Regulating Beneficial Ownership Learning from History Ex ante analysis in UK 2002

1. Regulating Beneficial OwnershipLearning from History Ex ante analysis in UK 2002 John Howell John Howell & Co Ltd UK www.jh-co.com

2. Structure of Talk • The 2002 Study. • Scoping the EU Study. • Lessons learned. NB: These slides only cover Part 1 Utrecht 2007 John Howell & Co Ltd

3. Origins of UK Interest • UK Performance and innovation unit study (June 2002). • “Recovering the Proceeds of Crime”, use of disclosures and abuse of ease of incorporation. • Asset Recovery Agency established. • Misuse of Corporate Vehicles OECD 2001. • FATF et al. Utrecht 2007 John Howell & Co Ltd

4. 2002 - The Mischief (1) • Companies play a useful role as limiting liability encourages enterprise • But criminals exploit anonymity and ease of incorporation • Able to keep real ownership secret • Better disclosure regime needed to tackle (especially) serious organised crime gangs Utrecht 2007 John Howell & Co Ltd

5. 2002 The Mischief (2) • Criminals can control companies without owning them (legally or beneficially). • Shadow directorship rules ineffective. • Disclosure regime neither supports inquiries into ownership, nor produces data that are complete, current or avoid tipping off. • Poor data and search systems. Utrecht 2007 John Howell & Co Ltd

6. UK Proposals • Five + Two cumulative options identified. • Small company details (for LE only) to all company real time data (fully public). • “Variables soon multiply”. • Substantial effort just to define the initial categories (good early work by HMT) and... • ..complex iterative process to get to watertight options. Utrecht 2007 John Howell & Co Ltd

7. Hand Out 1 Summary of Options Utrecht 2007 John Howell & Co Ltd

8. Base Case 1 - Context • Lots of types of companies with lots of special legal characteristics (for perfectly good reasons) which create weak spots. • UK company formation very easy, quick and cheap (online, immediately for £35). • Good for UK plc and UK lawyers (40% of international contracts under UK law). • Favourable tax regime. Utrecht 2007 John Howell & Co Ltd

9. Base Case 2 – Why UK Ltd? • Company formation agents there to help – 10% of companies owned by overseas interests. • Don’t have to be registered as a business in UK to do business, though you must comply with rules of doing business (data, tax). • UK obligations usually not extraterritorial. Utrecht 2007 John Howell & Co Ltd

10. Base Case 3 - Ownership • Legal owners are the members and the legal owner of a share is the shareholder or warrant holder. • Natural or legal, holding in full or in part. • Shareholding under contract by “nominee”. • Legal and beneficial ownership often separated. • Beneficial ownership is not a “share class” • Legal definition: a person who holds or is entitled to a beneficial or equitable interest in property, such as a person for whom a trust is created. • armonisation a nightmare Utrecht 2007 John Howell & Co Ltd

11. Base Case 4 - Control • Control is arguably more important than ownership of whatever type (smokescreens). • Inland Revenue, FSA, Take Over Code all dwell on control, but study followed fact and degree of changes in ownership in percentage terms. • Did not determine way to define “beneficial control” but highlighted key role of directors, including nominee directors. • Influential beneficial owners are shadow directors. Utrecht 2007 John Howell & Co Ltd

12. Base Case 5 - Disclosures • Duty to (i) disclose to Companies House (ii) keep a register, with respect to both shareholding and director events. De facto disclosure via stock transfer forms. • No Section 212 powers as with PLCs. • Companies House a registry – checks a filing is made but little content analysis. • Prosecutions rare and very public. Utrecht 2007 John Howell & Co Ltd

13. Base Case 6 – Searching Data • Companies House Data publicly available for a fee online. • Includes director disqualifications. • Substantial data bases in UK – Experian, D&B. • Used by LE but not linked (though intelligence might be doing so). Utrecht 2007 John Howell & Co Ltd

14. Base Case 7 – Investigative Powers • Ownership and control investigation powers mainly in CA 1985 S442, S444. • S2 CJA 1987. • NCIS, National and Regional Crime Squad, 53 constabularies, HMCE, IR, DWP, FSA. • PACE 1984, Terrorism Act 2000. • Civil Powers – Anton Pillar order. Utrecht 2007 John Howell & Co Ltd

15. Story So Far… • No gatekeepers, no due diligence. • Automatic incorporation without ID. • S352 ignored – nothing to pinpoint control. • Tipping off risk, offshore trails problem. • Open record creates public order risk (HLS). • Tracing BO takes up vast amount of time. • Lack of FIs. • Poor data. Utrecht 2007 John Howell & Co Ltd

