Tackling Corruption: Beneficial Ownership and Politically Exposed People

First, a question. This week it was announced that Mount Everest is 86cm taller than the previous measurement. But might climate change result in Mount Everest shrinking in the future? We will come back to this.

Corruption often manifests itself as people in positions of influence, such as politicians, exerting that influence for personal gain, or the undue gain of others. For many years one of the key tools to tackle this corruption has been to require those deemed at risk of corruption to disclose their business interests. Registers of interests exist in many countries, and usually require a politician to disclose businesses in which they have an investment interest, or by whom they are employed or otherwise engaged. In some countries, the register is far more detailed, including information on all material assets owned by the individual, including the car they drive and the watch they wear.

These registers provide an important tool in tackling corruption, but are less effective when the business interest, and therefore the potential corruption, is overseas. They are also of limited use if you want to check whether a company you are about to do business with has links to a political figure, as you would need to look on every register of interests internationally.

That’s where public beneficial ownership (BO) registers come into play. 

It is usual for a beneficial ownership register to include special provisions for beneficial owners who are politically exposed people (PEPs). That will include flagging the individual as a PEP, and perhaps having lower reporting thresholds.  

By identifying any PEPs with an interest in a particular company, and making that information publicly available, anyone about to enter into a transaction with a company can easily preform a check beforehand to see whether any PEPs are involved. This would be almost impossible globally using only registers of interest.

Identifying PEPs as part of a BO register isn’t without challenges, as the sphere of influence of a senior politician almost certainly extends to their close family and associates. Care needs to be taken in designing an effective, robust but also enforceable PEP requirement.

Ultimately there is a place for both tools. Registers of interest could be seen as a “bottom up” approach, starting from the individual natural person, and looking up into their investments and business interests. BO registers would then be a “top down” approach, starting from the company and looking down into the natural people who are beneficial owners and perhaps PEPs. 

Effective measures to tackle corruption can benefit from a combination of these “bottom up” and “top down” approaches, providing effective and useable transparency into the business interests of those in positions of influence.

So back to Everest. Climate change may well be having an impact on the snow cap of Everest, and could mean that future measurements of its height are lower. But there is another factor at play. Mountains are measured against average sea levels. If climate change causes sea levels to rise, every mountain will technically be slightly smaller.

So as with corruption, the answer involves looking from the bottom up, but also from the top down.

Michael Barron and Tim Law are independent consultants that have advised governments on four continents on implementing effective beneficial ownership reporting systems.