Tackling beneficial ownership and control

By Alex T Magaisa

IN attempts to tackle the problem of corruption the government needs to confront the key and highly sensitive issue of beneficial ownership and control.



“Verdana, Arial, Helvetica, sans-serif”>In very simple terms, the problem of beneficial ownership and control arises in situations whereby a person uses a corporate entity or individual as a front to obscure his real identity in commercial transactions or holding assets.

Although corporate vehicles have been used in this way for legitimate reasons, there is concern that they are at risk of being used for illegitimate reasons.


This is a key area in tackling corruption because most people involved in high-level corruption have an interest in not disclosing their identity and they increasingly employ highly sophisticated corporate structures to achieve this end. While by no means giving an exhaustive account, this article seeks to highlight key features in this area and argues that if the efforts to fight corruption are serious policy-makers should consider giving this issue priority.

The issue of beneficial ownership demonstrates recognition of the fact that a person who may often be represented as the legal owner of a property or party to a commercial transaction may not necessarily be the real beneficiary of that property or transaction. The key is to understand and appreciate that there is often a distinction between the appearance and reality in the ownership and control of corporate vehicles. While the use of corporate vehicles may be done for entirely legitimate reasons, authorities need to be alert as they can be used to perpetrate corruption.


In recent years there has been much concern at the international level over the use of corporate vehicles for illegal activities, which include money laundering, corruption, bribery etc. Research carried out by the Organisation for Economic Cooperation and Development (OECD) in 2000 demonstrated that corporate vehicles may also be used to manipulate markets, engage in insider dealing or simply to circumvent state regulations.


There are two lines of interest: firstly, how corporate vehicles can be misused for purposes of perpetrating corrupt acts and, secondly, what needs to be done to tackle this problem. This is an area that will test the seriousness of authorities in confronting the problem of corruption.

The first point is best illustrated by way of example. Let’s assume that the government decides to construct a sports stadium. The rules state that all cabinet ministers are prohibited from having any financial interest in the project.


However, a group of five ministers decides to disregard the rule participate. The only way they can do so is to disguise their identities. They engage a corporate service provider who sells them a shelf company. The shareholders of the company are nominees and two other people with no obvious connection to any of the ministers.


The small company gets into a partnership with a foreign company and they call this a “consortium”. In fact, they receive massive bribes from the foreign company which is paid to the local company as “consultancy fees”.


The consortium bids for the contract to build the stadium. Two of the ministers are key decision-makers in the awarding of the contract and the others pay bribes to members of the Tender Board to award the contract to the consortium.


The beneficial ownership and control of the ministers in the consortium is obscured by the fact that a corporate vehicle has been used to hide their true identity. They will claim that it is the company, not them, which is a party to the contact. The proceeds, which are products of corruption, ultimately reach the ministers although the apparent legal arrangement does not show them to have any stake in the consortium.


A simpler and perhaps more common illustration is where two farms have been allocated to a trust and the wife of a cabinet minister. The trust beneficiaries are the minister’s children. He can claim that legally he has no farm at all, yet in reality he is the beneficial controller of all two farms.


Legally he may not own a farm, but checks of beneficial ownership and control could reveal that it he who in fact owns the two farms. Technically there is no violation of the law, but in reality the minister has by corrupt means sought to make himself the ultimate beneficiary of all properties.


The misuse of corporate vehicles is quite common and lies at the very heart of the corruption problem. Sometimes also individuals can be used as fronts to disguise the identity of the real beneficiary. An individual can be the one who receives the bribe on behalf of a high-ranking government official.


The question is how many out there have distributed their assets to or conduct their business through trusts, companies that are in the names of the toddlers or spouses and claim to have no legal title to them yet in truth they are the beneficial controllers?


As I have indicated, there may be a few who do so for entirely legitimate reasons but there may also be a large number that simply do so to hide proceeds of corruption.


Are the authorities prepared to tackle this issue and see what lies beneath the surface of these many companies and trusts?


Of course, the more cunning ones often stash the proceeds of corruption in foreign countries in the names of corporate vehicles, which disguise the true identity of the beneficiaries. In some jurisdictions that have strict bank secrecy laws, it is very hard to trace the beneficial owners of bank accounts some of whom might be stationed in countries that are badly affected by corruption.


It is for this reason that Western governments also have an obligation to developing countries to prevent the use of their financial institutions to hide assets through obscure corporate vehicles.


Nonetheless, if Zimbabwe is serious about tackling corruption, it must begin by undertaking a massive overhaul of its systems of collecting, verifying and maintaining information on beneficial ownership of the thousands of corporate vehicles that are in use in the country. Greater cooperation with other jurisdictions across the world will yield yet more information on the use of corporate vehicles for illicit purposes.


It is important to bear in mind that it’s not only to identify legal ownership but control no matter the artificial legal barriers that might be in place. To do this, however, it is necessary to set up the proper legal framework that balances the need to protect human rights while fighting corruption effectively. Once the fight against corruption unreasonably invades individual liberties, it loses credibility and it will be hard to get international co-operation.


The OECD recommended in 2001 that the key approach to tackling the problem of disguising beneficial ownership and control is to develop mechanisms that are aimed at the prevention of misuse of corporate vehicles. The key element of this strategy is to enable regulators and law enforcement authorities to collect, verify and share this kind of information.

Therefore, it is necessary to establish mechanisms for the collection of information about the persons behind the ownership or control especially of corporate vehicles. Three broad ways have been identified:


* placing an obligation for up-front disclosure of beneficial owners at the time of incorporating the company and continuing obligation to inform of changes;

* using corporate service providers to obtain and retain information which can be accessed by authorities whenever necessary; and

* relying primarily on investigative systems.


All three options may be used in combination. (There is limited scope to discuss these mechanisms in this article.)


Since we have seen that the misuse of corporate vehicles is also an international problem it is necessary that there be mechanisms for sharing information with foreign regulators and authorities. The success of international cooperation and sharing information and assistance in extradition of accused persons is dependent on the existence of the rule of law in the individual jurisdictions.


At a minimum there must be confidence in the judicial system and in the existence of laws that are fair and just. The problem that Zimbabwe has faced in recent years is the lack of confidence in the justice system as a result of the perceived lack of judicial independence and laws that are seen as going beyond the generally accepted standards. Since sharing information requires international cooperation, Zimbabwe will have to surmount the difficulties pertaining to its justice system if its fight against corruption is to be successful.


In conclusion, an exploration of beneficial ownership and control is a key part of the policies that ought to inform the architectural design to fight corruption. This policy must define mechanisms by which information on beneficial ownership and control should be collected, verified and maintained for future use whenever needed. This is a key area that requires investment in ideas and resources.


The crucial question is whether those in authority have the political will to open this can, which is potentially laden with vast amounts of worms. The government would go some way to demonstrate its seriousness and persuade the masses to believe in this exercise by taking on this issue and exploring ways of exposing beneficial ownership.


The problem, of course, is that if those in authority are the beneficial owners and controllers of these corporate vehicles or individuals, such a policy may never be pursued.


For the new Anti-Corruption Commission, it might be an issue worth considering.


*Dr Alex T Magaisa specialises in corporate and financial services law. He can be contacted at alex.magaisa@nottingham.ac.uk or wamagaisa@yahoo.co.uk

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