RegTech Intelligence 
As JWG noted back in April, during the G-20’s April meeting in Washington tax evasion featured surprisingly prominently amongst the expected items on Basel III implementation.
G8 Leaders, as a result of the summit held in Northern Ireland in June, have now committed to publishing ‘action plans’ setting out the concrete steps they will take to combat tax evasion. The goal is to create an international agreement on new rules to create transparency in offshore tax havens that are used to conceal the ultimate owners of taxable assets and to facilitate the automatic exchange of tax-relevant bank information between jurisdictions.
The UK and U.S have now published their plans (here and here) and they make for interesting, if brief, reading. At only a page long each, they remain pretty vague on what the exact details are of their plans.
The clear focus, however, is the commitment to provide new mechanisms to improve transparency of companies’ ownership structures. This will be achieved through central registries of beneficial ownership information as well as new laws to require disclosure of beneficial ownership.
Identifying and verifying the beneficial owner of a counterparty to a transaction is a critical cornerstone of Know Your Customer (KYC) procedures in financial services. Understanding the ultimate owner is critical to a number of regulatory as well as business requirements such as anti-money laundering, anti-fraud, credit risk, as well as tax evasion identification. To quote George Osborne: “A company should know who ultimately owns or controls it – its beneficial owners – and it is essential that law enforcement and tax authorities have access to that information.”
Creating international clarity around beneficial ownership, while a very noble objective, is much easier said than done. For starters, there is no single definition of who exactly is a beneficial owner. Ownership definitions will differ depending on the jurisdiction, context and use-case.
Anyone involved in FATCA or AML will know that beneficial ownership means different things in different places and can be measured in different ways. For example, the Basel II/III definition is calculated through economic ownership and solvency procedures, while for money laundering purposes the definition has to take a more legal ownership perspective.
Not only are the definitions different, but the way you can measure it is different. The recent proposal for the 4th Anti-Money Laundering Directive requires beneficial ownership to be calculated from a cumulative, bottom-up approach as opposed to the top-down viewpoint used in FATCA. Additionally, for AML in Europe you are only technically required to identify beneficial ownership to a 25% threshold as opposed to 10% required in certain situations under FATCA.
These are important problems if you are intending to set up and (critically) enforce an international tax information sharing regime. Without common standards, U.K. beneficial ownership information is not compatible with the U.S which can lead to serious problems in sharing information or when it comes to a court of law.
If the first problem is the identification of who exactly can be considered a beneficial owner, the second major problem is the verification.
While the concept of a central registry of beneficial ownership information, as proposed by the action plans, is very welcome there are a number of practical problems in actually making it useful.
Verifying this information is accurate is problematic. Financial Institutions employ huge numbers of KYC analysts, data providers and automated solutions to identify and verify just their own counterparties KYC data. Given the whole point of creating this transparency is to root out less than honest business practices, any state sponsored repository will have to prepare itself for huge costs or run the risk of poor data quality (which will be no help for anybody).
To quote the White House “Although all states currently make some basic information available through public registries, states may choose to make beneficial ownership information publicly available.” Given the country has no legislation either at state or federal level to enforce disclosure, creating a truly centralised repository is problematic.
There isn’t even any guarantee that this information will be made available to financial institutions to compare and contrast (the UK has said that they will consult on whether to make this information publically available). This is particularly unfortunate given financial institutions regulatory mandate to identify tax evasion. AMLD IV has explicitly mandated tax evasion as a predicate offence for money laundering, meaning that firms now have an increased obligation to identify tax evaders. It is against the public good if regulators are going to be judging firms on the quality of their beneficial ownership information which has not been made accessible to them.
The good news is that these problems can be overcome. The OECD has been working on these problems for years and have made significant progress in advancing common, multilateral and mutually acceptable solutions (see their report to the G8 here). Ultimately the solution to these challenges is political, and the G8 decision to target tax evasion is a fantastic step towards building international transparency.