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Beneficial ownership

Identifying and registering beneficial owners is vital to making sure the wealthiest are held to the same level of transparency and accountability as everybody else.

A beneficial owner is the real person, made of flesh and blood, who ultimately owns, controls or receives profits from a company or legal vehicle, even when the company legally belongs, on paper, to another person or entity, like an accountant or a shell company. Companies must typically register the identities of their legal owners (which can be real people or other companies), but not necessarily their beneficial owners. In most cases, a company’s legal owner and beneficial owner are the same person but when they’re not, beneficial owners can hide behind legal owners, making it practically impossible to tell who is truly running and profiting from a company. This allows beneficial owners to abuse their tax responsibilities, break monopoly laws, get around international sanctions, launder money and funnel anonymous money into political processes – all while staying anonymous and out of the reach of the law.

By requiring beneficial owners to be registered just like legal owners, beneficial ownership registration laws make sure the wealthiest are held to the same level of transparency and accountability as everybody else.

Mossack Fonseca, the offshore service provider at the centre of the Panama Papers scandal, did not know who the beneficial owners were of more than 70 per cent of the 28,500 active companies it provided services to, despite Mossak Fonseca serving as the legal owner of some of those companies. To tackle this financial secrecy, companies and other legal vehicles like trusts must be required to register their beneficial owners, just like they are required to register their legal owners.

Because a company’s legal owner can be another company, which in turn can have another company as its legal owner, a multinational corporation can create a long chain of legal ownership made up of several companies it owns. For example, Big Company Group can own Big Company Inc which owns Big Company Corp which owns Big Company Ltd and so on down to Big Company Cafe, which sells you coffee. Big Company Café might be located around the corner from your home, but Big Company Ltd can be located in Ireland, Big Company Corp can be in the Cayman Islands and Big Company Group at the top of the chain in the US. In practice, multinational corporations build such complex ownership chains across so many tax havens, it becomes impossible to draw a straight line from the bottom of the chain to the top, and that makes it impossible to track and fairly tax profit. It also makes it nearly impossible to make sure no laws are being broken along the way. Beneficial ownership, however, make it possible to find the thread running across these convoluted ownership chains.

A beneficial owner has to be a real person, made of flesh and blood, which means a company cannot list another company as its beneficial owner. The company has to identify the real person at the top of the chain that owns, controls or profits from it, even if they do so through 20 layers of shell companies. By registering beneficial owners, we can draw a straight line from the cup of coffee you buy to the real person, made of flesh and blood, located half way around the world that pockets a share of the price you paid – and we can make sure they’re paying the right amount of tax for that profit and abiding by the same laws everyone else is to make it.

When the Tax Justice Network first called for beneficial ownership registration in 2005, the idea was considered to be too difficult and costly to implement. But, in the past few years, governments have rapidly begun to embrace beneficial ownership registration. In 2016, the UK was the first country to establish a beneficial ownership register. In 2020, 81 countries had laws in place requiring beneficial owners to register with government authorities. By reprogramming our tax systems to hold all beneficial owners to the same degree of transparency as everybody else, beneficial ownership laws reject the desires of some of the wealthiest individuals to be beyond the reach of the law and instead make sure all members of society are equal before the law.

While progress in recent years has been tremendous, there is still much more work to do to achieve effective transparency of beneficial ownership. Until all countries register beneficial owners, tax abusers and financial criminals will continue to be able to relocate their financial affairs to another country to hide their identities from the rule of law globally. In countries where beneficial ownership laws have been adopted, these being so new, many of the laws are not yet robust enough to effectively seal all the cracks beneficial owners can slip through.

There are two main ways countries can dramatically strengthen their beneficial ownership laws: reduce thresholds and register trusts.

Most countries currently only require an individual to be registered as a beneficial owner if they own or control 25 per cent or more of a company. The problem with this threshold is that a company can be owned by five individuals and have no beneficial owners. For example, a beneficial owner can reassign their company shares to their spouse and three children, allowing the original owner to continue to exercise complete control of the company and profit from it, while all five of the company’s shareholder avoid being registered as beneficial owners. To effectively exercise beneficial ownership registration, governments must drop the threshold from owning 25 per cent of shares to owning at least one share in a company.

Trusts are most often used to facilitate a transfer of an individual’s wealth in circumstances in which they can no longer do so themselves, most often after their death. A parent might store their wealth in a trust that pays out monthly allowances to their child until the child becomes old enough to take ownership of all the money and assets held by the trust that their parent left behind for them. A wealthy entrepreneur might leave their fortune to a trust dedicated to funding charitable causes. However, with governments increasingly clamping down on the avenues tax abusers use to hide their wealth, trusts are being increasingly weaponised to abuse tax and commit financial crimes.

Trusts allow the ownership of wealth and assets to be temporarily suspended. The wealth held by a trust no longer belongs to their original owner (the settlor), nor to the person receiving benefits now or in the future from the trust (the beneficiary), nor to the person tasked with managing the wealth on behalf of the settlor (the trustee) until the beneficiary assumes full control of the wealth held by the trust. Tax abusers are using this suspended status of ownership offered by trusts to hide their ownership of huge fortunes and highly valuable assets like mansions and companies, while they continue in practice to benefit from and to exercise full control over their money, their mansions and their companies. Governments must require trusts to register their beneficial owners just like companies do.

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