Can the UK’s beneficial ownership data be used to investigate corruption & money laundering?

Earlier this year, the UK became the first country in the world to collect and publish who controls and benefits from companies in a structured format, and as open data. Just a few days later, we were able to add the information in OpenCorporates, the world’s largest open database of company information. Together with Global Witness and DataKind UK, we are spending this weekend with 40 data scientists to understand how beneficial ownership data could be used for due diligence and investigations.

Most companies are created and operated for legitimate economic activity. There is a small percentage that doesn’t, and that disparity between the large number of legitimate companies and the small number of criminal ones is what makes it so easy for criminal companies, hurting business and society alike.

Those involved in corruption, money laundering and fraud often use companies as vehicles for their criminal activity. The Idiot’s Guide to Money Laundering from Global Witness shows how easy it is to use layer after layer of shell companies to hide the identity of the true person who controls and benefits from the activities of this network. You can imagine how these opaque structures can be lucrative for criminal activity, as was highlighted by the Panama Papers leaks. The World Bank Puppet Masters report found that over 70% of grand corruption cases involved the use of offshore vehicles.

While there has been a call from civil society for decades for public access to this information, it has only been in the last 4 or 5 years that we are beginning to see some commitments. The UK data, therefore, is one of a kind. It has been highly anticipated by transparency sceptics and advocates. All eyes are now on this data, as it becomes the benchmark for how other countries build on top of this, and strive to improve it for their own versions of this register. So far 14 countries have committed to having a public beneficial ownership register including Nigeria, Afghanistan, Indonesia, New Zealand and Norway though progress has been slow.

What are companies required to disclose?

The data from UK Government isn’t perfect and has problems, as it was bound to have, as it’s the first release of this kind but it’s an excellent starting point for more disclosures. There are still ways to skirt the current disclosure requirements.

Most UK companies and limited liability partnerships (LLPs) are required to report the individuals or entities who have significant control over the company to Companies House, and notify any changes.

Details required about the individual beneficial owner:

• Personal details: Name; month and year of birth; nationality; country, state or part of the UK where the PSC usually lives;
• Address: service address; usual residential address (this isn’t disclosed to the public)
• Dates and roles: the date they became a PSC in relation to the company; which conditions for being a PSC are met;
• Whether an application has been made for the individual’s information to be protected from public disclosure (for fear of safety and personal risk).

A beneficial owner or person with significant control (PSC) is defined as having over 25% share or voting rights over a company. The regulation also has room for including an individual when significant control over a company is exercised in another way.

It’s worth noting that the majority of companies will only have one or two beneficial owners but a small minority will have multiple beneficial owners. The companies that are involved with fraud and corruption, tend to have complex chains of ownership spanning multiple jurisdictions and that’s where the trail becomes messy.

In the case where companies are owned through another company, beneficial ownership may manifest in direct or indirect ways including the company’s constitution, rights via shares or securities, a shareholders’ agreement, or some other agreement.

The fact that they have this right to exercise significant influence or control over a company is enough to fall under this disclosure requirement regardless of whether or not they actually exercise that right in practice.

There are various exemptions for companies and individuals that do not need to report yet. This might change due to the forthcoming EU 4th Anti-Money Laundering Directive. For example, limited partnerships (LPs) or Charitable Incorporated Organisations (CIOs) are not required to report. Companies with voting shares admitted to trading on a regulated market in the UK or European Economic Area (other than the UK) or on specified markets in Switzerland, the USA, Japan and Israel are also exempt.

Most importantly, overseas entities operating businesses in the UK may be required to disclose beneficial ownership in their home country but are not subject to the
UK reporting requirements. This was a serious point of contention between the government and civil society as we wanted these entities to be subject to disclosure as it could be seen as a serious loophole that could be used for illicit activity.

What does the data look like?

The UK must be commended for its role in championing the collecting beneficial ownership information as structured data and publishing it as open data. When you open the structured data file, it looks like this (and you may think that it’s not the most user-friendly):

{“company_number”: “09145694”,”data”: {“address”: {“address_line_1”: “Reading Road”,”locality”: “Henley-On-Thames”,”postal_code”: “RG9 1DP”,”premises”: “161”,”region”: “Oxfordshire”},”country_of_residence”: “England”,”date_of_birth”: {“month”: 2,”year”: 1977},”etag”: “26281d9bedb2d102359f6afc3cb8cf62bb4a7f01”,”kind”: “individual-person-with-significant-control”,”links”: {“self”: “/company/09145694/persons-with-significant-control/individual/bIhuKnMFctSnjrDjUG8n3NgOrlU”},”name”: “Mrs Nga Thanh Wildman”,”name_elements”: {“forename”: “Nga”,”middle_name”: “Thanh”,”surname”: “Wildman”,”title”: “Mrs”},”nationality”: “Vietnamese”,”natures_of_control”: [“ownership-of-shares-50-to-75-percent”],”notified_on”: “2016–04–06”}}

In this form it is not meant to be read, but to be combined with other data.

