The private sector plays a critical role in achieving economic and social goals through providing goods and services, employment and tax revenue. Corporate vehicles such as companies, trusts, foundations, partnerships, and other types of legal persons and arrangements, make up a large share of the private sector. Although corporate transparency is a standard business practice of most companies, other corporate vehicles have less transparency as revealed by the International Consortium of Journalists in the Panama Papers. Corporate transparency regulations need always to balance measures aimed at catching bad actors with measures that encourage voluntary transparency, to avoid overly burdensome rules. This howtoregulate article focuses on good examples of corporate transparency regulations and highlighting opportunities for improvement.
A. International and supra-national regulatory framework
I. United Nations (UN)
1. Recognising that companies are important to achieving sustainable development goals, the UN and its various bodies have many initiatives that encourage companies to advance UN goals through responsible Corporate transparency regulations practices.
2. The 17 Sustainable Development Goals (SDGs) were adopted by all UN Member States in 2015 calling for an end to poverty, protect the plant and ensure that all people enjoy peace and prosperity by 2030. The SDGs are integrated which means that actions in one area will affect outcomes in others and so everyone is needed to reach these targets. To capture “everyone” the UN has created the Partnership for the SDGs, which is a global registry of voluntary commitments and multi-stakeholder participation towards achieving the SDGs. To register, participants are required to explain how they are implementing one or more of the 17 SDGs based on the SMART criteria: Specific, Measurable, Achievable, Resource-based, and Time-bound. The Registry of participants of corporate transparency regulations is online and open for all to browse. Registered participants of corporate transparency regulation are required to keep their entry up-to-date and provide an annual self-report on progress. Annual reports starting from 2013 are provided by the UN, which summarises partnership trends and highlights successful partnerships.
3. The UN Global Compact is an initiative of the UN Secretary General based on the voluntary commitments from company Chief Executive Officers to implement universal sustainability principles and take steps to support UN goals. The Compact requires companies to operate in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption, wherever they have a presence. Companies incorporate the Ten Principles of the Compact into strategies, policies and procedures, and by establishing a culture of integrity, companies uphold their basic responsibilities to people and the planet. The Ten Principles are derived from: the Universal Declaration of Human Rights, the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the UN Convention Against Corruption. The Compact operates a “secretariat-light” function whereby the Global Compact Board oversees the implementation of integrity measures that aim at promoting greater public accountability and transparency of participating companies, including reporting policies, logo policy and dialogue. The Compact has a complaint process whereby it manages allegations of systematic or egregious abuses of the Ten Principles but will not involve itself in any claims of a legal nature. The complaint process procedures and enforcement (click on respective language, Chapter 4 Allegations of Systematic and Egregious Abuses) measures follow the “diplomatic route” typical of the UN’s good offices role and where a company is found to be non-compliant it is de-registered form the Compact.
4. The UN Convention Against Corruption (UNCAC) is the only universal legally binding anti-corruption instrument, requiring Member States that have ratified, to adopt and enforce national legislation, policies and practices that, among others, affect the private sector. One of the goals of UNCAC is to prevent market distortions and combat unfair competition and so irrespective of Member States’ ratification, the private sector is a key player in the marketplace.1 UNCAC covers all acts of corruption, including bribery, embezzlement, obstruction of justice, trading in influence and the concealment or laundering of the proceeds of corruption. The anti-corruption measures are not limited to private-public relationships but also private relationships between companies. The UN Office for Drugs and Crime oversee UNCAC’s implementation and provide a number of good resources on anti-corruption regulation:
- An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide;
- Technical Guide to the United Nations Convention against Corruption;
- Legislative Guide for the Implementation of UNCAC; and
- TRACK (Tools and Resources for Anti-Corruption Knowledge) a web-based anti-corruption portal involving a legal library, an electronic database of legislation and jurisprudence relevant to UNCAC from over 175 jurisdictions, anti-corruption learning platform and a collaborative tool for communication.
