Posted in: news

12th August 2015

Chris Taggart: Who Really Controls Companies?

Although the phrase “ultimate beneficial ownership” is not exactly snappy, it’s fast becoming one of the most heated issues in corporate transparency since, well, arguably since the invention of companies back in the 19th century.

Similarly, the idea of attending a B20 Anti-Corruption Working Group workshop on beneficial ownership would hardly fill hearts with joy. However, the workshop, held in Paris last month, turned out to be a rewarding event that surfaced a large number of ideas that have the potential to really advance the debate.

First, it's worth unpicking the jargon of “beneficial ownership.” At my organization, OpenCorporates, we normally explain “ultimate beneficial ownership” it as “shareholding without the obfuscation”, or “who really controls companies”. Why does this matter? Much of the debate has been led by NGOs such as Global Witness, ONE and Transparency International, which are concerned that corporate entities are increasingly being used as the vehicle of choice for large-scale corruption, fraud, money-laundering, tax evasion and organized crime.

This has been enabled by two factors: first, the ease and speed of setting up companies in a global, wired world means that they are far from the traditional idea of bricks-and-mortar businesses that are based in a local community; second, it’s now possible to combine dozens, even hundreds of such companies often in highly secretive offshore jurisdictions, sometimes with nominee directors and shareholders, into complex networks.

As a result, it is often impossible for law enforcement, anti-corruption investigators and tax officials to find out who really controls or benefits from such networks, as the true control has been completely obfuscated. However, as the workshop showed, there's another perspective—that of legitimate business, which is increasingly realizing that it too is in need of the data on who ultimately owns and benefits from a corporate entity. Like the all of us, business is struggling to cope with the implications of the increased pace, complexity, and interconnectedness of the modern world.

Below are just a small selection of the benefits to business of having ultimate beneficial ownership information (UBO), identified by the workshop:

  • Know your customer: are you enabling money laundering?
  • Know your partners: are the businesses you're going to partner with in foreign companies in some way connected with senior politicians, sanctioned companies or individuals or organized crime?
  • Know your affiliates: are there risks in your own structure, exacerbated by who your affiliates are dealing with?
  • Know your supply chain: is there a systematic concentration of ownership, are these suppliers you are proud to be associated with?
  • Government procurement: are some of the bidders owned by the same parties, polluting the procurement process, or connected with the civil servants deciding the contract?The truth is this is an issue for every business.Large businesses, struggling to manage the twin demands of quarterly reporting and dispersed management structures, can be tempted to cut corners to meet targets.Small and medium businesses are struggling to compete in an increasingly winner-takes-all economy. They struggle with long and dispersed supply chains, which bring short-term cost benefits, but increased risk too—both in terms of quality, and reputational, financial and legal risk. For example:
    • Fashion and clothing companies discover that their suppliers that they thought were clean are actually subcontracting to sister companies using of child labour or operating from unsafe factories.
    • Food manufacturers discover too late that some of the companies in their supply chain are connected with criminals, and have been selling them fake or low-quality ingredients, as the UK horse-meat scandal demonstrated
    • Exporters fear that they are inadvertently doing business with companies or individuals on sanctions or debarment lists, or bidding for contracts against companies that are connected to highly placed officials or ministers. All are facing increased vectors for fraud, corruption and bad dealing, with the US Foreign Corrupt Practices Act and UK Bribery Act making this potentially serious legal as well as financial risk.

At the workshop, we heard from banks that were struggling to access data, from large multinationals that were struggling to vet local suppliers and potential partners, and from companies that feared that they were exposing themselves to existential risk.

In this context, knowing who you’re doing business with is fundamental for creating a good business environment, both at the macro level for societies and markets that are based on fairness and the rule of law, and at the micro level to find customers/suppliers/partners that are worthy of doing business with.

As Robert Lowe said when introducing the 1856 Companies Act, which created Limited Liability companies in the UK, it is essential to give “the greatest publicity to the affairs of companies, that everyone may know on what grounds he is dealing.”

Chris Taggart is CEO and Co-Founder of OpenCorporates, a company that believes that free and open public data on companies is fundamental to an inclusive, democratic society and to fair markets. OpenCorporates has statutory data on over 80 million companies, all of which is freely available.