On OpenCorporates, you can see a PSC record as this:

As you can see, the structured data now has a user-friendly interface and you can see other details about the company on the same page. In this example we see that this company, GREAT PORTLAND ESTATES PLC has 5 statements of control (the beneficial ownership data) related to it. All of these are control statements were submitted by the child companies. GREAT PORTLAND ESTATES PLC itself has not filed a statement as it is a company listed on the London Stock Exchange, so is exempt.

By clicking on each of the child companies you can see data related to them (directors, addresses, filings etc) and if you click on details’ it will take you the PSC filings. For instance, here’s the filing for Knighton Estates Limited.

Interesting leads to start investigating company networks

As of this week, over one million control statements have been published by Companies House. Given that we don’t have much data about overseas companies operating in Europe, a proportion of which could be involved in money laundering — what is the current data useful for?

Let’s try to think like a criminal. I’ve been involved in some back-door oil deal in Tanzania. How do I launder money through the UK and hide it on the current disclosures?

I could,

• give false information.
• give partially false information
• layer up companies.
• close the UK company or offshore parent before I have to declare the relationship
• could move the filing date forward to give myself time to funnel the funds

What are the questions we should ask?

Is the address false? Are there hundreds of companies registered to an address? Could a nominee director be used to puppet master a large network? Could cash-based businesses be being to funnel money? Does the company have a parent in a secrecy jurisdiction such as British Virgin Islands, Delaware, Cayman Islands etc? Is one of the directors or beneficial owners (and family members) that are on Politically Exposed Persons (PEPs) lists? Has the child company submitted their control statement but that parent company has not done the same? Are there odd links links with non-profits or trusts without any obvious reason for it? Is part of the company network operating in an offshore jurisdiction and/or in high-risk sectors (real estate, extractives, construction, gambling etc)?

Here are some of the things we could also look for when trying to find the needle in the haystack of data from legitimate businesses. To investigate these leads is not going to be easy, and it will almost never be sufficient to just use the beneficial ownership data. However, the fact that it is data, machine-readable, structured information that can be combined with other data sets (addresses, directors, shareholders, licenses, filings, change of directors, annual accounts, corporate structure data) and other tools (openstreetmap, court documents, news stories etc) can make that needle much easier to find.

OpenCorporates has company data on over 115 million companies and 119 jurisdictions; Switzerland, Japan, Guernsey, Isle of Man, Jersey, Hong Kong, Bahamas, Nevada, Wyoming and Delaware being amongst them. This means you have open data, of varying depth depending on the amount of information being made available by the jurisdiction, that can be connected across borders. The nature of modern day business is transnational so having a global dataset is crucial for investigations.

This power to connect and link companies is especially useful in the case of the UK beneficial ownership data. Here’s an example of an Israeli company that was automatically reconciled by our database from the control statement its UK child company had done. This was possible because we have data from Israel and the unique identifier (company number) was used with the jurisdiction to link the link the records together.

In the case of companies that have a parent in a secrecy jurisdiction, here’s an example from Delaware. Like the example above, the OpenCorporates database was able to match the records from our Delaware company data & PSC control statement from its UK child company. Also note how we have information about subsidiaries and branches available too. This is critical because Delaware was one of the most popular destinations for incorporation in Panama Papers by Mossack Fonseca (see The Guardian: Forget Panama: it’s easier to hide your money in the US than almost anywhere). The 2015 Tax Justice Network index on tax havens declared US the third most lucrative jurisdiction for hiding assets — taking over Cayman and Singapore. The two places that preceeded were Switzerland and Hong Kong. OpenCorporates has more than a million companies in Switzerland.

It’s also worth noting that the chances of hitting false positives is pretty high. Sometimes a company network might look suspicious but there is no criminal activity there. Here’s an example of that in which a freight network seems to have a non-profit as part of it. As someone who does not know much about the aviation logistics industry, I found that odd. However on closer inspection, I realised that it was just a professional association of service providers and these are often set up as nonprofits.

“Since 2006 the Aviation Logistics Network is an independent association of international logistics service providers, all of which specialise in the transportation of time-critical freight for the Aerospace Industry. Apart from combining their resources and skills, the co-operation within this global organisation primarily focuses on the flow of communication and direct action during exceptional logistics cases. With currently about 350+ stations around the world, our network structure provides a high degree of localised decision-making skills, when attending to and monitoring individual freight solutions, so your time-critical deliveries arrive quickly and smoothly.” — http://www.aln.aero/

Moving forward

There are legitimate concerns that the information in the UK PSC register might be inaccurate or incomplete.

Companies can still avoid reporting the “true” beneficial owners by using avoidance tactics such as strawman/nominees, offshore structures or having multiple beneficial owners who come below the 25% threshold. There is also a lack of understanding of how to report beneficial ownership data and more support for companies and firms can help the unintended misreporting.

We hope that as more stress tests are done to the data and the loopholes are analysed, it will become harder for this happen. Firms will be asked to do more than just to reply on beneficial ownership registers as it is their responsibility to ensure that information is accurate

In the future, it might be that companies, simply for the fact that they are registered in an opaque jurisdiction will be seen as being guilty of some fraud. Regulators will become stricter with penalties as the public pressure mounts.

—

We will be blogging about the outcomes of the data dive too. Stay tuned.

Thanks to my colleagues Chris, Alex, Robert and Sam for helping me with this piece.