II. Organisation for Economic Development (OECD)
5. The OECD has developed standards and tools for a stronger, cleaner and fairer economy because well functioning markets (and the world economy) depends on propriety, integrity and transparency in the conduct of business. Initiatives and standards aimed at corporate transparency regulations, include:
Base Erosion and Profit Shifting (BEPS) collaboration forum of over 135 countries to end tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax. These countries are implementing 15 Actions to tackle tax avoidance, improve coherence of international tax rules and ensure a more transparent tax environment;
The Declaration on Propriety, Integrity and Transparency in the Conduct of International Business and Finance: political commitments made by OECD and non-OECD Member States in the areas of competition, corporate governance, investment and responsible business conduct, tax cooperation, anti-corruption, interaction between government and business, quality of regulation and financial literacy and consumer protection;
Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas;
Guidelines for Multinational Enterprises (MNEs) are recommendations from government to MNEs on responsible business conduct;
Principles of Corporate Governance helps policy makers evaluate and improve the legal, regulatory and institutional framework for corporate governance;
Principles for Transparency and Integrity in Lobbying focusses on enhancing transparency, fostering a culture of integrity, mechanisms for effective implementation, compliance and review; and
Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones, helps companies that invest in countries where governments are unwilling to unable to assume their responsibilities by posing a range of questions addressing risks and ethical dilemmas that companies are likely to face in weak governance zones. The UN supports the use of this tool for companies operating in areas where there is conflict, a peacekeeping mission and a post-conflict peace-building mission.
III. World Bank
6. The World Bank combats corruption by working with the public and private sector, including civil society to prevent corruption, improve remedies to address wrongdoing when it occurs, and promote ethical behaviours, norms and standards needed for sustaining anti-corruption efforts. In 2016 the World Bank updated its commitment to anti-corruption at the 2016 Anti-Corruption Summit focussing on three areas of work:
(1) Build the capacity of developing countries to deliver on their commitments to enhance transparency and reduce corruption.
- Creation of Public Participation Principles and Guidances of Global Initiative on Fiscal Transparency;
- Leadership of the Fiscal Openness Working Group of the Open Government Partnership;
- Development of the Open Fiscal Data Package; and
- Expanding the use of Public Expenditure and Financial Accountability Assessments.
(2) Enhance our support for implementation of anti-money laundering requirements and for the recovery of stolen assets.
- Hosting Global Forum on Asset Recovery;
- Setting international standards on asset recovery and money laundering; and
- National assessments of money laundering and terrorism financing risks.
(3) Increase work in the areas of tax reform, illicit financial flows (IFFs), procurement reform, and preventing corrupt companies from winning state contracts.
- Strengthening tax policies;
- Tools to address tax evasion and its links to corruption;
- Using beneficial ownership information to support tax transparency;
- Development of a rapid assessment tool2;
- Country level work on illicit financial flows;
- Implementing a beneficial requirement for World Bank projects;
- Supporting open contracting principles;
- Leading the development of the methodology for assessing procurement systems; and
- Promoting access to risk-relevant information across jurisdictions to inform public procurement decisions.
IV. Financial Action Task Force (FATF)
7. The FATF is an inter-governmental global money laundering and terrorist financing (ML/TF) watchdog. It sets international standards that aim to prevent these illegal activities and works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. The FATF Recommendations coordinate the global response to prevent organised crime, corruption and terrorism. The FATF reviews anti-money laundering and counter-terrorist financing (AML/CFT) techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply. The FATF Guidance on private sector information sharing contains a useful list of the challenges that may prevent the private sector from disclosing information that could be useful in the fight against ML/TF, including solutions. FATF Recommendation 12 (Factsheet) deals with Political Exposed Persons (PEP), whose companies and transactions require additional scrutiny. It also “names and shames” jurisdictions with weak measures for AML/CFT and issues three times a year a list on its website of countries with weak AML/CFT regimes. So far FATF has reviewed over 100 countries and jurisdictions and publicly identified 80 with weak AML/CFT regimes, 60 of the 80 identified have since made the necessary reforms to address these weaknesses.
V. European Union (EU)
8.Large public-interest companies (listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities) with more than 500 employees in the EU are required to disclose certain information about the way they operate and management social and environmental challenges. The non-financial reporting directive (NFRD)(Directive 2014/95/EU) outlines the rules on non-financial and diversity information and since 2018 this information was required to be included in companies’ annual reports. The NFRD requires companies to publish reports (Guidelines on NFRD) on the policies they implement in relation to
- environmental protection;
- social responsibility and treatment of employees;
- respect for human rights;
- anti-corruption and bribery; and
- diversity on company boards (in terms of age, gender, educational and professional background).
