I've long argued for the contention in the title of this blog. I am convinced legal limited liability is a privilege - after all, if people sign a piece of paper to form a company they no longer have to accept full responsibility for their debts. That's an extraordinary state of affairs, and a massive privilege. But I have said that, like all responsibilities, this one comes at a price. The price is to say who you are i.e. to disclose who really owns the company and who really runs it, as well as to say what you do i.e. to put true and fair accounts on public record.
For a long time this argument has been resisted, so it's especially welcome to note the Economist saying this week:
Limited liability–a commercial venture that protects its shareholders from personal bankruptcy–is one of the greatest wealth-creating inventions of all time.
I agree. And it then follows up saying:
But limited liability is a concession–something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed.
And as they add:
In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see article). Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders–and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.
It does not seem unreasonable to ask who are the main recipients of this benefit [of limited liability] (with, say, stakes above 5%). Legitimate concerns for owners' safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an unlimited option–but that will be their risk.
That last point is well made: limited liability is a choice. As they conclude:
Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.
The Task Force on Financial Integrity and Economic Development has campaigned on this issue - as have I, Global Witness, The Tax Justice Network and others who are all members of that body. It's great to see support for our call for reform from a paper like the Economist.
Now will the UK reform its company registry to comply?
And will offshore listen?
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Surely a better idea is to force full disclosure just to the tax authorities, after all if I am registering a company to undertake some specific research or develop a product, maybe with a partner in another field, I probably wouldn’t want my competitors to know what I am doing.
But why would they know? Company accounts do not provide such information?
Hi Richard
Interesting that the Economist is saying it. That’s very significant.
On a related note I was arguing with a friend of mine about IETs the other day. This person is a conservative with a small c and a very decent person but he was dead against the idea.
His objections are as follows
a) it would add an extra layer of bureacracy on business. Compliance is not cheap as it is. I don’t think this argument holds water as you have to do your KYC anyway and it’s not that labourious to send the data to the relevant jurisdiction
b) Which jurisdiction do you inform? You could have a huge number of directors all of different nationalities and the actual enterprise of which they are directors could be located in several others.
c) What counts as offshore? Also if say the British crown dependent territories adopt IETs and other offshore jurisdictions don’t isn’t that discriminatory and wont the business just go elsewhere?
Could you let me know exactly how an IET would work so I can get back to him on it?
Regards
Robert
Answers
a) Nonsense – you have to do it to open a bank account and it takes minutes…it’s called the price to prevent fraud and the yield would be high. So you’re right – this is just extended KYC and no reason why a central database, do it once and keep it updated, could not be established. HMRC manage it
b) Wherever the company is registered you tell them – not hard to answer that one.
c) For these purposes no different – everyone should follow same rules – we do on FATF money laundering now
Does that help – come back if not