In the 1989 film Field of Dreams, a troubled farmer played by Kevin Costner is inspired by a voice telling him “if you build it, he will come”. He builds a baseball diamond in his field, but I won’t spoil it for those who haven’t seen the film by telling you what happens next.
I’m afraid things aren’t that simple when it comes to beneficial ownership (BO). Building a BO register, even one based on a robust definition and effective forms will only go so far towards creating a populated register. There is a big difference between “building it” and achieving high levels of compliance by those who should be reporting BO information.
Maximising compliance is one of the most significant challenges facing countries implementing a BO reporting process. Such a process has a number of elements in common with a tax return submission process. It has a large number of submitters (in the case of BO, all companies and other organisations in a country). These submitters have a wide range of circumstances and a range of understanding of the issue. All need to report in a standardised way and produce data that is comparable and useable by a range of agencies. A high level of compliance is needed to ensure the data set is as complete as possible and again is useable.
The barriers to high levels of compliance for a BO reporting process include lack of familiarity with the concept of BO (and how to identify a company’s ultimate beneficial owners), the legislation and regulations imposing a reporting obligation and the sanctions facing those who do not comply. Poor enforcement of regulations and a lack of dissuasive sanctions and penalties can undermine compliance and even make it difficult for authorities to distinguish between those who don’t take their obligations seriously and those who really have something to hide.
In addition, there may be concerns about how government officials will use (or could misuse) the data. Equally, there may be concerns about potential threats to privacy and personal security, especially where a country is implementing a public BO register. These are all significant challenges, but in many cases, a government agency implementing a BO register makes life harder for itself.
Aspects that place more barriers in the way of compliance include over complex BO submission forms, poorly designed forms, inadequate guidance on how to complete the forms, lack of consultation with stakeholders from an early stage to identify concerns and means to address them, lack of communication from an early stage to explain the rationale for BO regulations and how to comply, insufficient guidance and training for those administering the BO register.
Implementing countries can avoid all these pit falls. Addressing these aspects is within their control with a well-developed BO implementation plan and need not require significant resources. Government agencies implementing a beneficial ownership registry can learn a great deal from the approach taken by the UK’s tax return submission process.
HMRC (the UK’s tax authority) mark the run up to the submission deadline with an advertising campaign across all media to remind UK citizens of the looming deadline. HMRC have designed the submission process to be as straightforward as a tax return can be. The online submission process guides the submitter through a series of logical steps. There are also a range of tools such as worksheets available to help individuals put the correct information in the right box. There are also stiff penalties and fines for those that are late in submitting a form, making payment or get the information wrong. The result is that levels of compliance are high and over the many years that the system has been in place, a strong culture of compliance has grown.
The central elements to facilitating high levels of compliance in a BO reporting process are:
• Setting clear policy objectives for the purpose of the BO register (such as anti-money laundering, combatting corruption and building trust in the economy) and the type of information that needs to be collected,
• Taking a strategic approach to engagement and communications from the very earliest stages of designing and implementing a BO reporting process. Such an approach can make a major contribution to overcoming the inherent barriers to compliance through enhancing familiarity with BO and the relevant regulations. A strategic approach includes engaging with stakeholders in the business community to explain the concept and importance of collecting BO information, the rationale for the BO register, what actions companies will have to take to comply (and the consequences of non-compliance). Where a country is implementing a public register, it is also important to communicate the benefits to companies of access to data on their suppliers and other business partners,
• Keeping the submission process as simple as possible. This includes ensuring the process is as intuitive as possible and is supported by extensive guidance. This guidance will come in several forms: general communications, specific detailed guidance notes for reporting companies, guidance notes attached to the submission form and help line that submitters can access with specific questions on their particular circumstances. The submission process should, where possible, be online rather than hardcopy,
• Ensuring the data submission form is as simple and intuitive as possible, whether it is online or hardcopy. This should include taking the submitter through a series if logical steps, limiting the scope for free form data entry by using drop down menus and specific data ranges. The form should also have sufficient space for the submitter to provide all relevant information e.g. if the threshold for identifying a beneficial owner is 20%, the form should allow for the submission of details of at least five beneficial owners.
Maximising compliance with its BO reporting process will contribute to a country building a compliance culture, building trust in the business environment and reducing the risks from corruption, money laundering, tax evasion and other illicit financial flows.
Steps 3, 4 and 5 of the BO6 framework include:
Step 3 – Design of a simple reporting regime and an effective enforcement regime
Step 4 – Legislate for sanctions for those who do not comply
Step 5 – Implement that regime with sufficient resource to support users and enforce sanctions
Finally, Communication spans all 6 steps of BO6.
Governments designing and implementing a BO regime should be particularly careful to consider what they can do to facilitate better compliance, and not just build a BO register and assume compliance will be the result.
So perhaps if Kevin Costner had been building a BO register, the voice would have said “build it, make it as simple as possible, explain what it is and have an effective sanctions regime, and they will comply”. But perhaps that wouldn’t have made such a good movie.
Michael Barron and Tim Law are independent consultants that have advised governments on four continents on implementing effective beneficial ownership reporting systems.