EU need transparency for your company ownership structure

Written by Michael Barron and Tim Law

Government and NGO expectations of corporate behaviour are starting to resemble the state of “everything out in the open”. On 15 December, in the latest move for ever more transparency for companies, the EU agreed to revise the EU’s fourth anti-money laundering directive (4MLD). This will now be voted upon. The amendments include requirements for companies to report their real or beneficial owners in a register, to be made available to anyone with a “legitimate interest”. Member states will also have to verify the accuracy of this information. Information on ownership of trusts will have to be made available to the authorities rather than being made public.

The measures, which are due to come into force by mid 2019, are likely to have most impact on private companies and high net worth individuals rather than listed companies. For listed companies, some transparency and governance around their ownership already exists as part of stock exchange listing regulations. But for private or family owned businesses, this ownership may not have been under scrutiny in the past.

The EU’s aim in aligning beneficial ownership registers is to trace the real human owners at the top of the ownership chain of companies, beyond any intermediate legal entities or holding companies. The EU’s move is the latest in a series of measures, initiatives and regulations over nearly twenty years to bring transparency to business dealings, including at EU, OECD and national government levels.

The original demands for greater transparency were prompted by a desire to combat corruption but in recent years these have morphed into efforts to reduce tax avoidance and now as part of the effort to counter money laundering. While the EU’s latest rules are contained in 4MLD, they also fit into its wider effort to reduce tax avoidance.

The EU’s rules on beneficial ownership are not the first efforts to bring more clarity around who really owns companies. One of the first economic sectors to feel the pressure for more clarity around company ownership was the extractive sector (oil, gas and mining) albeit on a voluntary basis. The Extractive Industry Transparency Initiative (EITI) has in many ways acted as a trailblazer in the world of tax transparency since it was set up in 2001. Some of its central requirements, such as transparency around tax payments are now being adopted in other international initiatives for the wider economy beyond oil, gas and mining. EITI added transparency in beneficial ownership to the its standard in 2016. The 51 countries who have adopted EITI, have until 1 January 2020 to implement beneficial ownership reporting systems for those who bid for or operate extractive activities in their countries. Many are already implementing these provisions in advance of the deadline.

As a result, companies and individuals are facing the demands and pressures for more transparency. They can learn much from the experience of the oil, gas and mining sectors, who have been dealing with these issues for much longer. The main lessons are:

  • Commit to the debate. Or put another way, do not ignore the issue and hope it will go away. It will not. The issue is here to stay and is growing. Committing to the debate means showing leadership and devoting management effort, time and finance to engage and contribute in a meaningful way. This includes understanding the full implications for your business and your sector. Substantive and serious engagement will allow you to shape the debate rather than react. The extractive sector reacted too little, too late and therefore were not able to shape the debate and put across their position. They were portrayed as being against transparency, which was not the case. Reactive or obstructionist approaches to the agenda allow campaigning NGOs to depict companies as against transparency with resulting damage to their reputation with both governments and potential customers.
  • See the bigger picture. Understand the opportunities for your industry as well as just your company. There could be an opportunity to enhance your reputation as a responsible company and indeed a responsible sector. Companies or industries that governments and customers perceive as non-transparent or not paying their fair share of tax could see their licence to operate undermined and attract increased scrutiny from tax authorities and other regulators.
  • Consider alliances. Campaigners for more transparency are directing their call at all companies and in all sectors. This may not be an agenda that you can tackle on your own. Collaboration with others in your industry through trade associations and with other sectors may strengthen your approach and allow you to have real influence on the direction of the debate.
  • Have a very clear position backed up by evidence. The Panama and Paradise papers and other leaked documents provide many clear examples that campaigners can use against companies and to advocate for more transparency. If you believe that some detail of transparency rules will do you real commercial harm or have unintended consequences, you will need strong evidence. Reliance on vague claims about commercial confidentiality will not be sufficient. Many in the extractive sector were keen to limit their new transparency requirements to a country-by-country level, rather than project-by-project. However, they were unable (or unwilling) to provide strong evidence that project-by-project reporting would cause real damage, and so lost that battle. Likewise, the oil, gas and mining companies have not been able to prevent moves towards contract transparency.
  • Get the details of new regulations and rules right. In the EU’s efforts to legislate for tax transparency in the extractive sector, simple slogans did not translate into straightforward rules and easy implementation. The devil was in the detail such as trying to define a project or what exactly is a tax payment. When efforts to legislate for more transparency are unwrapped, a complex and intricate set of challenges are revealed.

Michael Barron is an independent consultant with more than nine years’ experience of engagement with extractive industry transparency and more than 20 years’ experience of working with the international oil and gas sector including verification of business critical processes.

Tim Law is a qualified Chartered Accountant and independent tax consultant with nearly 25 years’ tax experience, including 12 years responsible for tax transparency with the global mining company Anglo American plc.

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