Activists and politicians tout beneficial registries as a solution to the perceived abuse of anonymous company ownership. Stephen Baker and Charlie Sorensen of Baker & Partners contend that kleptocratic dictators and sophisticated fraudsters won’t be impeded by such registries. The authors explain how existing civil laws have proven effective in seizing ill-gotten gains.
Recent high-profile cases involving the seizure of assets in Jersey have grabbed headlines around the globe, not least because of their connection to high-profile former dictators and corrupt politicians. However, these cases provide an important opportunity for debate around the wider issues of ownership transparency—particularly in offshore jurisdictions—as the race to chase ill-gotten gains rumbles on around the globe.
1. In the first case,
- some $267 million of property was forfeited following an order of the Royal Court of Jersey.
- This sum represented the proceeds of a fraud committed under the kleptocratic Nigerian regime of General Sani Abacha.
- This money was held in accounts in the name of Doraville Properties Corporation (Doraville), a company incorporated in the British Virgin Islands (BVI) which was the vehicle of Mohammed Abacha, the son of General Abacha.
- This forfeiture was brought about using U.S. and Jersey civil forfeiture legislation, which allows assets which are shown (on the balance of probabilities) to represent the proceeds of crime to be forfeited by the court.
- In this case the U.S. had jurisdiction because money stolen from the Nigerian Treasury was laundered through U.S. dollar denominated bank accounts and using U.S. backed securities.
- Jersey had jurisdiction because Doraville held assets there, resulting in a U.S. civil forfeiture order enforced in Jersey.
2. In a second case,
- the Royal Court of Jersey recognised the appointment of two liquidators who had been appointed by the BVI High Court over three BVI companies. Those companies had been used to launder the proceeds of an over-invoicing infrastructure fraud whose victims were the Municipality of Sao Paulo and Brazil.
- The main fraudster was Paulo Maluf, the former Mayor of Sao Paulo, who had used BVI companies as part of the money laundering process.
- Mr Maluf has subsequently been convicted of criminal offences in Brazil. The liquidations followed a civil trial in Jersey in which judgment was obtained against two of the BVI companies in a sum which (with interest) has risen to over $30 million, giving liquidators control over the Jersey-held property of the three BVI companies and full access to their financial records.
Both of these cases represent textbook examples of jurisdictions with a sound rule of law taking responsibility for misuse of financial services, including company incorporation, as well as effective action being taken against criminals who misuse offshore companies.
In the context of the Nigerian case, the law enforcement authorities used statutory powers only available to the state to compel the production of documents. This was backed by full international cooperation, with everyone involved or who could show an interest having the right to be heard.
In the Brazil case, civil proceedings were instituted by Brazil and Sao Paulo against the BVI companies, alleging that they had dishonestly assisted in the fraud and knowingly received property. In Jersey local financial institutions were ordered to disclose documents, and Brazil and Sao Paulo were then able to freeze the assets in question in advance of the trial. The Jersey Court concluded “unhesitatingly” that there had been a fraud and, thanks to the BVI taking the necessary steps to enforce the judgment, liquidators are now in place and there is a very real prospect of a substantial recovery.
Registry…or Red Herring?
It is important that these cases are considered in the light of the very strong drive, led by the EU and Financial Action Task Force, to move to an international standard where public registries of beneficial owners of corporations become the norm. The Parliament in Westminster has become so exercised about this issue that it has purported to legislate for its Overseas Territories to force such registers upon those jurisdictions. How would such a system have realistically helped?
The answer is: “not much.”
In neither case above would the existence of such a register of the beneficial ownership of the offshore corporations have made any difference—and the stark reality is that the same is likely to be true in most cases of fraud. It is inconceivable that the Abacha or Maluf family would have made their names available to the public. A criminal of any sophistication will not have his name in a public registry.
The only people who will record their names will be honest citizens. Those are not the persons in which there should be any interest, and—on the contrary—it might be thought that they are entitled to some privacy as to their property and business affairs. Does anyone really think that the despot’s wife who owns the company which owns the central London hotel will allow her name on a public register?
Take, for example, the existing U.K. companies registry, which requires persons of significant control of a company be made public.
There is no effective regulation of the information provided—nobody checks it. Although it may be a crime to provide false information to the registry, the expression “garbage in, garbage out” springs to mind.
A better system would be to allow only the incorporation of companies by licensed corporate service providers. That is the system that many offshore centers—including the Crown Dependencies—have had in place for many years. There is a mass of legislation which requires banks and other financial services businesses, lawyers, and accountants to carry out proper due diligence before entering business relationships. If a corporate service provider is subject to inspection by an active regulator, then that should mean there is a proper check on whether a thorough due diligence process is being followed. The authorities, including tax authorities, have substantial powers to obtain information—by compulsion where necessary—both at home and abroad, and there are substantial international tax reporting obligations. Such effective regulation should significantly reduce the risk of companies being misused.
The information as to beneficial ownership of companies must be provided to many Offshore Companies Registries, and it is a crime to provide false information. Currently, that information is not available to the general public and is only accessible by law enforcement or court order. Courts regularly order disclosure of information where it is needed in both civil and criminal matters.
Will public registers of beneficial ownership realistically add to this body of information? It is difficult to see how they will be any more than window dressing. In fact, there is a real risk that such registries will be counter-productive and that criminals will use further layers of nominees and “straw men and women” to disguise their ownership of property, making the task of tracking down criminals, including tax evaders, even more difficult. This would inhibit the ability of an insolvency practitioner or asset recovery lawyer to uncover true beneficial ownership by a well-considered disclosure application.
So what are the alternatives?
Aside from the potential for requiring company incorporation by a licenced service provider, the most powerful weapons in the fight are the use by victims of the civil courts in jurisdictions with strong adherence to the rule of law and—one which has in reality been rarely used—the great powers of the law enforcement authorities. The U.K. has had powers to forfeit criminal property for many years, but they have not been widely used. The powerful laws which jurisdictions already have should be properly used. As just one example, broad publicity in the U.K. followed the first use by the High Court of an Unexplained Wealth Order, which requires a person to explain how an asset has been purchased with lawful income on pain of assets being forfeited in the absence of a satisfactory explanation. It will be very interesting to follow how frequently these orders will be used and how effective they will be. If properly used, they have the potential to be very powerful indeed.
Although it may score political points, legislation requiring public registries of beneficial owners is not necessarily the way forward when it comes to tackling these issues and may be counter-productive. Instead, jurisdictions with a strong rule of law must take responsibility for the misuse of their financial services. In civil cases, courts should be more willing to hear cases where assets are held in, or controlled from, that jurisdiction or companies incorporated there have been involved in wrongdoing. The result is likely to be less posturing, and more action.
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This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Stephen Baker is Senior Partner and Charlie Sorensen is a Senior Associate at Baker & Partners, a leading specialist offshore litigation and disputes law firm based in Jersey, Channel Islands.