by Bruce Zagaris

On April 19, 2018, Transparency International issued a report G20 Leaders or Laggards? Review G20 promises on ending anonymous companies.

The TI report discusses how the major cross-border “grand corruption” scandals have tarnished the Group of 20 (G20) countries in recent years.  It cites the fact that in 2017 Odebrecht the Brazilian engineering company, was assessed a US$2.6 billion fine for bribery after being charged with paying US$788 million in bribes. In the “Russian Laundromat” scandal, exposed in 2017, a group of individuals in G20 member Russia allegedly established 21 shell companies, which then moved and laundered illegal proceeds out of the country, making more than 26,000 payments to 96 different countries including every G20 country aside from Brazil.  Increasingly, anonymous companies hide the identity of the person at the source of the funds either to launder and transfer stolen money, or to operationalize corrupt deals, using companies and offshore accounts to pay bribes or buy influence.

The report makes 5 major findings and then recommendations as follows:

1. G20 Countries are starting to tackle anonymous company ownership – but progress is slow.  Some 3 years after the G20 adopted their High-Level Beneficial Ownership Principles  at the Brisbane G20 Summit, the number of countries with weak or average frameworks has dropped from 15 to 11, but still major weaknesses exist across the principles.
2. The majority of countries still do not know who owns and controls companies in their territories and do not keep current information on them.   The 20 Principles encouraged legal entities to require beneficial ownership information when recording information about their shareholders.  Legal entities are now expected to understand their ownership and control structure and monitor individuals  who have an interest in a company but are presented through nominee shareholders or other legal entities.  However, the great majority of countries evaluated still do not require legal entities to maintain beneficial ownership information themselves.  Central beneficial ownership registers improve collection of beneficial ownership information and access to law enforcement, supports domestic and international cooperation between authorities and permits them to do their job more quickly.  Six assessed countries now have central beneficial ownership registers.
3. Verification of information is weak across the board.  This undermines the ability of competent authorities to investigate suspicious cases, and the ability of banks and businesses to carry out proper due diligence.  All 23 countries analyzed now require financial institutions to identify the beneficial ownership of customers.  Unfortunately, in high-risk cases, only 8 G20 countries required financial institutions to use independent and reliable sources to verify the beneficial owner of their customers.  Finally, no register authority in any G20 or guest country verifies information collection in company registers.
4. Rhetoric does not always translate into action.  Government are frequently aware of the weaknesses in their system.  However, in many cases they fail to implement key measures they know will help mitigate those problems.
5. Gatekeepers such as lawyers, accountants, real estate agents, and trusts and company service providers remain money laundering weak spots.

TI makes the following recommendations:

— Governments should establish a central register of beneficial ownership information and make it publicly available in open data format.

— Governments should resource and establish mechanisms to ensure that at least some verification of beneficial ownership information occurs, such as cross-checking the data against other government and tax databases, or conducting random inspections.

— Financial institutions or DNFBPs should not be permitted to proceed with transactions if the beneficial owner of their customer cannot be identified.

—  Governments should undertake national money laundering risk assessments on a regular basis.  These should include an analysis of the risks posed by domestic and foreign legal entities and arrangements. Key stakeholders, including obliged entities and civil society organizations should be consulted.  The results of the assessment should be published online.

—  Governments should consider prohibiting nominee shareholders.  If they are permitted, they should be required to disclose their status upon the registration of the company and registered as nominees. Nominees should be licensed and subject to strict anti-money laundering obligations.

— Governments should require the registration of both domestic and foreign trusts operating in their country.  Information on all parties to the trust (trustee, settlor and beneficiaries), and the real individuals behind them should be recorded.

The report illustrates how civil society plays an important role in shaping and implementing commitments by governments and international organizations to transparency and anti-corruption.  They invest significant resources before the G20 meetings to develop precise commitments and then lobby the governments to support them.  Thereafter, civil society continues to monitor the performance of the governments against the commitments and produce reports, exposing gaps.  They also work with other organizations, such as the International Consortium for Investigative Journalists (ICIJ).  The current issue of the IELR will have a more comprehensive discussion of the TI report.