Article 30(1) of the EU’s Fourth Anti-Money Laundering Directive (2015/849) requires all Member States to put into national law provisions requiring corporate and legal entities to obtain and hold adequate, accurate and current information on their beneficial owner(s) in their own internal beneficial ownership register. Article 30(3) requires that beneficial ownership information be held in a central register in each Member State. Article 9 concerns checks on transactions involving high-risk third countries and empowers the Commission to develop a list of high-risk third countries from which Member States are to implement stricter scrutiny mechanisms on companies and transactions from such high-risk countries. The EU has a separate mechanism for fighting tax avoidance by developing a list of non-cooperative tax jurisdictions. The tax list “names and shames” countries that do not comply with the international standards on information exchange, have harmful tax practices, no not apply the OECD anti-BEPS measures and has a tax rate that encourages artificial tax structures.
B. International Standards Setting Bodies
1. Global Reporting Initiative (GRI) is an independent international organisation that develops standards for sustainability reporting. It provides training and information events to help businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social wellbeing. The GRI Sustainability Reporting Standards are developed with multi-stakeholder contributions based on the public interest. The standards‘ structure are modular and interrelated, representing the global best practice for reporting on a range of economic, environmental and social impacts. The standards are free to download and GRI also have a resources sections that include “explainer” presentations about the standards to use in the company, information on the standard’s links with other regional/national standards such as the EU Non-Financial Reporting Directive, UN SDGs and Hong Kong Stock Exchange. The French law on sustainable reporting follows the GRI standard.
2. The International Electrotechnical Commission of the International Organization for Standardization (ISO) has a standard for social responsibility (ISO 26000). Like other ISO standards, ISO 26000 must be purchased from the ISO site but some resources that explain the standard’s relationship with PECD Guidelines, UN SDGs and posters are free. ISO 2600 provides guidance rather than requirements and so it cannot be certified like ISO’s other standards. The aim of ISO 26000 is to help clarify what social responsibility is, help businesses and organisations translate principles into effective actions and share best practices. The standard was developed by a multi-stakeholder group from government, NGOs, industry, consumer groups and labour organisations from around the world.
3. The Science Based Targets Initiative (SBTi) is a collaboration between the CDP, UN Global Compact, World Resources Institute and the World Wildlife Fund for Nature and one of the We Mean Business Coalitioncommitments. The purpose of the SBTi is to provide companies with a clearly defined pathway to future-proof growth by specifying how much and how quickly they need to reduce their greenhouse gas emissions. Targets are “science-based” where they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C. SBTi promotes science-based target setting as a powerful way of boosting companies’ competitive advantage in the transition to the low-carbon economy by defining best practice in a science-base target setting, presenting case studies, organising events, providing resources and workshops. The three science-based target setting approaches are:
- Sector-based approach: The global carbon budget is divided by sector and then emission reductions are allocated to individual companies based on its sector’s budget.
- Absolute-based approach: The percent reduction in absolute emissions required by a given scenario is applied to all companies equally.
- Economic-based approach: A carbon budget is equated to global GDP and a company’s share of emissions is determined by its gross profit, since the sum of all companies’ gross profits worldwide equate to global GDP.3
C. National laws
Key elements of national corporate transparency regulations concern access and records about beneficial ownership, corporate governance systems, reporting, tax disclosure and effective mechanisms for compliance and enforcement. The following regulatory examples show the approaches that various jurisdictions have chosen to encourage corporate transparency regulations.
I. Beneficial ownership
1. Information about the beneficial owner/s of a corporation helps authorities to prevent corruption, organised crime and tax evasion. Where corporate transparency regulations permit the anonymity of a corporation’s beneficial owner/s, it has been revealed that bad actors choose such structures to avoid their corporate responsibilities and increasingly for purposes contrary to the public interest. Furthermore, directors of such corporations cannot complete due diligence checks for conflict of interest, a minimum requirement in most corporate transparency regulations of the world, if the beneficial owner/s are unknown. While there are legitimate commercial reasons for the creation of corporate vehicles such as shell corporations or trusts, corporate transparency regulations should require, at the minimum, records about beneficial owner/s so that enquiries by the authorities are facilitated.
2. The FATF Guidance on Transparency and Beneficial Ownership provides that the best regulatory mechanisms require the establishment of a company registry where companies record basic information about the company, maintain an up-to-date shareholder register, that is publicly available. Examples of simple and free registries include: UK’s Companies House, Australia’s ASIC Register and Canada’s. The US EDGARsystem is also free but is a more complex registry and India’s registry contains comparatively less free information. Further information about how the regulation of the company registry can be found for these countries: UK, Ireland, Portugal, UAE (its law), and see Annex I for a full summary of FATF measures to enhance transparency of companies (page 44 refers).
