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National

February 20, 2017

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Beneficial ownership —needle in a haystack

Beneficial ownership —needle in a haystack

Panama Leaks

Panama Leaks and the consequent rush of blood with regard to transparency throws up a number of issues.

One such reaction has been the introduction in the New Companies Bill of the Companies Global Register of Beneficial Ownership. The law will require every substantial shareholder or officer of a company incorporated after the enactment of the Bill having ten percent or more shares in a foreign company or body corporate to report to the company his beneficial ownership or any other percentage or interest as may be notified by the Securities and Exchange Commission of Pakistan, on a specified form within thirty days of holding such position or interest. Such company is required to submit the information received by it during the year to the registrar along with the annual return on a specified form.

The issue here is of verification. The changes being proposed in the new Company Law does not require the information on the register to be verified. The entire concept is based on voluntary disclosures.  Those who seek anonymity for abusing the international financial system              are going to be the very people who are not going to be honest with voluntary disclosure. It is unlikely that every company or individual will be fully transparent about its or his beneficial ownership. Some will not comply at all or will give misleading or incomplete information. It needs to be explored as to what are the ways to verify or corroborate what is being declared. Clearly, the Regulator in Pakistan cannot seek validation or certification in respect of such disclosure from any external source. 

A big question that the Government will not be able to answer is whether people had lied to the Register or provided inaccurate, imprecise, indistinct or inexact information. This is going to be a serious challenge for the credibility of the Global Register. The challenge is how to ensure accuracy and truthfulness of data.There will always be cases where (a) the information is false (b) it is partially false (c) the off shore company is layered (d) trusts are created to conceal beneficial shareholding (e) the off shore company is closed before the time for declaration and so onso forth.

Ultimately, the support for maintaining such a Global Register will become lukewarm as the Register will be reduced to a largely passive, archival function merely revolving around receiving and filing documents. Clearly, the Regulators cannot and do not have the responsibility to verify the documents they receive and they do not have any verification process in place to ensure that the information is accurate. In such a case all that will be left is the expectation or hope that the threat of miss-declaration will have consequences and criminal penalties. Without an amnesty in place, this expectation is misplaced and the reason is not sufficient to induce people to provide accurate information.

Regulations will therefore have to be framed to support the provisions relating to Global Registry. While the Regulations will not be able to provide a mechanism to ensure verification, it would be a step in that direction. For example, the verification process could include a signed, notarized, attested affidavit to be furnished with the disclosure; cross checking the submission against corporate filings done by the off shore company; review of the constituent documents of the off-shore company etc.

For a brief period when the Companies Ordinance, 2016 was in place, it was widely reported that majority of Pakistani companies have denied having substantial shareholdings in offshore companies. Majority of the companies that did respond to the notices served to them to 

disclose their offshore substantial shareholdings appeared to have given “nil statement”. One reason for this is attributed to the fact that the majority are not Pakistan companies but individuals who own shares in off shore companies and a very small number of Pakistan companies would have substantial shareholding in off shore companies. 

The reality of making public such Global Registers to become the global standard is doubtful. While the US has promised to set up Registers State-wide, the US Congress has repeatedly shut down laws to require States to create private beneficial ownership Registers, let alone public ones. Canada has not even committed to promising to establish any such Global Register. Until a public Register becomes the global standard, those countries including Pakistan that choose to put their necks out are doing so at a great risk to business within their jurisdiction and putting them at a significant comparative disadvantage. 

While the private intermediaries or service providers who internationally incorporate or sell off shore companies may have a robust system of verifying the credentials of the beneficial owner (who instructs them to set up the off-shore company), there is no obligation on the service provider to notify the tax authorities of the country where the beneficial owner is tax resident. This is where the problem lies. If the service providers notified the tax authorities of the country, where the beneficial owner is a tax resident,it would constituteeffective and practical verification that will ensure that there are no false declarations. Otherwise for any investigation, one will have to invoke the web of trying to seek information through the mutual assistance treaties if they have been signed; OECD or other bilateral conventions and treaties. A virtual impossibility in present times.

Defining beneficial owner to cover all cases will always be challenging. Though various legal, industry and academic definitions exist, at the same time it is not difficult to argue in a particular case what does and what does not constitute beneficial ownership.At the same time, there are several ways of concealing the beneficial ownership. In the simplest cases, one or more persons stand in as shareholders for the beneficial owner. There are other ways by creating opaque structures and fronts; bearer shareholders or a Trust. Clearly, there is no beneficial ownership if there is  (a) a mere hope of benefit (b) conditions have to be met at the sole discretion of the trustees (c) consent of the maker of the Trust is required (d) and in all likelihood the beneficiary does not even know of this remote possibility that a benefit exists. This would not constitute beneficial ownership. In such circumstances, it would not be appropriate that a member of the public at large should be able to access this information through a search of a Global Registry.

(The writer is a Barrister and President of SAARCLAW)       

 

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