Beneficial ownership has become one of the most hotly debated topics globally. Governments, as well as international and civil society actors, are trying hard to implement new regulations tackling problems associated with beneficial ownership. It is worth mentioning that the interest towards beneficial ownership has risen because companies are often mired in corruption, especially with high level of corruption when current or previous government officials conceal their true identities in companies that are registered overseas in order to conduct business by using illegitimate financial resources.
On one hand, beneficial and nominal ownership are normal trends in economic and business relations, especially in securities markets. Hiding the real owners, however, has often become problematic in various spheres of a state’s economic and judicial life, most importantly in procurement, extractive industries, large businesses, and foreign investments. Individuals who have acquired large financial assets via corruption and other illegal means often use various schemes common in beneficial ownership structures to hide their identities in order to execute money laundering activities. Consequently, it is vital to strengthen the measures for increasing transparency of beneficial ownership and for revealing the real characters behind nominal owners.
Countries have created different tools for fighting the problems associated with beneficial ownership. The analysis below shows that the most widespread and effective tool is the establishment of public registries, where interested stakeholders can see the real owners of the companies in question. At the same time, there are other measures that can enhance the reliability of these registries and increase the trustworthiness of the information provided about the companies. Various states and international and civil organizations have created several mechanisms that positively affect the transparency of beneficial ownership of companies. These mechanisms are briefly discussed in the document below.
It should be underlined that keeping beneficial owners out of sight is a severe problem for developing economies. The 1990’s was a difficult time for the post-socialist world. The transformation of the economy and state institutions was accompanied by many cases of corruption and abuse of power by the authorities. Therefore, the money acquired because of illegal deeds can and has been used to promote a particular political or business agenda. Georgia is one of the examples that went through a turbulent period in the ‘90s, but later, after 2003, implemented swift reforms against corruption. Unfortunately, the situation regarding beneficial ownership remained largely the same, with no transparency requirements in place. Though Georgia became a member of the Open Governance Partnership and pushed for more transparency, the government largely ignored the recommendations of non-governmental organizations and, particularly, of the Institute for Development of Freedom of Information (IDFI), for creating a registry of beneficial ownership. It should be noted that the Government of Georgia took the obligation to consider creating such a registry in 2016, during the Anti-corruption Summit in London, but never fulfilled it. Additionally, on the Anti-corruption Summit, Georgia undertook the following commitments: ensure that law enforcement agencies have access to information about the beneficial owners of offshore companies; sign bilateral agreements with partner countries for the purpose of exchanging this information; take necessary steps in order to ensure the transparency of ownership of companies taking part in public procurement; form public-private information sharing partnerships aimed at detecting, preventing and disrupting money laundering. Though, overall, it can be argued that Georgia has implemented positive measures towards fulfilment of the obligations undertaken on the Anti-corruption Summit in London, it failed to execute any significant actions in achieving the transparency of the beneficial ownership. Therefore, the problems in the sphere of beneficial ownership still remain.
Together with OGP and other international initiatives and organizations, another actor that highlights the importance of transparency in beneficial ownership is the Extractive Industries Transparency Initiative (EITI). Despite years of active advocacy by the CSOs in Georgia, much like in the case of OGP, the Government of Georgia refused to endorse the principles of EITI that would have led to eventual openness of the information on beneficial owners. In almost all countries, including in Georgia, there are several important sectors where beneficial ownership structures are more widespread, such as public procurement and extractive industries. In the case of extractive industries, it directly and negatively affects the environment and the rights of local communities. In public procurement, public funds can be used to enrich affiliate companies of the ruling political parties and/or members of the government. Transparency has crucial importance for effective and efficient functioning of state bodies and for the prevention of corruption and money laundering. Activities in public procurement and extractive industries can have vital effects on areas like infrastructure, social and economic sectors, preservation of cultural sites and distribution of exploits of natural resources.
The aim of this policy brief is to analyze the definition and structure of beneficial ownership, underline problems associated with beneficial ownership and their causes, and present solutions based on international best practices that meet the challenges of this complicated topic. These solutions will be presented as recommendations for Georgia and other countries that wish to create a registry of beneficial ownership and provide more transparency in the sphere.
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