3. The US House of Representatives passed the Corporate Transparency regulation Act of 2019 (HR 2513) in October 2019 and a companion bill is being reviewed by the Senate. The purpose of HR 2513 is to create a national database of the beneficial owners of corporations and limited liability companies (entities) in the US “to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct”4. Such entities are required to provide proscribed information of the identity of the beneficial owners on an annual basis. Given that in 50 US states incorporating a company requires less personal identification than registering for a library card5 and around 2 million companies are in the scope of the Act, HR2513 will be useful in regulatory enforcement. Only law enforcement agencies can access the database.
4. Singapore recently amended its regulation on corporate vehicles for investment, which in effect regulates “shell companies”, by creating the Variable Capital Company Act 2018 (coming into effect January 2020). Acknowledging the reality that shell corporations had no employees, often no directors as well, the Act creates the structure of a variable capital company (VCC), which requires AML/CFT checks to be outsourced to an eligible financial institute (EFI). Appendix 1 and 2 of the Notice VCC-N01 Prevention of Money Laundering and Countering the Financing of Terrorism – VCCs. The Notice VCC-NO1 is extremely clear that VCC’s must pay special attention to any new products, practices and technologies that favour anonymity (Paragraph 6.3). Paragraph 7.1 of the Notice Vcc-NO1 provides that
No VCC shall establish or maintain business relations with any customer on an anonymous basis or where the customer uses a fictitious name.
All customers of the VCC must be identified. Minimum information about customers is proscribed at Paragraph 7.5. Where the customer is a legal person or legal arrangement, the VCC shall: identify the legal form, constitution and powers that regulate and bind the legal person or legal arrangement (Paragraph 7.6); and identify the connected parties of the customer, minimum information about which is also proscribed (Paragraph 7.7). The VCC is required to verify the identity of the customer using reliable, independent source data, documents or information (Paragraph 7.8). Paragraph 7.17 requires the VCC to maintain a beneficial owners registry. Chapter 9 has enhanced customer due diligence for politically exposed persons (PEP), which are detailed and represent best practice. The Singaporean regulator, ACRA, also lists the VCC’s it has registered on its website as well as a Model Constitution for a VCC.
5. Cayman Islands has strengthened its legislation [Companies (Amendment) Law 2020] and regulations [Beneficial Ownership (Companies) Regulations (2019 Revision)] around beneficial ownership of companies registered. The amending legislation created a duty for a corporate services provider to establish and maintain a beneficial ownership register (Section 7 Amendment of Section 252). The regulations defined the duty (Regulation 3) for the company to provide additional matters (Regulations 4-7) to the corporate services provider or Registrar within one month of becoming aware of that matter ceasing to be true. The corporate services provider or Registrar also has a corresponding duty (Regulation 7C) to provide such information it becomes aware of. Part 4 provides a strict definition for how to interpret holding an interest in a company directly or indirectly.
6. The Private Trust Companies Regulations (2020 Revision) were also amended to strengthen transparency around timely and accurate recording of beneficiaries, requiring a natural person be appointed as a director. The amended Trust Regulations also strengthened the Authority’s power to refuse/cancel registration of a private trust company where it has reasonable grounds to believe the trust or any of its principals are conducting business in breach of the AML Regulations or cease to be a fit an proper person.
II. Corporate governance
7. A commitment to corporate transparency regulations requires companies to have systems and cultures (corporate governance) that prevent and detect transactions and relationships that are contrary to corporate responsibility (as so defined either nationally or internationally).
8. The Philippines prescribes standards for corporate governance in its recently updated Code (MC No. 24 s.2019) of December 2019. The Code requires all public companies and registered issuers to submit a new Manual on Corporate Governance, either comply or explain, within six months to the Securities and Exchange Commission as well as posted on the company’s website. The Code prescribes the information the Manual should contain, among others, policies on the training of directors, establishment of the Board and executive remuneration, disclosure policies and shareholder/ member rights6. The Code is arranged according to 16 Principles, each with a Recommendation, followed by an Explanation. For example Principle 2 concerns establishing clear Board roles and responsibilities and Recommendation 2.6 provides that the board is responsible for ensuring there exists a policy and system governing related party transactions, which guarantee fairness and transparency of the transactions7.
