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The US tackles how to actually log who owns corporations

Oligarchy is a weekly newsletter tracking how the super rich are changing the world for the rest of us. In this edition: how do you actually build a corporate registry that’s effective and transparent? And how do you set a fair global minimum tax on companies?

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TRANSPARENCY

Somewhere in an office of the U.S. Treasury Department’s Financial Crimes Enforcement Network – FinCEN – employees are poring over the more than 200 comments they received after asking for suggestions on how to craft the rules governing the country’s new beneficial ownership registry. When I was a young journalist, I was often instructed (by my boss, a grizzled Yorkshireman): “Don’t focus on process, lad; focus on outcomes. No one cares about process.” Well, I’m pretty grizzled myself now, and I’m going to focus on process as much as I like, because this is a really big deal. Shell companies are the getaway cars for kleptocrats, crooks, thieves, tax-evaders and villains, and the sooner we get rid of them, the better it will be for everyone (except for kleptocrats, crooks, thieves, tax-evaders and villains).

Up to now, when it’s come to corporate transparency, the U.S. played the role of the biggest, richest and most popular gang member who won’t give up his life of crime. Other gangsters had gone straight but, as long as Uncle Sam kept stealing purses and jacking cars, there wasn’t much incentive for others to join them. Thanks to the Corporate Transparency Act, the U.S. has finally decided to clean up its catastrophically awful corporate system (it’s long been easier to get a shell company than a library card in many states), and suddenly other countries are quitting the gang too.

Why is corporate transparency important? Read this story about European social media influencers being asked to undermine the confidence of their millions of followers in Covid-19 vaccines. Clearly, something was going on, and whatever it is was nefarious and important, but who was behind it? Thanks to the UK’s corporate registry being openly accessible, the journalists could see who stood behind the shell companies involved and trace the disinformation campaign back to a Russian with ties to Kremlin elites.

  • “The woman, Yulia Serebryanskaya, is a veteran of political campaigns and event planning for the ruling United Russia party, and briefly ran as an independent for election in the Moscow city elections in 2019,” the investigation concluded.

The more countries report who owns their companies, the harder it will be for scoundrels to hide their identities while doing harm (if you would like this idea expressed in a more cogent and/or coherent way, here is a really useful policy paper from Open Ownership doing just that). Previously, thanks to the roadblock of the United States, it would have been unimaginable that the G7 could have taken decisive action to force all countries to start collecting reliable corporate ownership information. But this year, we can dream.

  • “Anonymous shell companies have become a tool of kleptocrats and organized crime groups involved in the trafficking of drugs, arms, endangered species and people. They have also become a tool of malign foreign policy targeting democratic societies,” wrote Transparency International in a letter to the leaders of the G7 nations. “When you meet on 4-5 June, we urge the G7 to show its leadership and support a meaningful review of the current global standard on beneficial ownership to ensure it is fit for purpose.”

Of course, it is not enough just to commit to action; sadly, the action actually has to be taken (I won’t actually lose five pounds unless I do in fact stop eating cake at 11 o’clock every morning). In 2015, EU countries took the step FinCEN is currently debating, and established corporate registries. Three years later, they committed to opening up those registries and making them public, by the beginning of this year, as part of their fight against money laundering. So how’s that going?

According to this analysis, some EU members are really struggling to give up the cake. Hungary, Italy and Lithuania haven’t even taken the first step and created a central registry, while another six countries — Cyprus, Czech Republic, Finland, Greece, Romania and Spain — are yet to make theirs public. Even elsewhere, there are effective limits on searching the databases, such as the searcher having to be a citizen of the country in question. The cost of kleptocracy is overwhelmingly borne by the citizens of poor countries, so if their representatives are unable to gain access to shell company ownership data in rich countries, that is quite clearly not good enough.

  • “Unless these issues are addressed across the board, authorities and independent actors in the EU and beyond will continue facing difficulties in identifying the real individuals behind the companies that are used and abused to commit financial crimes – which means there’s no stopping the flows of dirty money in the EU,” Transparency International concluded.

