Who really benefits from company ownership?

In this next article we look at beneficial ownership and the need for global improved transparency, as well as a registry here in South Africa.

This year, OpenUp launched a project that interrogates transparency within the private sector, “Transparent Corporates” (TRACE). Our mission is to make corporate data freely and publicly available, and to empower everyone living in South Africa to hold the right people in the private sector accountable when they do things that affect everyday life. Over the next few weeks, we’ll be publishing a series of pieces that highlight some of the work we do, from looking at international shareholding to tax evasion, Trump to “paid Twitter” and much, much more. In this next article we look at beneficial ownership and the need for global improved transparency, as well as a registry here in South Africa.

The term “beneficial ownership” has in recent months come under the spotlight in South Africa. Linked to the belief that a lack of transparency in beneficial ownership leads to increased tender fraud, tax evasion and money-laundering, the need to globalise beneficial ownership transparency has been growing. As it stands, the UK and Denmark have already started creating their registries and in April this year, OpenOwnership launched an online database that has information on nearly 2-million companies throughout the UK.

What exactly is beneficial ownership?

According to the Financial Intelligence Centre Amendment Bill (FICA), a beneficial owner “directly owns the legal person; or exercises control of the legal person”. In other words, a beneficial owner is the person who really benefits from an entity, beyond the legal owners.

The concept in and of itself is not a bad or unlawful one, but the problem comes in when you can’t identify who the beneficial owners of a company are. The FICA Bill sets out to improve financial transparency and accountability and it seems that the government is taking the issues surrounding beneficial ownership seriously. Last year, at the Open Government Partnership’s regional meeting, it launched its third national action plan which includes a high-level commitment to create a public register of beneficial ownership information. This came about in response to anti-corruption organisations within civil society who have been calling on the government to implement the G20 High-level Principles of Beneficial Ownership. Transparency International, with their Unmask the Corrupt campaign, have been at the core of this debate for some time now.

Why all the fuss?

When companies don’t make the identity of their beneficial owners known, they fuel the fire in helping along corruption and illicit financial flow. There are a few major reasons why, as a country, we should be pushing for G20 compliance, specifically with regards to beneficial ownership:

  1. It will increase competitiveness: With a lack of transparency and not knowing who the beneficial owners are (throughout the sector), the market is distorted by not allowing the best and most competitive companies to win tenders. The idea with having a global consistent approach to beneficial ownership transparency is to harmonise business competition and the local economy; and those economies which we operate in.
  2. It will reduce the risk of investment by knowing exactly who you’re doing business with: This one is relatively self-explanatory, but like most things in life, you want to know exactly who’s at the other end of the line, in order to protect your investment and make smart choices. This too will benefit the economy. However, this will only happen if the information is made accessible to everyone.
  3. It will help to increase financial stability: And oh boy, do we need that right now. With an uncertain economy and increased political instability, we need to do due diligence in at least trying to maintain a standard, and being transparent about what’s going on in the corporate world will, in the long run, contribute to financial stability.
  4. It will help to reduce impunity: No matter how much money you have, how successful you are or how much you contribute to the local (and global) economy, you shouldn’t be exempt from facing the consequences of unlawful behaviour. Sure, money can buy you a lot of things, but it shouldn’t be able to buy you out of facing up to the law. By allowing a continued lack of transparency, we are allowing people to get away scot free, just because they’re rich.

Countries with economic inequality and high levels of corruption, like South Africa, suffer the most from the consequences of financial opaqueness, especially with being easy targets for illicit financial flow and tax evasion. Corruption, however, is a global problem, but with corrupt monies finding safe harbour in anonymous countries like South Africa (while we aren’t officially classified as a tax haven, there are pockets of anonymous wealth, such as Sandton, in Johannesburg), our economy is being used as a get-away vehicle for corruption.

What are some of the problems we’re experiencing with regards to beneficial ownership here in South Africa?

In 2015, Transparency International released a series of reports that ranked each country based on the G20 Principles on Beneficial Ownership transparency. Some of the problems identified with South Africa were as follows:

  1. There is currently no law defining beneficial ownership. Of course, as previously mentioned, FICA has started to address that, but it is only a draft at present. The government cannot be expected to hold anyone to account for ‘failing’ to identify their beneficial owners without some kind of legislation to back it up At the same time, civil society and the public cannot expect increased transparency if there are currently no consequences for keeping beneficial owners locked away behind closed doors.
  2. We have not, since 2012, conducted any sort of review to identify anti-money laundering risks in relation to legal entities and company practises. Without binding legislation, companies are not required to identify the beneficial owners of their customers. This makes for an increasingly opaque environment.
  3. The (accurate) acquisition of and access to beneficial ownership information is relatively difficult. Because legal entities aren’t bound by law to identify their beneficial owners, many companies don’t ever bother to make this information public, sticking to the bare minimum that they’re required to share.

The report also identifies the need for a registry in relation to the authorities having to rely on very basic information to hold the right people accountable when corruption and fraud takes place. As you can see, there’s a lot of work to be done here in South Africa. Hopefully, the work that organisations such as Transparency International are doing will soon start paying off as government moves closer (on paper, at least) to actively adopting these principles.

