Blinded by Transparency: How the government plans to shine a light on beneficial ownership

Given the bewildering array of initiatives proposing to shine a light on who actually owns and/or benefits from companies and trusts, there is a real danger of clients being blinded by transparency, says Maurice Turnor Gardner’s Edward Burton, Claire Weeks and Jessica Zimmerman…

In the wake of the disclosures surrounding the Panama Papers, there has been an ongoing push by governments around the world to shine a light on who actually owns and/or benefits from companies and trusts.

There has been a blizzard of changes, with a number of global initiatives, for example FATCA from the USA and the Common Reporting Standard, accompanied by an increasing domestic focus on transparency in many key private wealth markets.

In the UK, registers of beneficial ownership have been established addressing taxable trusts and UK companies. However, of particular interest to the property industry is a current government consultation which proposes the establishment of a central register of beneficial owners of all companies, wherever incorporated, which hold UK property. This is a key issue of concern for many clients who are legitimately concerned over their ownership of a residential property being disclosed on a public register.

Given the bewildering array of often overlapping initiatives, there is a real danger of clients being blinded by transparency. This article seeks to give a high level overview of the three main current and proposed registers of beneficial ownership.

Beneficial ownership register

The UK government has published plans for a public register of the beneficial owners of UK properties held by overseas entities.

A consultation paper has been released to which responses are awaited, but this promises to be wide-ranging in terms of its impact.

The current proposals envisage that the register will very largely follow the PSC Register (described in more detail below) which is currently in force in respect of UK companies, with a requirement for the information to be updated every two years. This can therefore, in broad terms, be thought of as an extension of the PSC register to all companies which hold UK property.

It has been suggested that the register will come into effect in 2018/2019, with a one year transitional period for companies to register or restructure, but this is not fixed at present.

The register would be maintained by Companies House and would be freely accessible online. Very similar information to that provided by UK companies in respect of the PSC Register would need to be provided in respect of overseas companies. Therefore, if implemented, the information relating to beneficial owners of all overseas companies holding UK property would be immediately and freely accessible online.

To ensure compliance, following the one year transitional period, it is proposed that overseas companies will only be able to deal with UK property if they have a registration number from Companies House evidencing compliance with the disclosure requirements of the register. A note will be entered on the title of properties held by overseas companies at the Land Registry, such that no transfer may be registered without the new regime having been complied with.

Further, failure to comply with the requirements of the register will result in the transfer being void if there is no valid overseas company registration number for the relevant entity/ies in place by completion. Therefore, draconian consequences are proposed for a failure to ensure that the regime has been complied with in addition to the criminal penalties and fines which it is proposed may be imposed for a failure to comply.

It is proposed that there will be grounds to prevent the public disclosure of information which are in general terms, risk to the individuals for a number of reasons or persons associated with them, a public safety risk associated with linking the property to the individual or protection for minors or people with diminished capacity. However, a designated body will determine whether such information can be kept confidential. It will be of interest to see the approach that the designated body will take to applications particularly in the light of the small number of successful applications reported in the context of the PSC register (in respect of which please see further below).

UK companies – Register of Persons with Significant Control

The register which has already received the most attention is the Register of Persons with Significant Control or PSC register. From 6 April 2017, every UK company and certain partnerships have been required to keep an internal register of their “beneficial owners” or persons with significant control (PSC), with a publically accessible online register also held at Companies House. The information available to the public includes the individuals name, correspondence address, month and year of birth, nationality, country of residence and a statement/statements explaining how the individual is a PSC.

There are significant penalties for failing to comply with these requirements, including a prison sentence of up to two years and/or unlimited fines.

A PSC is an individual who, directly or indirectly:
(i) owns more than 25% of the shares;
(ii) holds more than 25% of the voting rights;
(iii) has a right to appoint or remove a majority of the board of directors; and/or
(iv) has a right to exercise or actually exercises significant influence or control over the company (or where trusts or partnerships are involved), over the activities of that trust or partnership.

The government is interested in identifying the person behind the UK entity, therefore all foreign companies in an ownership structure will be “looked through” until a PSC or relevant legal entity (meaning a UK company that is subject to its own PSC disclosure requirements) above it can be identified, although it is possible in some cases that there is no PSC or relevant legal entity.

What about those clients for whom confidentiality is paramount? An application to a designated body can be made for information to be suppressed if its entry on the register would present a serious risk of violence or intimidation against the individual.

A report by Global Witness, an international NGO that looks to break down transparency barriers and reduce corruption, states that approximately 30 beneficial owners have make a successful application to keep their name off the PSC register due to concerns about their security which suggests that the scope of the exemptions is very limited given the number of entities affected by these rules.

Global Witness have also reported that over 9,000 companies list the beneficial owners as a foreign company and 2,160 beneficial owners born in 2016. Therefore, whilst an enormous amount of information is being disclosed to Companies House, the quality and relevance of some of this appears to be questionable.

Trusts – Register of Beneficial Ownership

The final relevant register relates to the beneficiaries of certain trusts. This imposes disclosure obligations on trustees of trusts with a UK connection, requiring them to keep an internal register of beneficial owners and to report on the same to HMRC. This will include UK and non-UK trusts holding UK property.

Comment

HMRC will maintain a central register of beneficial owners although at present it is not proposed that this will be publically accessible. Increasing transparency obligations are a developing feature of the private wealth landscape and it appears that the government are at present particularly focussed on transparency in the context of the UK property market.

Whether this new register relating to overseas companies holding UK property will come into effect given the competing demands imposed on the government imposed by Brexit remains to be seen. However, one thing which is certain is that ongoing attempts to bring greater transparency to the beneficial ownership of companies and other structures is here to stay.

Edward Burton, Claire Weeks and Jessica Zimmerman work at boutique private wealth law firm Maurice Turnor Gardner LLP

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