The British Parliament has announced that legislation will be introduced which forces overseas companies which own real estate within the jurisdiction to disclose the ultimate beneficial ownership of the shareholding. Unless there is a proper system of regulation of the information provided the system will not work. This legislative proposal appears to arise as a result of fears that many properties in London are owned by corrupt foreign officials and other financial criminals. It could also be a reaction to 2016 and 2017 U.S. Department of Treasury Geographic Targeting Orders that temporarily required U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas.
FinCEN found that 30 percent of the transactions covered by these GTOs involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report. This corroborated FinCEN’s concerns about the use of shell companies to buy luxury real estate in “all-cash” transactions.
It follows the creation of a UK system whereby it is compulsory on pain of a criminal offence for public details of the beneficial ownership of English companies to be available through Companies House. In truth Companies House only makes public what it is told by the person incorporating the company as to who the beneficial owners of the company are. There is no mechanism through which authorities can check the veracity of the information provided. There may be computer systems at Companies House that pick up if Donald Duck or Mickey Mouse is declared a beneficial owner of an English company, but that is about the extent of it. There is no proper regulatory framework. Garbage in, garbage out. Strangely criminals have a tendency to lie. If the purpose of having a registry of beneficial owners of corporations which own real estate or other assets is supposed to help track stolen assets and recover them then such legislation may well have the opposite effect. Corrupt politicians will hide assets behind other persons such as businessmen, lawyers, other intermediaries and yet more complicated holding structures making tracking assets more difficult.
The proposed legislation dealing with real estate, while possibly well-intentioned rather than politically motivated, may paradoxically have the opposite effect of its purpose. Further, one proposal is that the English Companies House is provided with this information as to beneficial ownership of foreign companies which own registered land in England and Wales. On proper analysis, what is the point of this if the Registrar can be fed garbage and won’t check and the government’s ability to get this information from abroad to verify the beneficial ownership of foreign corporations is limited or non-existent. England is not alone with these problems. Most states in the United States have no system of regulation or even requirement for incorporators to provide Company Registrars or their equivalent the identities of the true beneficial owners of a company. A more sophisticated and ultimately more effective system is likely to be one which works to ensure that jurisdictions in which companies are incorporated have an effective system for regulating who the beneficial owners of companies are. Those jurisdictions where the Company Registrar has a system whereby he can and does check the information provided are those which should be encouraged to own British real estate. There is no need for the information as to beneficial ownership to be made public provided it is available to the law enforcement authorities and those who have suffered wrong where Justice requires it. The most basic system is to make it compulsory for companies to be incorporated through Company formation agents and to regulate those agents by a system of site visits by the regulator. Unchecked information as to who a beneficial owner is said to be may well make matters even more opaque. Does anyone believe Robert Mugabe’s London real estate is held in his name or that he would declare he was the beneficial owner if Westminster says he must?
Jack de Kluiver, Managing Partner
Stephen Baker, Partner