Of course, the UK is no longer a member of the EU (you may have heard…) but it was one of the first countries to open its registry to scrutiny. Since then, there has been a colossal avalanche of exposés of financial crime using British shell companies. It remains unclear if this avalanche is the result of a disproportionate UK role in facilitating fraud, or the result of it being easier to research fraud in the UK than elsewhere, although my money is on both.

The British government is committed to reforming the registry (although how much are commitments from the British government worth?), and this is an interesting blog from a key official describing how that might work.

  • “What we do not have are the tools to prevent a lot of the misuse of corporate entities that we see. That’s what reform will give us. Something as straightforward as verifying the identities of people looking to set up companies would prevent a lot of criminal activity from occurring,” Martin Swain writes. Personally, I fear he’s being a bit optimistic. I for one can’t see any sign that Boris Johnson cares at all about stopping Britain’s role as the world’s premier enabler of financial criminals, but hopefully, I’m wrong.

If you want a strong argument against being cynical, and for being optimistic, this is great from Maggie Murphy, who used to engage with the G20 for Transparency International.

  • “As soon as we give in to cynicism, we lose our own sense of agency and become bystanders to a process. Far better to channel the cynicism into concrete ways to support and promote ambition, collaboration and accountability on anti-corruption goals,” she writes.

So, on an optimistic note, it is good that a UK court dropped the country’s customary deference towards wealthy individuals and agreed to make public the identities of two Azeri nationals who are the subject of a huge money laundering case. It’s pretty ridiculous that so many hoops had to be jumped through before we could learn how they were. Well done to the Evening Standard newspaper and others who fought this fight.

MINIMUM TAX

I have received some thoughtful emails (thanks, please keep them coming!) from readers after I wrote last week about my enthusiasm for a minimum global tax rate.

  • “It scares me because now we have competition between governments. One offers a lower rate to attract business. Maybe they can operate more efficiently and tax at a lower rate. Creating a world minimum corporate tax rate removes that incentive for government to operate more efficiently and thus tax at a lower rate,” was one reader’s take.

Reasonable people can disagree about what the correct rate of tax should be, and what governments should prioritize, but I think we can all agree that whatever system we have, it has to be fair. A system that allows wealthy people and big companies to gain advantages denied to everyone else will lose legitimacy and democratic support. Currently, anyone able to afford skilled tax advisers who can exploit mismatches between different countries’ rates is able to lower their taxes to almost-zero.

Right now, the equivalent of a nurse’s salary is lost to tax avoidance every second – that’s $427 billion a year.

Governments do not stop employing nurses just because they’re gaining less revenue, so they increase taxes on everyone else – often by imposing consumption taxes, which are hard to avoid. As a result, the tax burden increasingly falls on people and companies too poor to avoid it, which begins to look worryingly like the kind of thing that traditionally presages revolutions.

Obviously, the solution to a problem as huge as this will be complex, but Joe Biden’s plan is elegant: if you don’t tax our companies on their profits, we will. This destroys the business case for routing profits via tax havens and gives democracies power back over the companies they incorporate. Incorporation is not a right; it’s a privilege: governments limit a company’s liability for its debts, in exchange for the company contributing towards society.

This new policy is not, as one of my correspondents said, like East Germany building a wall around its borders to keep people in. If you are wealthy, or if you dislike the tax rates your government levies, you have the right to leave. However, if you are resident in a country, if you’re enjoying the services its government provides, pay up. Taxes, after all, are what we pay for a civilized society.

WHAT I’M READING

I’m actually on holiday this week by the seaside. For once it’s not raining, but I will be taking time to read Tom Bergin’s Free Lunch Thinking, how economists ruined the economy, which has been praised by reviewers on the right and left of politics. 

Tom Bergin is an investigative journalist for Reuters, whose investigations have looked into everything from football to Donald Trump, so I have high hopes for the book. I’ll let you know.

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Oliver Bullough

Oliver Bullough is an author and journalist from Wales, who specializes in writing about financial crime, often when it has links to the former Soviet Union. His most recent book is Moneyland, why thieves and crooks now rule the world and how to take it back, and he is currently trying to write another one despite lockdown.

@OliverBullough