9. Another aspect of corporate governance is the focus on culture and therefore people, which are regulated by directors duties. In Australia the legal requirements of officeholders such as directors or secretaries, are set out in the Corporations Act 2001. The key duties of directors include:
- being honest and careful in all your dealings;
- understanding what your company is doing;
- making sure your company can pay its debts on time;
- ensuring your company keeps proper financial records;
- acting in the company’s best interests, even if this conflicts with your personal interests;
- using any information only for the good of the company. Using information to gain an unfair advantage for yourself or others could be a crime; and
- if any personal interests conflict with your duties as a director, this should be disclosed at a directors’ meeting.
Australia concluded in 2019 a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, which identified the root cause of misconduct was greed: greed by licensees and greed by advisers8. The final report is worth a read for its comments about governance, culture, remuneration, and conflict of interest, key aspects of which include:
Despite the Corporations Act 2001 banning conflicted remuneration, such remuneration was widespread and clearly influenced the selling of financial products that were not in the best interests of the retail clients9.
On culture and governance management should take proper steps, as often as possible, to: assess the entity’s culture and its governance; identify any problems with that culture and governance; deal with those problems; and determine whether the changes it has made have been effective10.
The regulator should supervise culture and governance by: building a supervisory programme focussed on building culture that will mitigate the risk of misconduct; use a risk-based approach to its reviews; assess the cultural drivers of misconduct in entities; and encourage entities to give proper attention to sound management of conduct risk and improving entity governance11.
10. South Africa’s Companies Act extends the directors duty to avoid conflicts of interest to prescribed officers, members of the board (even if those persons are not directors) and persons related to the director12. A transaction or contract will be void if directors, prescribed officers et al are found to be non-compliant. A director/prescribed officer will be personally liable for any loss, damage or costs sustained by the company due to a failure to disclose a personal financial interest13.
11. The UK’s Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 has comprehensive rules about the disclosure of remuneration of directors, including share options and the information must be freely available on the company’s website for ten years. This public disclosure facilitates scrutiny of directors as they move to other positions in other companies as their past “financial interests” is recorded.
12. Corporate reporting is a mandatory requirement for corporations to report on issues relevant to its business. As we saw in the above Philippines example, corporations are required to post on its website its Manual on Corporate Governance. This requirement means corporations have to think carefully about the adequacy of their governance policies because it must to submitted to the regulator and posted online, which in turn enables citizen enforcers or civil society organisations to scrutinise corporations. Similarly, regulations around corporate reporting proscribe the issues that are relevant for annual reporting, usually information relevant for shareholders and stakeholders to make informed decisions. Traditionally, relevant information has been understood in a narrow financial sense but corporate social responsibility (CSR) reporting is increasingly becoming the standard encouraged through regulation.
13. Social and environmental reporting is becoming mandatory in more jurisdictions aligning with the role the private sector plays in meeting UN SDGs. A 2015 OECD report on climate change disclosure in G20 countries provides a detailed outline of regulations requiring companies to report on their environmental impact, including scope of information to be reported, verification and enforcement mechanisms. Global auditing firm KPMG rates France’s CSR reporting highly across a number of categories.
14. The French Loi n° 2010-788 “Grenelle II Act” Section 225 requires companies to report on the “social and environmental consequences of their activity and their social commitments in favour of sustainable development”14. Section 225 of the Grenelle II Act amended Section 225-102-1 of the Commercial Code requiring:
Companies with over 500 employees are required to report on their “social and environmental consequences”, as well as their subsidiaries;
The amended Commercial Code requires such companies to report on over 40 topics derived from ISO 26000, Global Compact, OECD Guidelines for multinational corporations) into three themes: Social (employment, labour relations, health and safety); Environmental (pollution waste management, energy consumption); Commitments to sustainable development (social impacts, relations with stakeholders, human rights)15;
Each topic to be reported on has no specific indicators and so companies may select the most relevant for them, those deemed not relevant must be accompanied by an explanation as to why there is no information to be disclosed on the topic16;
The company’s report must be verified and certified by a third party accredited with either the French Committee of accreditation (COFRAC) or by the European coordination of accreditation bodies. The third party is required to certify the quality of the company’s reporting and provide a “reasoned opinion” on the accuracy of information provided and the explanation provided for non-disclosure of a topic. There is no legal sanction for non-compliance of this requirement.
The French peak business association, Mouvement des Entreprises de France (MEDEF, represents over 750,000 companies of all sizes with activities in France) developed a Guide to CSR Reporting (updated guide in english) offering practical guidance for its members.
15. The UK’s regulation and Japan’s are also rated well by the KPMG CSR report, but the UK’s regulation applies to fewer companies in comparison to France’s and Japan’s is a far more complex regime. The UK also requires UK quoted companies of 250 employees to disclose and explain each year the ratio of their CEO’s single figure remuneration to the median, lower quartile and upper quartile remuneration of the company’s UK employees17.
