Much has been written about the benefits to law enforcement agencies of having access to reliable information on the ultimate beneficial ownership (BO) of companies. It is also clearly an important part of the work done by financial institutions and professional advisors in meeting anti-money laundering and KYC requirements. These benefits extend further if that BO information is made public, as this opens up the significant potential benefits for private sector users, as discussed on our previous blog piece, found here. But at what price?
There is a compliance burden, although with a well-designed regime this should be minimal. Indeed, evidence from the UK suggests that the benefits to business of a public register can significantly outweigh the costs.
Then there is the cost to privacy. Any additional mechanism whereby a government agency collects personal information will always raise questions of privacy. If that agency then makes that information public, the concern is that much greater.
But is this really a cause for concern?
The privacy argument generally manifests itself in three ways.
Phishing scams are a real issue, where criminals extract personal information in order to impersonate people or steal their identity for financial gain. These criminals will start with names, addresses and dates of birth, but then try to extract banking details, passwords or PIN numbers.
Does a public BO register facilitate identity theft?
It’s correct that a BO register needs to collect personal information about individuals. This is a vital part of uniquely identifying people. But there is an important distinction to be made between information collected by a register, and information published by a register. For example, the UK beneficial ownership register (the Register of Persons with Significant Control, or PSC Register) collects the full date of birth of all beneficial owners. However, it only publishes the month and year of birth. Residential addresses are also collected but not made public on the register.
So, a BO register can be designed and implemented in such a way as to mitigate the risk of identity theft, and in many cases doesn’t need to disclose more personal information than many people choose to share through their personal or business social media.
It is clear that wealth and influence can sometimes lead to concerns around personal safety, whether that is an increased risk of burglary, personal attacks or even kidnap. These risks are real, and have been a concern for the wealthy as long as wealth has existed.
Does a public BO register increase the risk to personal safety?
Firstly, it is important to acknowledge that the identities, residences and movements of the wealthiest in society are already well known. We live in a world in which most people carry a smartphone with a camera and are connected to social media. A criminal wishing harm on a well-known or wealthy individual does not need a BO register to gain crucial personal information.
So, the real concern should be with those cases where the BO register puts new information into the public domain; information made public solely and directly as a result of beneficial ownership transparency. And that information would put an individual in personal danger. The answer here is to allow certain individuals to have their BO information redacted.
This can be achieved without undermining the integrity of the BO register by very tightly drafted rules allowing for the redaction of BO information in very specific circumstances. This shouldn’t be a free pass for the rich and famous, but rather an important protection for those people owning companies with activities which might make them a target, such as life sciences or animal testing. The UK has this form of exemption.
This is probably one of the biggest obstacles to BO transparency in some countries.
The UK has for a long time had a cultural acceptance of certain amounts of transparency in business. Companies are obliged to prepare annual financial statements, and those are publicly available, together with details of legal ownership. So, the step of making the ultimate BO of those companies public too was not that great.
However, in countries which don’t have the same culture of corporate disclosure, BO can feel like a significant intrusion. There are jurisdictions, both OECD and non-OECD countries, where corporate disclosure requirements are minimal, and it is difficult obtain even basic information about companies e.g. some US states. More beneficial ownership transparency is therefore important for law enforcement and business integrity.
So, is there really a privacy issue with BO transparency?
Well, yes and no. Concerns regarding identity theft and personal safety can be addressed through a well-designed and managed public register. The real issue comes down to a more nebulous concern about personal information in general. Do the benefits of having a public register of BO outweigh limited loss of privacy?
The argument of “why should you care if you have nothing to hide?” doesn’t really get there. People do care about their privacy, whether or not they are well-known. Business owners in Germany have expressed concern about the privacy implications of EU beneficial ownership transparency requirements and the balance with information disclosure regulations. But the truth is, most people have better things to do with their time, even during Covid lockdowns, than search for the businesses interests of their friends and neighbours.
The real question is whether additional personal information made public by a BO register is a reasonable price to create a tool to improve the integrity of the business environment and tackle corruption, money laundering, terrorism financing, tax evasion and a host of other financial crimes. The number of countries implementing public BO registers would suggest that those scales are coming down on the side of greater transparency.
Tim Law and Michael Barron are independent consultants that have advised governments on four continents on implementing effective beneficial ownership reporting systems.