The UK is the first nation in the world to have introduced a publically accessible register of accurate and current information about persons who really own companies and LLP's.
The legislation came into force through the addition of 32 new sections and two schedules into the Companies Act 2006 and was effective from 6 April 2016 with compliance being required before July 2017.
Why is this a big deal? Just ask Mossack Fonseca and other organisations who have been specialising and facilitating the hiding of corporate information.
The 11.5 million papers of revelations seemed a generous gift to a UK Government who were delighted at the serendipitous timing coinciding with their new legislation; until reality kicked in that transparency means what it says and that there are things even a Prime Minister would like to keep secret.
The terminology is that the register is of People with Significant Control (PSC's). PSC's are people who own more than 25% of shares in the company; or 25% of voting rights; or the rights to appoint or remove the majority of directors; or the right to exercise 'significant influence or control' over the organisation, or the right to exercise 'significant influence or control' over a trust or firm meeting one of the other four conditions.
What must be done to comply?
A company must take reasonable steps to identify its PSC's. They must then give notice to persons who know or have reasonable cause to believe that they are PSC's or have reasonable cause to suspect that a person a) knows the identity of a PSC or b) knows the identity of someone likely to have that knowledge. That is quite an imposition!
The PSC must then respond within a month and the company keeps its register up to date and informs Companies House, which in turn notifies the law enforcement agencies (including the police and relevant local authorities). There are penalties for non-compliance including a restriction upon the shares themselves, but also in a criminal context there is the prospect of a fine or even up to two years imprisonment which could be faced by both the company officers and the offending PSC.
The legislation as enacted raises serious issues:
- The definition of 'significant influence and control'. Whilst there is indicative draft statutory guidance, the term is wide and flexible. This is deliberate but can create enormous uncertainties.
- The extent and risks of disclosure. Although the publication of name, month and year of birth and a correspondence address is equivalent to a company directors 'protected information' the position of a PLC is very different to that of a paid director who chose to take the post. Anyone can obtain that information as of right from the company on payment of a fee unless i) the request is not for a 'proper purpose' or ii) there is the existence of evidence that disclosure will lead to a 'serious risk of intimidation or violence'.
- The financial burden for companies. They will receive no compensation for the cost of complying the legislation and only the fee of £12 to consider and address claims for information.
- The burden upon the individual PSC who will have an obligation to comply with the initial request and keep the company appraised of any changed circumstances.
Why is it being done? Because the government have expressed their belief in transparency and that it will assist in combatting tax evasion, criminality including money laundering and help prevent terrorism.
That is a very effective button to press in the post 9/11 world and is one that seems to be shared by the public.
So what are the potential dangers?
- That the most vulnerable companies will be hit hardest. It is the company that is paying for themselves to be policed, whilst the companies being targeted -the criminals, are likely to avoid the legislative requirements without the realistic possibility of being investigated.
- That the use of nominees will continue without the authorities having the finances to recognise the difference between legal and beneficial ownership.
- The speed of implementation might criminalise those least financially able to comply.
- Will it discourage investors at a time when many organisations (such as banks) have an increased obligation to meet equity ratios in view of the risk, complexity and publicity of being associated as a PSC?
- What about the amount of information available to the State? Whilst there is little doubting the bona fide's of the government's aims and drivers, it is telling that it acknowledges that information is power.
When the European Court of Human Rights struck out the EU Data Retention Directive on the basis that it provided those who possess power to use it with the capacity to interfere in ways that do not track the interests of those who might be on the receiving end of it, the UK Government immediately responded by rushing through the Data Retention and Investigatory Powers Act as emergency legislation. As this has a 'sunset clause' at the end of 2016, it is to replace the state's ability to be equipped with a 'snooper's charter' that the Investigatory Powers Bill is making its way through Parliament. The importance of obtaining similar information through the scaffolding of the PSR register should not be ignored, and neither should the danger that these powers can pose in connection with individuals whose information is made available.
Be that as it may, the UK Government appears wedded to the PSR structure and the public outcry in response to the Mossack Fonseca revelations appear to back them up. Furthermore, the Fourth Money Laundering Directive will be in force in all member states in 2017 and will require a similar register of corporations throughout Europe.
Whilst there is no going back, we should perhaps be a little more critical of what we wish for.
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About the Author
Julian Dobson, Lecturer in Law at the University of Winchester