Britain loves the moral high ground, and last week’s anti-corruption summit was no exception. Prime Minister David Cameron joked to the Queen about “fantastically corrupt” Afghanistan and Nigeria—supposedly private words which were caught by a conveniently placed microphone.
Certainly the public language could hardly have been tougher. The prime minister called corruption a “cancer,” noting its role in terrorism, organized crime and other ills. U.S. Secretary of State John Kerry termed it a “destroyer of nation states,” saying it fostered the “feelings of desperation that stoke extremism.” Other political leaders vied to denounce sleaze in similarly strong terms.
Yet the campaigners and officials who thronged the glitzy rooms of Lancaster House were all too aware of the irony. Barely a stone’s throw away are the parts of London—Belgravia, Chelsea and Mayfair—beloved by global plutocrats. Their wives and daughters frequent the boutiques of Bond Street and Sloane Street. A short ride away in a chauffeur-driven limousine are the city’s ever-accommodating bankers, lawyers and accountants.
The plutocrats do not want to keep their money in the place from where they stole it. It is in Britain where want to buy houses, frolic in our nightclubs, shop in our boutiques and educate their children. They know that the coveted sheen of respectability comes easily when polished by enough money. Our pinstriped professional classes have made it all too easy for them.
Britain is belatedly making some effort to derail the financial juggernaut which allows the rich and ruthless to shield their financial affairs from public gaze. From now on, foreign firms that own property in London must declare their true ownership in a public register.
Yet the summit only nibbled at the problem. The British Virgin Islands—which plays a central role in world finance thanks to the near-impenetrable secrecy it offers companies that register there—stayed away. Other “privacy” jurisdictions such as the Cayman Islands and Panama refuse to cooperate.
The upshot is that corporate ownership is all too often still like a masked ball: fun, but no place to do business. For a few hundred pounds, and in less than half a day, you can set up a company in some far-flung corner of the world to conceal your identity. In some jurisdictions your details won’t be stored, or even checked.
The justification is privacy—but it comes at a high cost for everyone. Verifying the identity of a British-registered company takes only a few seconds at the Companies House website. We can find its registered address and the names of its directors and see if has filed its accounts promptly.
In most foreign jurisdictions, that search ends almost as soon as it begins. The registered office will typically be a taciturn law firm, under no obligation to answer the public’s questions. In places like Panama, officials are legally prohibited from responding.
Even if served with a warrant, they may not know the answer. Ownership may have changed dozens of times since the firm was first registered. In most “privacy” jurisdictions there is no obligation to keep information up to date.
Worse, the chain of ownership can involve dozens, even hundreds of such “shell companies, all in secretive jurisdictions—not only offshore islands, but notionally respectable places such as the U.S. states of Delaware, Wyoming or Nevada. Even the most diligent investigator, armed with the full force of law, quails at such a quest. For the ordinary citizen, finding answers is impossible.
Yet trustful interaction is the basis of civilization, and that requires verifiable information about other people. We should reasonably expect to know who owns the house next door, or whom we are doing business with. Anonymity creates unfair competition too: how can a law-abiding, onshore business that pays all its taxes compete with a company whose assets and profits are shrouded in secrecy?
Worst, it is a boon to tax-dodgers, money-launderers, terrorists and any other malefactors. The wily and unscrupulous can use anonymity to dodge taxes, conceal their ill-gotten gains—and pay bribes and put money into politics, safeguarding their interests.
Corporate secrecy has long been one of global capitalism’s dirtiest secrets. Belatedly, change is coming. One reason is leaks. The “Panama papers” were a huge shock to the secretive denizens of the offshore world. The richest and most powerful people in countries like Russia, China and Pakistan had assumed that their activities would never be brought to public view. Yet thanks to the anonymous “John Doe” whistleblower, we now know their names, the companies they set up, and at least some details of the vast fortunes that have passed through them.
Politicians are changing their tune too. When the previous coalition government tried to crack down on corporate secrecy in 2012, Cameron hurriedly backed down. When The Economist wrote a leader saying that corporate anonymity was indefensible, we were attacked for our “utopian” approach. But unmasking secret ownership is now government policy in both Britain and the United States. Britain abolished “bearer shares”—paper certificates that enable unregistered shareholdings to be concealed and moved—only in 2015.
This week’s corruption summit in London brought stringent new proposals. Companies buying real estate in Britain will have to declare their real owners—“beneficial ownership” in current jargon.
President Barack Obama has also urged Congress to pass laws toughening America’s company-formation laws and intensifying cooperation with foreign police investigations (on which America, so far, is scandalously tardy).
Even this limited progress is a huge victory for campaigners such as the London-based group Global Witness. Yet a great deal more needs to be done. Even if we tighten up the rules on forming of new companies, tens of millions of them already exist. There is little point in making corporate registries open if the information they contain is bogus or outdated.
It is worth remembering that nobody voted for this. Corporate anonymity is an accident of history. Joint-stock companies were invented to allow partners in a commercial venture to take risks without risking personal bankruptcy. If the business failed, you lost only the money you had invested.
In effect, we, the public, are subsidizing company directors. If the company does well, they get rich. If it goes bust, suppliers, customers and employees bear the pain. But nobody ever said incorporation should confer anonymity.
The best way of dealing with this invasive species of financial chameleons is to change the environment they live in. The first stage—already underway—is to say that you cannot buy property without disclosing who you are. The next stage is to say that you cannot sell it. That in effect imposes an asset freeze on the world’s plutocrats. They can retain their privacy—but they cannot profit from it.
But there is plenty of scope to go further. The English legal system is the jurisdiction of choice for the world’s wealthy. We should make disclosure of ownership a requirement for anyone seeking recourse to our courts. Next we should set a deadline, say 2020, by which time any assets that still have anonymous beneficial ownership should be frozen. The owner can reclaim them, but only by explaining who he or she is. Within another couple of years, these frozen assets will be publicly auctioned. The money will then be held in trust, say until 2025. After that, it reverts to the state.
This is no obstacle to the law-abiding but privacy-shy. Yet it would squeeze stolen wealth out of the anonymous world and into the pockets of taxpayers (and take the steam out of the top end of the London property market). Crooks and cronies can keep their money in Panama or Macau if they want. But what use is that if they can’t spend or invest it?
These loopholes in our financial system damage the West’s reputation in foreign eyes; Russians mockingly call our capital city “Londongrad.” It also discredits our system in the eyes of the voters. One of the reasons that politicians such as Donald Trump are doing so well is the widespread—and justified—suspicion that there is one law for the wealthy and another for the poor. If we don’t bring the plutocrats to heel, we give ammunition to the modern-day Bolsheviks: those who say that the whole Western system is based on hypocrisy and fraud. They are uncomfortably close to being right.