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By David Lewis
There is a head of steam building behind what must sound like an arcane, technical proposal – that companies be obliged to reveal their beneficial owners and that this information be placed on a public register.
After intense lobbying by Transparency International and other nongovernmental organisations, this proposal was adopted by the Group of 20 (of which South Africa is a member) and is one of the key recommendations of the recently released report of the High Level Panel on Illicit Financial Flows from Africa chaired by former president Thabo Mbeki.
This recommendation deserves widespread public support. It is about unmasking the corrupt, the tax evaders and the global criminal syndicates.
The principle insight underlying the proposal is straightforward: criminal conduct of these varieties involves mind-boggling sums of money. The Mbeki report estimates that $50-billion worth of illicit money leaves Africa each year. Global Integrity puts the figure of annual global illicit flows at $1-trillion. The perpetrators are vulnerable to detection at two points in their "value chain": first, when they pay the bribe or deliver the drugs and, second, when they attempt to hide or "launder" the proceeds.
Why the emphasis on corporate declarations? First, when tax evasion – largely done through transfer pricing – is recognised, as does the Mbeki report, as the largest source of illicit money, then companies are clearly the major perpetrators. Second, companies are used, sometimes unwittingly, as repositories of illicit money. Where better to hide large sums of money, than by purchasing shares of a large listed company?
Of course, the investing company would be ill-advised to call itself "Tony Soprano Investments" or to have him on the board. But that’s the point: if companies were obliged to reveal their beneficial owners, it would enable regulators, the public and companies to trawl up the ownership ladder until the true beneficial owner of the "Waste Management Investment Fund" is exposed as … you guessed it, Tony Soprano, or, indeed, as the New Jersey politician whom he bribed to get the state’s waste management business. And it’s then that the law enforcement or tax authorities ask Soprano to explain where he came upon the $100-million with which he bought the shares in the listed US company.
The Mbeki report makes a number of important recommendations aimed at staunching the flow of illicit money. One of these reads: "Transparency of ownership and control of companies, partnerships, trusts and other legal entities that can hold assets and open bank accounts is critical to the ability to determine where illicit funds are moving and who is moving them.
"African countries should require that beneficial ownership information is provided when companies are incorporated or trusts registered; such information is updated regularly; and such information is placed on the public record. Beneficial ownership declarations should also be required of all parties entering into government contracts. False declarations should result in robust penalties."
The government should take special note of the last part of this recommendation. It could immediately require that all companies from which it procures declare their beneficial ownership. Not only would this assist in curbing illicit financial flows, it would also assist greatly in enforcing the ban on public servants doing business with the state.
In South Africa, while companies are obliged to maintain a shareholder register, they are not obliged to make public or even to ascertain who the beneficial owners of their shares are. Responsibility for preventing illicit financial flows rests with the Financial Intelligence Centre.
All of this is happening in tandem with an important annual international event – this week’s Mining Indaba in Cape Town. In mining there’s a voluntary sectoral initiative that precisely seeks to promote transparency in the flow of mining-related revenues. This is the Extractive Industries Transparency Initiative. The failure of South Africa, still one of the world’s great mining economies, to subscribe to the initiative is conspicuous.
I cannot do justice to the elaborate initiative in this piece. But what the Mbeki report and the initiative have in common (Mbeki also recommends that African firms and countries sign on to it) is their mutual support for one simple principle: "sunlight is the best disinfectant". You want to act pre-emptively against tax evasion, corruption and drug trafficking, then make it possible to follow the money.
• This article was first published in Business Day.