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In this next article we look at beneficial ownership and the need for global improved transparency, as well as a registry here in South Africa.

This year, OpenUp launched a project that interrogates transparency within the private sector, “Transparent Corporates” (TRACE). Our mission is to make corporate data freely and publicly available, and to empower everyone living in South Africa to hold the right people in the private sector accountable when they do things that affect everyday life. Over the next few weeks, we’ll be publishing a series of pieces that highlight some of the work we do, from looking at international shareholding to tax evasion, Trump to “paid Twitter” and much, much more. In this next article we look at beneficial ownership and the need for global improved transparency, as well as a registry here in South Africa.

The term “beneficial ownership” has in recent months come under the spotlight in South Africa. Linked to the belief that a lack of transparency in beneficial ownership leads to increased tender fraud, tax evasion and money-laundering, the need to globalise beneficial ownership transparency has been growing. As it stands, the UK and Denmark have already started creating their registries and in April this year, OpenOwnership launched an online database that has information on nearly 2-million companies throughout the UK.

What exactly is beneficial ownership?

According to the Financial Intelligence Centre Amendment Bill (FICA), a beneficial owner “directly owns the legal person; or exercises control of the legal person”. In other words, a beneficial owner is the person who really benefits from an entity, beyond the legal owners.

The concept in and of itself is not a bad or unlawful one, but the problem comes in when you can’t identify who the beneficial owners of a company are. The FICA Bill sets out to improve financial transparency and accountability and it seems that the government is taking the issues surrounding beneficial ownership seriously. Last year, at the Open Government Partnership’s regional meeting, it launched its third national action plan which includes a high-level commitment to create a public register of beneficial ownership information. This came about in response to anti-corruption organisations within civil society who have been calling on the government to implement the G20 High-level Principles of Beneficial Ownership. Transparency International, with their Unmask the Corrupt campaign, have been at the core of this debate for some time now.

Why all the fuss?

When companies don’t make the identity of their beneficial owners known, they fuel the fire in helping along corruption and illicit financial flow. There are a few major reasons why, as a country, we should be pushing for G20 compliance, specifically with regards to beneficial ownership:

  1. It will increase competitiveness: With a lack of transparency and not knowing who the beneficial owners are (throughout the sector), the market is distorted by not allowing the best and most competitive companies to win tenders. The idea with having a global consistent approach to beneficial ownership transparency is to harmonise business competition and the local economy; and those economies which we operate in.
  2. It will reduce the risk of investment by knowing exactly who you’re doing business with: This one is relatively self-explanatory, but like most things in life, you want to know exactly who’s at the other end of the line, in order to protect your investment and make smart choices. This too will benefit the economy. However, this will only happen if the information is made accessible to everyone.
  3. It will help to increase financial stability: And oh boy, do we need that right now. With an uncertain economy and increased political instability, we need to do due diligence in at least trying to maintain a standard, and being transparent about what’s going on in the corporate world will, in the long run, contribute to financial stability.
  4. It will help to reduce impunity: No matter how much money you have, how successful you are or how much you contribute to the local (and global) economy, you shouldn’t be exempt from facing the consequences of unlawful behaviour. Sure, money can buy you a lot of things, but it shouldn’t be able to buy you out of facing up to the law. By allowing a continued lack of transparency, we are allowing people to get away scot free, just because they’re rich.

Countries with economic inequality and high levels of corruption, like South Africa, suffer the most from the consequences of financial opaqueness, especially with being easy targets for illicit financial flow and tax evasion. Corruption, however, is a global problem, but with corrupt monies finding safe harbour in anonymous countries like South Africa (while we aren’t officially classified as a tax haven, there are pockets of anonymous wealth, such as Sandton, in Johannesburg), our economy is being used as a get-away vehicle for corruption.

What are some of the problems we’re experiencing with regards to beneficial ownership here in South Africa?

In 2015, Transparency International released a series of reports that ranked each country based on the G20 Principles on Beneficial Ownership transparency. Some of the problems identified with South Africa were as follows:

  1. There is currently no law defining beneficial ownership. Of course, as previously mentioned, FICA has started to address that, but it is only a draft at present. The government cannot be expected to hold anyone to account for ‘failing’ to identify their beneficial owners without some kind of legislation to back it up At the same time, civil society and the public cannot expect increased transparency if there are currently no consequences for keeping beneficial owners locked away behind closed doors.
  2. We have not, since 2012, conducted any sort of review to identify anti-money laundering risks in relation to legal entities and company practises. Without binding legislation, companies are not required to identify the beneficial owners of their customers. This makes for an increasingly opaque environment.
  3. The (accurate) acquisition of and access to beneficial ownership information is relatively difficult. Because legal entities aren’t bound by law to identify their beneficial owners, many companies don’t ever bother to make this information public, sticking to the bare minimum that they’re required to share.

The report also identifies the need for a registry in relation to the authorities having to rely on very basic information to hold the right people accountable when corruption and fraud takes place. As you can see, there’s a lot of work to be done here in South Africa. Hopefully, the work that organisations such as Transparency International are doing will soon start paying off as government moves closer (on paper, at least) to actively adopting these principles.

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