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Chancing It: How Secret Company Ownership is a Risk to Investors

This September 2016 report from Global Financial Integrity and Global Witness, “Chancing It: How Secret Company Ownership is a Risk to Investors,” draws on ten cases involving anonymous companies.

The report was released in Singapore as hundreds of investors gather at the PRI in Person conference and shows how corporate secrecy can damage the global economy, and hurt unwitting investors and pension fund holders.

The Financial Transparency Coalition, of which Global Financial Integrity and Global Witness are members, supported this project.


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Overview

In order to make sound and responsible investment decisions, investors need to know who they are dealing with and what the track record is of those they do business with. This is one of the ways shareholders can protect themselves from fraud, losses, or unknown dealings with “politically exposed persons” who may have stolen state assets. If these people are able to hide behind secret, or “anonymously-owned companies,” it is very hard to manage all types of risk—both financial and non-financial.

As repeatedly shown by Global Witness, Global Financial Integrity and others, anonymously-owned shell companies are used by the criminal and corrupt to evade taxes, facilitate bribe payments and skirt sanctions. They are also used to win government contracts at the expense of legitimate businesses, finance terrorism and launder earnings from trafficking human beings, weapons and drugs.

Recommendations

Investors should call on all governments, including the U.S., to make beneficial ownership information public for all to see. The destabilizing nature of the abuses caused by secret companies can disrupt operating environments, create an imbalance in markets and increase financial and non-financial risks for investors. At present, the lack of information available on the people behind American companies is a gift to individuals who want to use them to hide their identity and move their ill-gotten gains. The disproportionately large number of companies created in the U.S. makes action by the U.S. Congress of paramount global importance.

Investors should assess the steps taken by companies to manage risk by publicly disclosing their ultimate beneficial owners and uncovering the beneficial owners among their business partners and supply chains. To further safeguard against risks associated with anonymously-owned companies, investors should directly engage their universe about companies’ approaches to identifying and mitigating risk related to the lack of corporate ownership transparency.

Investors should engage the U.S. Administration to ensure that it supports legislative and regulatory efforts to determine the ultimate, true beneficial owners of American companies as a priority. While the Obama Administration has recognized the importance of this issue, the U.S. Administration should pursue a strong definition of beneficial ownership. This should be a priority domestically and in international fora. Support for a weak definition of beneficial owner, such as the definition in a 2016 U.S. Treasury regulation requiring financial institutions to identify the beneficial owners of their legal entity customers,47 stands to undermine domestic and global progress in efforts to end the harms caused by anonymous shell company owners.

All companies should publicly disclose who ultimately owns and controls them as an expression of business integrity and ethics. A company’s ability to conduct the necessary due diligence to understand the actors in its supply chains, partners and its own corporate structure is a basic component of its commitment to good governance. This goes to the heart of its integrity and ethics. Companies should require beneficial ownership disclosures from those they do business with, including in contractual terms, and use that information in due diligence and vetting processes. Companies can provide this information on their website, and will eventually be able to contribute to a pilot project to register global beneficial ownership information, which will be a voluntary, public database of beneficial ownership.48 However, to level the uneven playing field and make beneficial ownership registration information compulsory for corporations, the business community, including investors should call on the U.S. Congress to take urgent action to eradicate anonymously-owned American companies.

Read the Report

In addition to downloading the full PDF of the study, the full report can be read, shared, and embedded via the Scribd window below.

About

About Financial Transparency Coalition

The Financial Transparency Coalition is a global network of civil society, governments and experts. We work to curtail illicit financial flows through the promotion of a transparent, accountability and sustainable financial system that works for everyone.

Global Financial Integrity and Global Witness are members of the Financial Transparency Coalition and we are grateful for its financial support to advance this work.

About Global Financial Integrity

Founded in 2006, Global Financial Integrity works to curtail illicit financial flows by producing groundbreaking research, promoting pragmatic policy solutions, and advising governments.

More money flows illegally out of developing and emerging countries each year – facilitated by secrecy in the global financial system –than they receive in foreign direct investment and foreign aid combined. Beyond bleeding the world’s poorest economies, this propels crime, corruption, and tax evasion globally.

About Global Witness

Global Witness wants a better world – where corruption is challenged and accountability prevails, all can thrive within the planet’s boundaries, and governments act in the public interest. Many of the world’s worst environmental and human rights abuses are driven by the exploitation of natural resources and corruption in the global political and economic system. Global Witness is campaigning to end this. We carry out hard-hitting investigations, expose the facts, and push for change. We are independent, not-for-profit, and work with partners around the world in our fight for justice.