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.

Active Re-branding or leave it to do-gooders?

Are we too complacent?

Henry Porter, writing in The Observer on 8th September about the Snowden affair, calls the British people “complacent” in its attitude to secrecy. He is concerned that the BBC’s Today programme on the previous day did not cover the subject recently when he believed it should have been a leading item.

In the UK, as we hopefully begin the escape from one of the worst recessions in history and where wages are, Iike in the US, still falling behind prices despite renewed growth in the economy, there is a mistiness amongst the population that is likened to Huxley’s Brave New World – where many of us appear to be high (or low) on Soma.

The Soma of the 21st Century is, maybe understandably, related to wealth– the money we earn that gets us through life. It pays our bills, buys our food and clothing and shelter, pays our tax and is almost everything most people think of as their main route to wellbeing. For almost all, money seems to form the basis of our lives and engulfs our thinking.

For money appears to be at the heart of everything the 21st human believes in – lack of money effectively disenfranchises us from most of life’s gains. Lack of money dis-enables. Maslow got it right to a point. We are all focused on the lower levels of his hierarchy. The trouble is how enough of us penetrate the upper layers.

Maslow's Hierarchy of Needs

We seem to get the shelter and food parts, even the desire to belong and group ethics; but, once we get to esteem we believe that this relates to work and jobs and self-actualisation is well beyond almost anyone anyway. Working to the common good, for example, is maybe a stretch too far.

A recent survey shows that “only” 9% of us actively participate in civil society – working for civic pride – maybe being self-actualisers. The Charity Aid Foundation (CAF) found that just 9% of people give 66% of all the time and money to charities / not for profits in the UK. See report.

The “civic core”  – a concept first espoused by Mohan and Bulloch in 2012 – drives the charity sector. The “zero givers”, as the name suggests, relies on them to be the “do-gooders”.

 I am reminded of the days when Schools’ Boards of Governors were obliged to meet with parents annually. I cannot remember one occasion when, I as one of the governors, was confronted by an audience larger than the school governors present. For a school with over 1,000 sets of parents and guardians, possibly 10 people would turn up. No wonder this annual ritual no longer exists. Most people want to engage with themselves and their families and not with the wider community – let the civic core do it.

This reflection on society may seem overly harsh but does shine a light on Henry Porter’s concerns about society being “complacent”. Except in times of abject misery – like a time of war – most of society is not complacent but reliant. Reliant means that the vast majority of people looks to the civic core to run the core of society.

CAF senses that much of this is down to time-poverty – or lack of time to commit to other things. Is this really true? Are 91% of the population lacking time – or is this an excuse? Maybe there is no sense of the Big Society that David Cameron no longer mentions. Maybe we are individualists that rely on the rest of society where it counts – where priorities like secrecy issues are well down the list.

Re-branding society is a challenge – a call to inaction or action?

Of course, 9% of the adult population actually represents a lot of people – around 9% of 50 million – which is 4.5 million.

According to CAF, 4.5 million are actively involved – the civic core – who are not so time sensitive. A high proportion, though, are over-65’s and there are many more women than men, less full-time employed, less young people.

The challenge to which Henry Porter alludes is how to galvanise sufficient of civil society to make a difference – in an age where not enough of us commit to anything other than ourselves or to our close kin and friends – or, maybe to the ultra-loose contacts on Facebook or Twitter, where a retweet has somehow become our idea of “campaigning” and close friends are indicated by the number following you on LinkedIn or Facebook.

An indication of this is an excellent article by none other than comedian Russell Brand writing in the Guardian – 13th September.

This article followed his “joke” at clothing firm Hugo Boss’s expense at the recent GQ Awards. Brand’s article is very well written but it is not the explanation for his comments that struck me, but that such an articulate and obviously concerned individual as Brand could say the following (and I quote at some length):

” …For example, if you can’t criticise Hugo Boss at the GQ awards because they own the event, do you think it is significant that energy companies donate to the Tory party? Will that affect government policy? Will the relationships that “politician of the year” Boris Johnson has with City bankers – he took many more meetings with them than public servants in his first term as mayor – influence the way he runs our capital?

Is it any wonder that Amazon, Vodafone and Starbucks avoid paying tax when they enjoy such cosy relationships with members of our government?

Ought we be concerned that our rights to protest are being continually eroded under the guise of enhancing our safety? Is there a relationship between proposed fracking in the UK, new laws that prohibit protest and the relationships between energy companies and our government?

I don’t know. I do have some good principles picked up that night that are generally applicable: the glamour and the glitz isn’t real, the party isn’t real, you have a much better time mucking around trying to make your mates laugh. I suppose that’s obvious. We all know it, we already know all the important stuff, like: don’t trust politicians, don’t trust big business and don’t trust the media. Trust your own heart and each another. When you take a breath and look away from the spectacle it’s amazing how absurd it seems when you look back.”

This may well be heartfelt but the essence of Brand’s words seem to me to be passive – a plea not to trust politicians, big companies and the media: heartfelt but inactive; a plea to do nothing – to be mournful, sad about the exploits of others but certainly no call to action. It is a call to inaction.

Maybe he is too busy to use his fame for good causes; maybe Russell Brand is more interested in having a few laughs with his mates. But, if someone as intelligent and thoughtful as Brand can’t rouse himself to do anything, to get involved somehow, what do we expect from the rest of the 91% (or even most of the 9% who, while involved, are certainly not out there campaigning or even showing annoyance or being pro-active)?

Finding the Catalyst for Action

When many don’t even vote or even consider it necessary, we know that democracy is not in a good state. But, voting is a passive demonstration even if critical to a democracy.

Most do not enter into a debate on issues outside their very close domain – sport and the weather seem the height of discussion in this country. Or, many get high on celebrity – X Factor or Big Brother. Former News of the World readers now tweet obscenities or attack feminists. So, issues like secrecy or tax havens (important to some) somehow seem trivial when prices are rising above the rate of wages and when good, full-time jobs are hard to obtain, when the trivial becomes all-important.

Maybe there is a catalyst out there that will encourage more to raise the temperature of debate and even to join in an active capacity. I have seen it at work. Organisations like Global Witness (where I was fortunate enough to work for close on five years) are full of young, impassioned, intelligent people who work hard to make real change happen. Whenever a job vacancy was advertised, there were often hundreds of applicants – from top quality people itching to get involved. There is a strong undercurrent of capability in the UK (and elsewhere) of well-educated, strong-willed people that want to pro-actively work for a better future, who are not complacent and not reliant on others.

Maybe we need to get them to talk more about what they do – not just to governments and politicians (who, in the short-term, are the change agents) but to young people in schools and universities – who are so focused on jobs and wealth (which is fine) but who may also want to ensure that society is properly balanced. This balance is not away from wealth creation (which will remain a fundamental underpinning of our society) but towards wealth creation that we all feel good about and where we do understand that money is not the only thing: wealth being quality not just quantity.

Maybe Russell Brand could get involved in this way – using his enormous power of communication to pro-actively make people want to get involved. From an inactive mournfulness to pro-active catalyst – a re-branding that makes sense.