist and Maoist Communism attempted to break the deal).

Elsewhere, theocracies or dictatorships continue. Overthrowing despotism does not overthrow the belief systems underneath.

This is the core of the issue – the longer that institutions are allowed to fester, the worse the situation erupts when change takes place. Ossified institutions repress change and thought. The Middle East is worse – the institutions are in a state of rigor mortis. Beneath, the potential for unrest is striking – even with the numbers of liberal-minded, the mass of the populations are poor – in terms of education and wealth.

Chances

In the West, we talk about wanting to give our kids the best chance in life through education. In the Middle East, where we tolerate and even support regimes in Saudi Arabia and Bahrain because of their oil, we are relatively powerless to the onslaughts of hatred.

But, in a global society, we have to ask ourselves some serious questions. Can we help the Middle East and Africa, so long under the repression of dictators and theocracies, to not just overthrow those elites that bind them but to also embrace a culture that we believe works? Can Western ideals of freedom of thought, religious tolerance (or tolerance of no religion), economic freedom and wealth creation shared amongst the population be brought into the thinking of these countries? Can institutions and sclerotic minds be changed?

As we battle economically with the Chinese (and hope that the repressed emotions between the Chinese and Japanese does not get out of control over Diaoyu / Senkaku), we have to battle with the repressed institutions of Saudi Arabia and Bahrain as much as Syria, Libya and Somalia or DRC. This is a never-ending battle of ideas and betterment – the belief that whatever one’s views on the afterlife, ensuring that this life should be a good one is as important and that no individual (or elite) deserves to capture all the chances. Chances have to be spread to as wide a sector of the population as possible.

This is not the culture of 1000 AD – it is the culture of the 21st Century – and a battle that is worth waging. We live in a global economy but also a close-knit world beyond economics – fuelled by communication systems that work to inform and dis-inform – fast and furious.

Opportunities

Old and outdated institutions will, eventually, explode under the weight of their inadequacy. But, explosions can hurt. Just as our own institutions need to be overhauled when they don’t work (and there are many instances of this in the West – where we continuously run the risk of institutional failure) so we should help where it is clear that repression exists through institutional rigor mortis.

Recent moves to support the new opportunities being created in countries like Tunisia and Libya should not be stopped because some of the repressed have not been given chances to improve their understanding of reality and have over-reacted to a film made to incite.  We should now support those like Mohamed Morsi in Egypt who has said: “We Egyptians reject any kind of assault or insult against our prophet, but it is our duty to protect our guests and visitors from abroad.”

This is an act of bridging – between the repressed and the future – which we should now be supporting. Opportunities have to be developed and out of the super-charged environment, so reminiscent of that which operated over 600 years ago, the West should react positively. Changes may take a long time and we may find that other disasters (such as to our environment) may well get in the way. But, Blair is right on this one. We have to keep engaging.