Flickr/ Collin Erickson; Cropped by TI-UK

Last week, the government published the agreements it has just signed with the Crown Dependencies and Overseas Territories for data sharing among law enforcement agencies.  It's not exactly the full transparency the Prime Minister has been pushing for.  Is it therefore a step forward in a longer journey - or just a smokescreen to make lack of action look like something more impressive?

The problem with secrecy

The Panama Papers and other similar exposés have revealed the extent to which the small islands of the UK’s Crown Dependencies and Overseas Territories - variously known as tax havens and secrecy jurisdictions - are used to hide and launder illicit financial flows, including the proceeds of corruption.  For years, law enforcement agencies around the world have been stumped when doing investigations, because they come up against a dead end of secrecy in these jurisdictions.

The Crown Dependencies - Jersey, Guernsey and the Isle of Man - claim that they already have good anti-money laundering (AML) systems, and should not be lumped together with the British Virgin Islands or other less reputable places.  That's a real hostage to fortune.  The UK's own AML Action Plan, also launched last week, is a tacit acknowledgement that the current system does not work, which is why it needs reform.   If the UK, with all its resources, finds it hard to keep out corrupt money, a less well resourced authority is less likely to deter or detect such illicit financial flows.  Keeping everything secret and telling the world to trust you does not usually inspire confidence.

What's the harm in secrecy?

Let's not forget what those illicit financial flows represent.  Corruption and organised crime have a devastating effect on society and the economy, both in the UK and overseas.  When a public official steals from the healthcare budget, ordinary people are denied healthcare; when a large multinational company pays a bribe, it undermines the economy in the country concerned, and the bribe may perpetuate the power of a corrupt politician or official.  In both cases, the money is often laundered through the global financial system.   Corruption thrives on secrecy, and secrecy within the global financial system enables harm on a global scale.

Why transparency should help

There are a number of significant benefits in publishing details of who really owns companies – and the equivalent information for trusts - in jurisdictions like the Crown Dependencies and Overseas Territories. First, it deters those who want to hide behind secrecy in order to launder the proceeds of corruption and crime.  Secondly, it increases the chances of corrupt individuals and organisations being caught, as ordinary people from around the world, including the country of origin, civil society and the media can also scrutinise the ownership.  The Panama Papers have demonstrated that this is no longer a benign system with some manageable problems at the edges; it has been hijacked by criminals, and that requires a different kind of response to the complacent regulatory 'trust-me' approaches of previous decades.  And thirdly, a further unexpected benefit is that it's cheaper than the alternatives: three separate studies by HM Treasury, Companies House and the European Commission concluded that public registers of beneficial ownership are more cost effective than closed registers.

What's the real reason for secrecy?

So why do the Overseas Territories and Crown Dependencies still insist on secrecy?  There are various theories.  At one end, it is argued that the governments are themselves corrupt, and so are deliberately turning a blind eye to the way in which their systems are used, as they get rich in the process.  There is insufficient research to know whether that is grossly unfair, or contains a grain of truth.  At the other end of the scale of arguments is that secrecy is the same as the right to privacy, and that is the service that is being provided.  Furthermore, if it were taken away, these small economies would lose their competitive edge, and end up being subsidised by the UK taxpayer.

Privacy vs secrecy

That's a lot of arguments to unpick, but here's one important observation. Privacy is not the same as secrecy.  You can get privacy by keeping your money in a UK bank account.  If you decide to keep it in a corporate or trust vehicle offshore, you are using an unusual structure behind a veil of secrecy.  The very same structures are, as we know from the Panama Papers, almost invariably used by those with illegal dealings to hide.  So in order to catch the criminals, the secrecy needs lifting.  This does not compromise privacy, because privacy can still be obtained elsewhere.  It does provide transparency over those who want to use offshore structures, for legitimate or illegitimate ends.  No individual or company is obliged to use such structures: but if they do, there seems little substantive reason why they should not face the same levels of transparency they face in the UK.  Unless they have something to hide.

The UK itself is about to introduce a public register of beneficial ownership.  There were those who said this would lead to companies fleeing the UK.  They have not.  It is genuinely unclear whether legitimate business would flee the Overseas Territories and Crown Dependencies if similar measures were introduced there.  But if the sole basis on which they have built their economies is secrecy, in a world that increasingly tends towards transparency, that is a dangerous economic model to follow.  Following this argument to a logical conclusion, the vulnerability to hacking or whistleblowing or other leaks is so high that they are probably doomed anyway.  Or perhaps the importance of secrecy is being exaggerated.

Is this a cop out by the PM?

There are compelling arguments in favour of public registers of beneficial ownership in the UK's Crown Dependencies and Overseas Territories, and the Prime Minister has been quite clear that the UK wants this to happen.  Does that mean last week's agreements are a cop out?  Actually, it does not.  It's tempting to criticise the government for not going the whole hog and imposing this, as it has the ability to do.  That should remain an option.  But there are some clear positives about yesterday's agreements.  They are a signed document with clear commitments and an acknowledgement of the problems, moving beyond the vague assurances of the past and creating the ability for those governments to be held to account.  They provide access to beneficial ownership information for law enforcement agencies, and that information should be provided with no excuses, within reasonable timescales, and for use as evidence.  These are all a great improvement on where we were only a few months ago.

That's the good stuff, but we should not pretend this is anywhere near perfect.  Most importantly, the registers will not be public; the access is still request-based and not an automatic view of the full database, thus requiring law enforcement authorities to know what they want to ask and making the system vulnerable to tipping off. And it is unclear how the agreements will relate to trusts and whether the registers will be of comparable form and standard to that envisaged in the UK.  A further reservation is that it is unclear whether only UK law enforcement authorities will have access, or others too, and if the latter whether they will be a drain on UK resources by routing requests via  the UK agencies.  The glass is not empty, but it's not yet even half full.

Where next?

If this is to be seen as an important step on the journey rather than a smokescreen, we need to know when and how the journey will end.  While the government, and the Prime Minister, are to be praised for securing this interim deal, it remains the case that we are some way from the PM's stated destination.  The flaw is that there is no apparent plan or timescale for how to get there.  And yet that is now needed.  How about this as a declaration by the PM at the anti-corruption Summit on May 12th: if the Crown Dependencies and Overseas Territories do not voluntarily create public registers of beneficial ownership by May 12th 2018 (five years after the Lough Erne Summit when they were first asked to do so), they will be required to do so by an Order in Council or an equivalent instrument.