This Tax Justice report tackles financial crime at its root: anonymity manufactured via layers of opaque legal vehicles, such as companies and trusts. While many countries, especially in the European Union, have made great advances in requiring companies and other legal vehicles to register their ‘beneficial owners’ (the individuals who ultimately control and benefit from legal vehicles), verification of this information continues to be a great challenge. What’s the point of requiring a company to identify and declare its beneficial owners if it cannot be prevented from lying to our faces?
The main proposal of this paper is the use of inter-connected government and public databases to ensure that registered information is valid and consistent: the declared name and date of birth of a shareholder should match whatever record the government has on the person; the commercial address of a company should be a real place you can find on Google Maps and should not refer to a park or a lake; the listed active director should still be alive. Verifying the validity of the information is the first step. The second step is verifying whether the information is legitimate. A company could register a real living person as its director instead of a deceased person, but that still doesn’t mean the company isn’t lying about who its real beneficial owner is. To address this risk, our paper proposes the application of advanced big data analytics to identify redflags, similarly to the analytics applied by banks and credit cards to prevent online fraud.
These advanced analytics could be trained to find patterns indicative that registered information is unreliable. For example, when a multi-million dollar company registers as its beneficial owner a person who has no declared income, no bank account and has been living for decades at the same address located in an impoverished neighborhood, the IT system would raise a redflag. Similarly, when a company is billing invoices worth millions of dollars to its commercial office, but the company has no employees and its office makes no electricity consumption, the system would raise a redflag. The relevant authorities would be notified of the redflags and scrutinize suspicious cases. Further investigation may reveal that the company that had registered a director with no bank account as its director was exploiting a poor individual to serve as a front director. The latter company with the empty commercial office may be revealed to be a shell company.
The paper also focuses on all the data that should be collected in the first place. A country may have the best computer system in place to run analyses, but if there’s not enough data to analyse, the results will be worthless. Based on our previous reports, the paper describes all the legal vehicles that should be subject to beneficial ownership registration, the details that should be registered on each shareholder, beneficial owner and director, and the right incentives to use to help ensure information is kept up to date (spoiler alert: it’s not a US$50 fine for non-compliance).
This report is also about rethinking commercial registers and their role in the economy and the fight against illicit financial flows. Commercial registries make magic. They give life (‘legal personality’) to thin air by allowing an abstract idea (a ‘company’) to own assets, open bank accounts and engage in business as if it were a real person. Commercial registries are so vital to the economy – and to financial crimes – that they should stop being regarded as old storage houses that print certificates of incorporation on request. The fact that anti-money laundering provisions usually consider the information held by commercial registries to be so untrustworthy that financial institutions are not allowed to rely only on them when running their due diligence checks on customers speaks for itself. Instead, we propose that commercial registries should become dynamic databases required to be consulted on a real-time basis by banks, notaries, corporate service providers or brokers before they engage in any transaction with a company. Any opening of an account, signing of a contract or purchase of a house should depend on the relevant company still being listed as “active” in the commercial register. This wouldn’t happen if the company failed to file an annual return or tried to register information found to be invalid (eg a non-existing address).
The proposals mentioned in this paper will not be able to prevent every possible crime, but they would give authorities a great deal more power to use technology in their favour. Criminals are using bitcoins to pay for drugs or ransomware. Internet giants know us better than ourselves by collecting tons of data on our photos, online searches and interactions. It’s about time authorities drop the world of paper and live up to the digital challenge.