SHELL COMPANIES MAKE FIGHTING FOREIGN BRIBERY AN UPHILL STRUGGLE. TIME FOR ECONOMIES TOOK ACTION
The Financial Action Task Force should improve the global standards on beneficial ownership transparency
Airbus, Odebrecht and Semlex are just a few examples of big companies that made headlines after it emerged they paid bribes win public contracts abroad. However, bribing foreign officials was not the only approach to doing business they shared – they also made extensive use of shell companies to cover up the bribe payments and kickbacks.
Over the last two decades, increased enforcement of foreign bribery rules, particularly by the US, helped shine a light on the ways many multinational companies operate. Just yesterday, the US announced it had entered into a plea agreement with J&F, a Brazilian meat conglomerate. The company bribed Brazilian government officials in exchange for obtaining financing and other benefits, including from the Brazilian National Development Bank. Unsurprisingly, the company used the same mechanism to pay bribes as the companies listed above. The plea agreementhighlights that:
“To facilitate the bribery scheme and conceal the true nature of the bribe payments, J&F and its co-conspirators created shell companies, opened bank accounts for the shell companies in the United States and made payments to those accounts for the intended benefit of foreign officials in Brazil.”
Shell companies not only make it possible for companies to make bribe payments, they also allow corrupt officials to hide and launder the proceeds of corruption. Transparency International’s new report, Exporting Corruption shows how shell companies are hampering the detection, investigation and prosecution of corruption by 47 leading global exporters.
According to our research, only seven out of the 47 countries surveyed in this report have central beneficial ownership registers which are publicly available with no restrictions, while 17 countries have no central register at all, including key economies like Australia, Canada and the US.
It is not a coincidence that the overall level of enforcement of foreign bribery legislation by the 47 countries assessed is shockingly low.
Competent authorities are less able to investigate foreign and domestic corruption as well as other crimes when they do not have access to a beneficial ownership register. Transparency International’s review of mutual evaluation reports conducted by the Financial Action Task Force (FATF) shows that in countries where competent authorities rely on obliged entities to access beneficial ownership information, such as financial institutions or corporate service providers, they face significant obstacles. Investigations may be delayed for years as a result. On the other hand, we found that countries performed better in investigations when they had a central beneficial ownership register. In addition, public access to central registers makes them more useful and accurate by enabling foreign investigators to gain speedier access and allowing journalists and activists to monitor the information.
Reforming the standards
Beneficial ownership registers are broadly recognised as an important tool to prevent and detect corruption and other crimes. Indeed, many countries have recently taken steps to implement such registers. However, international standards such as the FATF Recommendations on anti-money laundering, fail to require countries to establish them. The standards and existing guidelines simply require countries to ensure competent authorities have access to accurate beneficial ownership information without specifying how access should be guaranteed. The result is that countries are largely failing to effectively implement the recommendations. Key company formation centres take advantage of the vague FATF recommendations to continue selling anonymous companies and using opacity to attract “investments”.
Recently, the FATF announced that it has established a dedicated policy working group to analyse whether a review of the FATF standards on beneficial ownership transparency (Recommendation 24) was needed. The working group should make recommendations on how to improve the system to ensure the spirit of the FATF standards can be met by member states. FATF members will then have to agree on adopting these recommendations, unanimously.
The question that remains is: Will countries like Canada and the US – that have been resistant to the idea of beneficial ownership registers – block much needed reforms? Or have the many recent examples finally served as a wake-up call to the fact that fighting crime and corruption without transparency in company ownership is a Sisyphean task?
The FATF and its members have a unique opportunity to strengthen the ability of countries to pursue foreign bribery cases and other crimes. They should revise the FATF's recommendations and guidance documents to require member countries to establish beneficial ownership registers and encourage countries to establish public beneficial ownership registers as a way of improving transparency and accountability, as well as accuracy of the data. Will they take it?
By Maíra Martini, October 15, 2020, published on Transperacy International