16. Companies that are committed to transparency pay their taxes in the jurisdictions in which they generate their profits. However, this general principle has become distorted in the global taxation environment and is a subject that the OECD BEPS is attempting to solve through its 15 Actions. France is a trailblazer in resolving the tax distortion of digital companies through its Loi n° 2019-759 du 24 juillet 2019 portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés (colloquially referred to as GAFA tax – Google Apple Facebook Amazon). The GAFA tax targets companies of large groups with a strong digital footprint at the global level (annual global amount of products from taxed services greater than 750 million euros) and at national level (annual amount of products linked to France from higher taxed services 25 million) are affected because, due to the competitive structure of the relevant markets, they are not in a situation comparable to that of smaller companies18.
17. OECD BEPS Action 13 requires all large multinational enterprises (MNE) to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions, for use in high level transfer pricing and BEPS risk assessments. The US is one of 90 jurisdictions that has implemented this minimum standard in Country-by-Country Reporting (REG-109822-15), which requires US companies that are the ultimate parent entity of a MNE with annual revenue from the preceding period of US$850 million or more, to file Form 8975. The US regulation is a complex example of CbC reporting, containing exemptions on national security for companies Defence or US Government contracts. New Zealand’s regulation on CbC reporting is less complex as it assessed only 20 companies headquartered in New Zealand are effected, and so the tax authorities contact directly those MNE’s and provide them with the templates and assistance to file CbC reports.
V. Compliance and Enforcement
18. India took a decisive step towards compliance and enforcement around beneficial ownership by creating a Task Force on Shell Companies, which was empowered to work with other agencies to compile a database of shell companies. Using the power under Section 248 of the Companies Act 2013 just over 2.2 million companies were struck off the company list for not filing Financial Statement or Annual Returns for a continuous period of two or more financial years. Around 3 million directors were disqualified under Section 167(1) of the Indian Companies Act for non-filing of Financial Statements or Annual Returns for a continuous period of three financial years. Furthermore, the Task Force worked with the banks and financial institutions to ensure that the ex-directors of the struck-off companies are restricted from operating the bank accounts of these these companies, other than for specific purposes. The Task Force also coordinated with relevant Indian law enforcement agencies to send to the Institute of Chartered Accountants the enforcement action taken against chartered accounts, so that the regulator of the profession could take action.
19. In its Companies (Amendment) Law 2020 the Cayman Islands strengthened the power (Section 10 Amendment by insertion of Section 279A) of the authority to request additional information about the beneficial ownership register within the period specified by the competent authority. Failure to comply (a default) incurs a penalty of five hundred dollars and where the default is assessed to be wilfully authorised or permitted, an additional penalty of one thousand dollars is incurred and a further penalty of one hundred dollars for every day of default. Private Trust Companies Regulations (2020 Revision) were also amended to strengthen the Authority’s power to refuse/cancel registration of a private trust company (Section 4B) where it has reasonable grounds to believe the trust or any of its principals are conducting business in breach of the AML Regulations or cease to be a fit an proper person [Section 4B (b)(ii)]. The broader power at Section 4B (b)(ii) of the Trust Regulations is a useful power in circumstances where revelations such as the Offshore Leaks or Panama Papers implicate Cayman registered companies, trusts and their registered directors. The Cayman Islands’ regulator of companies has a very good website for receiving email complaints about illegal businesses, and has flexibility in its licensing law to appoint “trade officers” with the rights, powers, privileges and immunities of a constable when performing the functions of trade officers to enforce compliance and enforcement.
21. The US has a sentencing incentive as part of an anti-corruption programme, which provides incentives as a criterion for an effective compliance and ethics programme that can establish eligibility for mitigated punishment in sentencing20.
D. What we missed
1. There exist several good examples of regulation around the world that concern strengthening corporate transparency regulations. Some jurisdictions avail themselves of these good examples and others do not for a variety of reasons such as lack of resources for enforcement, lack of political will or lack of capacity/knowledge. Evidently, countries whose share of global MNEs is large or who may not have signed up to international laws on climate change may be less proactive in pursuing transparency regulations in those areas. Before moving to regulatory options missed to enhance corporate transparency regulations, several howtoregulate articles already touch on important aspects of corporate transparency regulations:
Requiring companies to establish a whistle-blowing policy or the jurisdiction providing a whistle-blowing portal for those that wish to report bad corporate behaviour helps enforcement of transparency regulations, see article “Whistleblowers: protection, incentives and reporting channels as a safeguard to the public interest”.
