‘Beneficial ownership avoidance’ in offshore finance centres is a ‘human rights risk’ that investor stewardship is missing

As international tax and transparency law evolves, RI looks at an under-scrutinised, but legally contentious angle.

Plans announced at the beginning of the month by the UK government to set up registers of beneficial owners of overseas entities could be as toothless as previous G20 tax transparency efforts, say campaigners. But there is another major related risk for institutional investors. Paul Beckett, Senior Counsel at MannBenham Advocates, an Isle of Man-based lawyer, says potential tax evasion and a deficit of offshore ownership accountability is becoming a ‘blind spot’ in investor stewardship duties and portfolio risk management, but perhaps not for the reason they might expect. Beckett has vast, hands-on experience in offshore finance, fiduciary services, trust law and international private banking. That’s the job which “pays the bills”, he says. But he has also developed an interest in human rights law alongside his career as a commercial lawyer, in particular assessing the potential for human rights abuses in offshore structures. After the 2016 Panama Papers leaks, the release of the Paradise Papers in November 2017 has again brought the use of offshore finance centres to the forefront of media and regulatory attention.
The pension fund industry is no exception to scrutiny. In Denmark, the newspaper Politiken published a survey which showed that nine pension fund members of Dansif (the national SRI investment forum) made use of funds in Cayman or Bermuda, with one of them having set up its own Cayman fund.
Beckett has investigated the structural side of tax – the wiring and plumbing of offshore investments, which he says is something that didn’t totally surface with the Panama and Paradise Papers revelations: “[In the Papers] you have a concentration on routes and flows of money, but how specifically and technically those flows were facilitated hasn’t been fully explored. It is dull and legalistic but essential.”Responsible Investor first met Beckett at the 2017 Annual Conference of the Tax Justice Network (TJN), where he was drawing attention to the weaknesses of one of the G20’s flagship initiatives on global finance: The High Level Principles on Beneficial Ownership Transparency, which emerged at the 2014 Brisbane Summit. Beckett argues that the political will behind beneficial ownership disclosure may not be what it appears. He describes the G20 principles as a “paper tiger” because they are not only superficial but also ignore an emerging worldwide industry that makes them toothless: so-called ‘orphan structures’: “These are actively marketed by local structuring professionals around the world. Tax haven governments are introducing them for no other reason than that they give them the possibility of totally anonymizing beneficial ownership. This industry has grown because it’s never been challenged,” he says. Much of Beckett’s experience and investigations have been compiled in the book “Tax Havens and International Human Rights (Routledge, 2017)”.
In it he explains the mechanisms behind these “chimeric” orphan structures, which twist corporate and trust law principles to untenable limits (a ‘legal freak show’ as he calls it) in order to conceal ownership. Such, he says, is the case of Non-Charitable Purpose Trusts, under which no asset is beneficially owned. In other words, there is no beneficiary and nobody ultimately owns the trust fund, which otherwise would be void under common law jurisdictions. Beckett highlights that many of these structures are commissioned by tax haven governments acting, he says, as “agents of obscurity”, which, in the context of fierce competition, seek to attract customers whose priorities could go beyond privacy towards plain “accountability
avoidance”. One example is the Bahamas Executive Entities (BBEs), commissioned by a London law firm to fill a gap in the offshore products market spotted by the Bahamian government. A non-exhaustive list of these ownerless structures includes the Cayman Special Trusts Alternative Regime (Cayman STAR Trusts), the Virgin Islands Special Trusts (BVI VISTA Trusts), the Seychelles International Business Company (Seychelles IBC) or the Nevis Multiform Foundation. Using different techniques (from absence of registration and public filling requirements, to immunity to foreign legal challenges and plain abolition of the concept of beneficial ownership) the effect is a rupture in the accountability chain.
Beckett says: “Now, the name of the game is ‘beneficial ownership avoidance’. That’s worse than whether or not you’ve paid your taxes. It’s who ultimately bears responsibility for civil law suits, criminal activities or human rights breaches. If you take away ownership you are creating a super elite of complete anonymity and non-accountability.” Beckett sees an evolution in the history of offshore centres: from ‘tax havens’ where tax was the determining factor when they started 40 years ago, to ‘secrecy jurisdictions’ as the TJN calls them. He suggests what the next stage might be called: “Accountability havens is a better name. Tax is the flower to the bee, the honey trap that attracts people to these jurisdictions. But when they see what else they can do there, tax becomes almost a side show.”
Beckett’s work has been praised for taking a new approach to the study of offshore centres, linking their abuse to international human rights legal obligations. He considers tax evasion and avoidance “a symptom of adeeper malaise, rooted in the breach of more fundamental human rights.” The use of anonymous structures opens the door to abuse, he says, and neutralises corporate sustainability benchmarks used by investors and companies, such as the UN Guiding Principles on Business and Human Rights and the UN Global Compact Principles.
But, because the orphan structures are state-sponsored, Beckett explains, the jurisdictions involved can be in breach of corresponding international human rights obligations: “If a government permits this activity [through incorporation], then that government is responsible on a subsidiarity principle.”
Instead, he says, reform attempts by the G20 and other governments remain “human rights blind” and pay lip service to solutions that are not fit for purpose.
The UK is an interesting case study given the plans outlined at the beginning of this piece.
In 2016, the UK Government introduced a domestic beneficial ownership register (a register of Persons with Significant Control), a transparency initiative that was welcomed but at the same time challenged due to certain weakness. Analysis by campaign group Global Witness identified loopholes in the way data is gathered and the interference of secrecy jurisdictions, i.e. tax havens.
In 2017, the Government launched a consultation on a beneficial ownership register for property ownership by overseas companies and legal entities.
The goal is that once it is in place by 2021, overseas companies will not be able to buy property in the UK or secure UK Government contracts without disclosing beneficial ownership information. Then, in April
this year the government published a summary of feedback from 56 respondents to a consultation on beneficial ownership.
But, Beckett says, the UK Government has made the same mistakes of the past, overlooking the issue of actual ownership: “Just like the G20, it has assumed throughout that somebody owns a structure: but a lot of them aren’t owned by anyone at all.”
The UK Government has already intimated that there would be exceptions, if appropriate, to the legal forms the register’s scope should cover.
In its response to the consultation, Transparency International warned about the risks of restricting the types of entities covered by the register and called for greater transparency over trust ownership.Then, on May 1, the UK Parliament voted to require British Overseas Territories to introduce public registers of beneficial ownership.
The measure has been welcomed as a step in the right direction. But depending on how it is implemented the risks remain. Beckett says: “This new transparency drive on the part of the UK Government will hit the same brick wall of ‘orphan structures’ as every other registration based system.”
Separately, the House of Common’s Treasury Sub-Committee has launched a tax avoidance and evasion inquiry, which closes on May 31. The Treasury Sub-Committee is investigating the amount of tax lost to avoidance and offshore evasion and whether HMRC, the UK tax agency, is capable of bringing about what the Committee itself calls: “a real change in the behaviour of tax dodgers and those who profit by helping them”.

The RI Europe 2018 Conference on June 5/6 in London is hosting a panel session entitled: “Tax – the iceberg risk: why the fall-out from the Panama and Paradise Papers is coming to investors” Click here to look at the conference agenda