ISLE OF MAN CONSULTATION
On 30 June 2014, the Cabinet Office of the Isle of Man Government published a consultation paper1 on the Isle of Man's current regime for identifying the beneficial ownership of companies and asked whether a centralised registry (either private or public) would improve transparency of the ownership and control of companies in the Isle of Man. This article considers some of the issues which the consultation paper raises.
At the Lough Erne Summit in June 2013, the G8 countries endorsed, inter alia, the following core principles considered fundamental to the transparency of ownership and the control of companies and legal arrangements:
- Companies should know who owns and controls them and their beneficial ownership and basic information should be adequate, accurate, and current. As such, companies should be required to obtain and hold their beneficial ownership and basic information, and ensure documentation of this information is accurate.
- Beneficial ownership information on companies should be accessible onshore to law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units. This could be achieved through central registries of company beneficial ownership and basic information at national or state level. Countries should consider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses. Some basic company information should be publicly accessible.
- Trustees of express trusts should know the beneficial ownership of the trust, including information on beneficiaries and settlors. This information should be accessible by law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units.
Whilst acknowledging that a generic approach may not be the most effective, the G8 consider these principles to be essential to ensure:
- the integrity of beneficial ownership and basic company information;
- the timely access to such information by law enforcement for investigative purposes; and
- the legitimate commercial interests of the private sector.
THE FINANCIAL ACTION TASK FORCE (FATF) RECOMMENDATION AND EXISTING COMPLIANCE
Recommendation 242 deals with transparency and the beneficial ownership of legal persons in the following terms:
"Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. In particular, countries that have legal persons that are able to issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and Designated Non- Financial Businesses and Professions (DNFBPs) undertaking the requirements set out in Recommendations 10 and 22."
It would seem that the Isle of Man has already addressed this recommendation.
Companies incorporated under the Companies Act 2006 (CA 2006) are legally obliged to have a registered agent. A registered agent must be a corporate service provider, who is licensed by the Financial Supervision Commission (FSC) under the Financial Services Act 2008 (FSA) to provide corporate services (within Class 4 of the regulated activities set out in Schedule 1 to the Regulated Activities Order 2011 (CSP). All corporate service providers have an existing obligation to identify and hold information on the beneficial owners of companies under anti-money laundering and countering the financing of terrorism legislation on the Isle of Man.
However, unlike companies incorporated under the CA 2006, companies incorporated under the Companies Acts 1931-2004 (CA 1931) are only statutorily obliged to have a registered office in the Isle of Man and may have no other presence in, or connection to, the Isle of Man. Additionally, until last year, there was no legal obligation on such a company to hold information on its beneficial owners.
The International Monetary Fund (IMF) 2008/2009 Financial Sector Assessment Programme Inspection of the Isle of Man considered, amongst other things, the Isle of Man's compliance with international standards for anti-money laundering and countering the financing of terrorism. The IMF scored the Isle of Man as "largely compliant" in respect of its ability to provide the appropriate authorities access to the beneficial ownership information of companies, where a proper request for information has been made. A proper request for information has to be made, being one made via the appropriate channels and not simply a fishing trip made in an attempt to satisfy someone's idle curiosity.
The IMF did however suggest that the Isle of Man take steps to address the deficiency in relation to the information relating to the beneficial ownership and control information held on certain companies incorporated under the CA 1931. The Isle of Man did so through the introduction of the Companies (Beneficial Ownership) Act 2012 (CBOA 2012) which came into force on 1 September 2013.
Under this legislation, a company incorporated under the CA 1931 must appoint a nominated officer who is either an individual resident on the Isle of Man or a CSP (Nominated Officer). Each member of a company incorporated under the CA 1931 who is not the beneficial owner of that member's interest must notify the Nominated Officer of certain required details. In respect of a beneficial owner who is an individual, the required details include: their name, residential address, nationality and date of birth. Where a beneficial owner has legal personality, the required details include: its name, legal form, jurisdiction of incorporation/formation, governing law, registered office and any registration details.
There are prescribed situations where the Nominated Officer must disclose the required details to relevant enforcement authorities but, essentially, although there is a record of the beneficial ownership of the company, the required details remain private and are held by the company, and the company alone.