16. Making the Options Workable • Need to ensure the options could have intended effect – intense discussion. • Duty to declare that they are not BO or else nominate “Next in Line” – not end BO. • Compare disclosures to spot discrepancies. • Practical smurf-proof percentage threshold. • Movements both ways. Utrecht 2007 John Howell & Co Ltd

17. Lesser Options • One line certification. • When thresholds passed - 3% absolute (and movements of 1% for Option 1c). • Disclosure made to company (Option 1) or to Companies House (Option 2) via Annual Return. • Option 3 requires timely disclosures to Companies House. Utrecht 2007 John Howell & Co Ltd

18. Greater Options • Option 4 Database with ownership look-up. • Option 5 Adds directorship data. • Both available to LE on inquiry. • Open Register • At company (Option 1) or Co. Ho. (others). • Information campaign. • Appropriate enforcement regime. Utrecht 2007 John Howell & Co Ltd

19. Establishing Benefits and Beneficiaries • Who would benefit and how? • Δ Value of data and access by option. • Effects and preconditions for effects. • Criminal and civil initiative. • Secondary (wider crime reduction) effects and their sensitivities. • Wide range of beneficiaries. Utrecht 2007 John Howell & Co Ltd

20. Confirming Benefits • Everybody thought the proposals would help by increasing capacity. • More, and more complex, investigations. • More success: time frame, evidence quality. • More data – leads, evidence. • Data mix ‘n’ match: proactive policing. • Secondary effects: deter advisers, press lesser charge, intelligence led approach. Utrecht 2007 John Howell & Co Ltd

21. Benefits to Industry • Open Register on balance more useful. • Safer environment from data sharing. • Small, vulnerable companies. • Cost savings from standardised data, CDD. • Maximising shareholder returns. • NB some LE wanted closed register to preserve illusion of data advantage and public order (dubious given other powers). Utrecht 2007 John Howell & Co Ltd

22. Serious Arrestable Offence • Little chance of automatic detection of false reporting. • Deterrent effect of potential arrest, search especially on advisers. • Increased willingness to point finger. • Light touch regime for petty infringement. • Serious consequences where intent involved. • Sanctions regime key in getting to benefits. Utrecht 2007 John Howell & Co Ltd

23. Judging Benefits - 1 • Too complex to get to precise values. • Hierarchy of benefits and common factors. • User estimates of orders of economy. • First Order (10%) – basic efficiency gains. • Second Order (15-25%) – complexity/scope • Third Order (30-50) – strategic change. • See Handouts 2 and 3 Utrecht 2007 John Howell & Co Ltd

24. Judging Benefits - 2 • Identify areas where benefits accrue. • Intelligence, investigation, evidence gathering, deterrence. • How would industry use open system? • Small changes in large numbers. • Stop migration from petty to serious crime. • Sensitivity to tax regime, data quality. Utrecht 2007 John Howell & Co Ltd

25. Costs • Direct, compliance, effect on sales, competition, unfair costs. • Easier in that many of them “simple” transaction processing costs. • Many variables to cost and combine. • Model based on Companies House costs. • Key point – how many BOs? • See Handout 4. Utrecht 2007 John Howell & Co Ltd

26. Beneficial Owners • 1.1 million companies have capital < £100. • 3.5 shareholders per company. • Most companies are husband and wife. • 300,000 at risk (5 – 20% chance). • 125,000 beneficial owners. • Few costs to most companies and shareholders as no changes after initial declaration (single box tick compliance). Utrecht 2007 John Howell & Co Ltd

27. Public Order Exemption • Threat from extremists (AQ, animal rights). • Need to focus on threats to life (Rushdie). • Simple stand alone PC system for rest. Utrecht 2007 John Howell & Co Ltd

28. Effects of Non-Compliance • Need for resilient system. • Non-compliance allowed for in sensitivity analysis by reducing order of economy. • Hits closed register options hardest. • See Handout 5. Utrecht 2007 John Howell & Co Ltd

29. Recommendations • Strict CBA: Option 3 Open • Functionality: Option 5 Open • Resilience: Options 3 or 2 (Open) • Camel’s Nose: Option 2 • Meet OECD: Option 3 • Look at semi open system before going to closed system. Utrecht 2007 John Howell & Co Ltd

30. OUTCOME REVENGE OF THE COUNTERFACTUAL Utrecht 2007 John Howell & Co Ltd