To ensure compliance with the law authorities need empowerments but in this field, like in all others so far investigated by us, the powers enacted in regulation are not complete. The howtoregulate articlesEmpowerments (Part I): typology and Part II: the empowerment checklist provide guidance on how to ensure state authorities are empowered to enforce the law.
I. Legal action of competitors or civil society
2. Where state authorities have limited resources, it might be appropriate to give companies the option to sue their competitors or civil society NGOs for infringements of specific regulatory measures. For example companies could sue a competitor for not meeting a requirement of non-financial reporting, particularly where that company meets the standard but the competitor does not. It is in the interest of the “policing” company that his competitors comply to the same level. Evidently, this measure is only as effective as the court’s capacity to hear complaints, one possibility is to hear complaints via arbitration.
3. Where companies are headquartered in high-income countries but operate in low to medium-income countries legal standing could be given to civil society NGOs or local communities whose interests have been affected by that company. This could operate in a similar way to the relaxed legislative right to sue to a less stringent threshold found in the Australian Environment Protection and Biodiversity Conservation Act at Section 487.
II. Civil society monitoring
4. In Part A of this article a number of international civil society organisations are involved in promoting and strengthening corporate transparency regulations, this does not include national or local organisations that do the same thing at a smaller scale. In the area of public procurement several countries provide opportunities for direct involvement of relevant external stakeholders to increase transparency and integrity. Mexico uses a system of “social witnesses” to participate in all stages of public tendering above proscribed thresholds. A similar system could be used for monitoring non-financial reports.
III. Digital compliance tools
5. Not all countries would have the capacity, resources or bandwidth to use digital tools in its corporate transparency regulations compliance. However, where countries do, they should so invest, or certainly funding from international organisations working in corporate transparency regulations could help implement such tools in countries disproportionately affected by poor corporate behaviour. For example requiring non-financial reporting to be provided to the regulator could be filed digitally and that platform could provide insights and analysis that could inform compliance and enforcement action. Certainly, fraud detection could benefit from digitalisation noting that many transaction between jurisdictions are digital and so if regulators rely on financial institutions to inform them of suspicious transactions and there is a significant time delay, then the regulations will be less effective.
6. Much of the regulations on non-financial reporting did not set standards, which may make sense where a jurisdiction only recently adopted such regulations. In the case of France, UK and Japan, non-financial regulations have been around for ten years and so it may be worthwhile to analyse and map how those companies can help achieve national climate-related goals. For example a rational approach would be to map the total greenhouse gas emissions of the companies registered in the jurisdiction and calculate whether or not that cumulative reduction effort would meet the national targets, if not, the application of a standard would be required. The standard would become the fall-back tool for under performing companies. The howtoregulate article “Referring to standards: never think there is no further alternative” concerns how to refer to standards and avoid the downsides.
V. Asset disclosure
7. Asset disclosure of members of parliament, members of government and in some jurisdictions of senior public servants is a key component of transparency and trust in democratic institutions. Such members of democratic institutions may previously have been business leaders and regulations exist about such disclosures on entering politics, including divesting of assets on commencement of public office. This is why regulations exist for the assets of Political Exposed Persons and any companies they own. Such broad asset disclosures in the public sector could be beneficial in the private sector. If all directors disclosed their assets on commencement in a company, it could go a long way to help manage conflicts of interests because it substantially increases transparency and control. For example the deterrence effects of public disclosure of directors assets may also be used to avoid embezzlement of illicit enrichment by private sector representatives. A number of initiatives towards more transparency in the income structure of senior private sector actors have been established, some of which are recorded at Part C in the disclosure of compensation to individual board members and executives.
8. Asset disclosure can also help in many other aspects like:
vested interests of administrative decision makers (ordinary officials);
monitoring of lobbying (certain lobbying behaviour could be better explained and countered if the asset structure was clear), see also howtoregulate article “Countering unfair lobbying”;
transfer of profits for tax evasion or “optimisation” coming close to tax fraud;
shifting of non-compliant products to companies of the same family to market them again, under the same or another name, in the same or another jurisdiction.