1. Maintain Status Quo
As an international business centre, the Isle of Man prides itself on being an open, transparent and well regulated jurisdiction which is responsive to the evolving standards of the international community. Where necessary, it has promptly introduced domestic legislation to ensure its continued compliance. It is arguable that the introduction of the CBOA 2012 in conjunction with the existing requirements of companies incorporated under the CA 2006, satisfies the requirements of FATF Recommendation 24. A new initiative, no matter what the source, should not be a reason to abandon previous established arrangements which achieve the same goals. That the present United Kingdom Government, mere months shy of a general election, has decided to go further and plans to proceed with establishing a publicly accessible register of beneficial ownership of companies does not mean that the Isle of Man has to follow suit. It is also worthy of note that the impetus for the register in the United Kingdom may not be wholly to promote full disclosure of beneficial interests.
Additionally, the Isle of Man is no stranger to anti-money laundering and countering the financing of terrorism legislation especially for any industry which falls under the requirements of Schedule 4 of the Proceeds of Crime Act 2008 (business in the regulated sector), which includes CSP's. Such businesses are already required to identify and verify applicants for business and their beneficial owners through satisfactory evidence of, amongst other things, name, date of birth, address, and nationality, are required to make sure such information remains up-to-date and to report suspicious transactions accordingly where considered appropriate.
2. A Private Register
One option would be to follow the United Kingdom Government's plans and introduce a register of beneficial ownership but keep its contents private. Presumably, the Nominated Officer or CSP would be required to provide the information they hold on the beneficial ownership of the company to whichever government department is tasked with compiling and maintaining the register. At face value this may be a worthwhile compromise – such beneficial ownership information is provided to a government department and therefore "can be obtained or accessed in a timely fashion by competent authorities".
One benefit of an independently held private register would be for authorities to access the information without contacting the Nominated Officer or CSP and thus reducing the risk of alerting the company or beneficial owner that they were under investigation (and thereby giving them an opportunity to take steps to evade justice). However, this potential advantage assumes the information held at the private registry would be up-to-date so it is questionable if a private register would really give authorities any tangible advantage over the current situation where the authorities contact, through the form of a notice setting out the information they seek, the Nominated Officer and/or CSP (as applicable). Additionally, the quality of the information held on the register would only be as good as the reporting accuracy of the filing party.
3. A Public Register
The third option would be for the beneficial ownership obtained by the Nominated Officer and/or CSP to be made publicly available, perhaps in much the same way as shareholders are currently listed on annual returns filed with the Isle of Man Companies Registry. This obviously raises privacy issues and there are many perfectly legitimate reasons why shares in companies are held by way of split legal/beneficial ownership. Even if a company had no dishonest reason for hiding its beneficial ownership, with growing data protection, privacy and identity theft concerns, would owners feel comfortable permitting such information to be public, especially if they could re-domicile their company to a comparable offshore jurisdiction and keep their beneficial interests private? Our reservations regarding a private register also apply.
Consideration should also be given to how companies who hide their true beneficial ownership for fraudulent reasons would react. A public register may well encourage such companies to re-domicile to less well regulated jurisdictions. This would not solve the transparency problem - only move it to a jurisdiction where enforcement agencies may find their job more difficult. Further, a public register may only encourage greater use of more complex structures including legal arrangements, whose beneficial ownership is not yet required to be identified. Both of these factors would surely defeat the object of the G8 proposals?
However if the international expected standard does evolve to a register of beneficial ownership, the Isle of Man might use the opportunity to showcase itself as a leading a jurisdiction which will do all it can to maintain its clean, transparent and well-regulated image and one which will take all necessary steps to tackle the threat of illicit finance, tax evasion and corruption. However, such zealotry will potentially damage the future of offshore finance in the Isle of Man if competing jurisdictions adopt a more pragmatic approach.
There is a fine line between balancing the need to play a part in what must be a global effort to increase transparency so to reduce crime, corruption and to increase trust in doing business with offshore companies and the need to continue to be a clean jurisdiction which is both attractive to businesses and competitive. So far, only the United Kingdom and France have announced an intention to establish a public register of beneficial ownership. The danger of introducing a register at a time where none of our competitor jurisdictions have done so or stated their intentions to do so, would put the Isle of Man at a competitive disadvantage and the risks involved should not be underestimated.
The purported increased transparency of beneficial ownership which may be achieved by the introduction of a register (public or private) will not, alone, neutralise the financial, economic and social impact of cross border tax evasion, tax avoidance, money-laundering, corruption and other crimes. However, the Isle of Man promptly reacted to implement the suggestion made by the IMF in relation to the beneficial ownership of companies incorporated under the CA 1931 and no doubt will continue to do all it can to maintain its compliance with international standards. Regardless of how beneficial ownership information is maintained, the information is only as reliable as the reporting competence of the person providing it. There are no guaranteed, fool proof steps which can be undertaken to banish the improper use of companies and other legal arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.