VI. International cooperation
9. In order to be able to investigate internationally, an authority should be explicitly empowered under national law to investigate abroad and to share information with other jurisdictions so that the other jurisdiction can investigate. However, in jurisdictions where such specific empowerments are not needed, it is advisable to provide an empowerment to investigate at home, on behalf of foreign jurisdiction, because the cooperation of other jurisdictions may depend on reciprocity. We have not found any such empowerments in the corporate transparency regulations screened by us, but legislation related to consumer protection does provide such an empowerment. For example Australia’s Competition and Consumer Act 2010 empowers its neighbour’s authority, New Zealand, to investigate cases on their behalf (Sections 155A and 155B). The Australian Consumer Act also enables confidential information to be disclosed to authorities of other jurisdictions where it concerns “consumer goods, or product related services, associated with death or serious injury or illness”21.
This article was written by Valerie Thomas, on behalf of the Regulatory Institute, Brussels and Lisbon.
Useful links about corporate transparency regulations
The B20 Collective Hub draws together various corporate transparency regulations guides
The Humboldt-Viadrina School of Governance “Motivating Business to Counter Corruption— Using sanctions and incentives to change business behavior”
Declaration on Propriety, Integrity and Transparency in the Conduct of International Business and Finance (the PIT Declaration)
French Study Centre for Corporate Social Responsibility (ORSE) is a good source for comparing national CSR reporting frameworks around the world.
Transparency International is an international NGO that works with governments, business and citizens to the the abuse of power, bribery and secret deals. Its flagship initiative, the Corruption Perceptions Index is a well-regarded index on the perceived levels of a country’s public sector. Its report on “Fixing the Global Standards on Company Ownership” highlights the problem of the ease with which a bad actor can set up and manage a legal entity without having to provide information about its beneficial owner.
UN Global Compact, “A Guide for Anti-Corruption Risk Assessment”, 2013.
“Fighting Corruption through Collective Action—A guide for business”, Version 1.0, 2008.
1 UN Office on Drugs and Crime, An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide, 2013,https://www.unodc.org/documents/corruption/Publications/2013/13-84498_Ebook.pdf.
2 World Bank, “Domestic Resource Mobilisation and Illicit Financial Flows: Board Update”, February 2018, p.17, para.37,http://documents.worldbank.org/curated/en/877291492623853466/pdf/IFFs-DRM-Board-Note-Master-vFINAL-04102017.pdf.
6 Recommendation 8.3 of the Philippines Code of Corporate Governance for Public Companies and Registered Issues, Securities and Exchange Commission Memorandum Circular No. 24 Series of 2019, 28 December 2019, p. 27 Code (MC No. 24 s.2019).
8 Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, Final Report (2019) vol 1, p. 138 https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf.
12 Section 75 of the South African Companies Act as found in No. 3 of 2011: Companies Amendment Act, 2011https://www.gov.za/sites/default/files/gcis_document/201409/34243gon370.pdf.
Deloitte South Africa, The Companies Act Implications for directors and prescribed officers, June 2013, p.6https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/ZA_DirectorsandPrescribedOfficers_16042014.pdf.
13 Deloitte South Africa, The Companies Act Implications for directors and prescribed officers, June 2013, p.6https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/ZA_DirectorsandPrescribedOfficers_16042014.pdf.
14 Kaya, I., “The Mandatory Social and Environmental Reporting: Evidence from France”, Procedia – Social and Behavioral Sciences,229 (2016), p. 209,https://www.researchgate.net/publication/308002995_The_Mandatory_Social_and_Environmental_Reporting_Evidence_from_France.
17 Part 3, Section 19 of the Companies (Miscellaneous Reporting) Regulations 2018 of the UKhttps://www.legislation.gov.uk/uksi/2018/860/contents/made?view=plain.
18 French National Assembly, Projet de Loi No. 1737, 6 March 2019, http://www.assemblee-nationale.fr/dyn/15/textes/l15b1737_projet-loi.
19 Treasury of Australia, Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime Proposal Paper 22 January 2020 p. 9 and 13, https://treasury.gov.au/sites/default/files/2020-01/c2020-24974.pdf.
20 United States Sentencing Commission, “US Federal Sentencing Guidelines Manual and Supplement”, 2010, Chapter 8—Sentencing of organizations, §8B 2.1, Effective Compliance and Ethics Program (6)) https://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2010/manual-pdf/Chapter_8.pdf.
21 Australian Competition and Consumer Act 2010 (Cth) Schedule 2-The Australian Consumer Law, Chapter 3, Part 3.3-Safety of consumer goods and product related services, Division 5, ss. 131-132A,https://www.legislation.gov.au/Details/C2017C00369/Html/Volume_1#_Toc498505795.