Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004.  He is now chairman of Flight & Partners Recovery Fund.

Last month, I wrote about the excesses of PEP Anti-Money Laundering (AML) regulatory requirements.  Now I am shocked to find an over-the-top and self-defeating piece of legislation hidden in the Small Business Bill, which is currently going through Parliament.

The poorly drafted Part 7 and part of Part 8, together with Schedule 3, introduce a requirement on companies to keep a register of individuals’ shareholdings of 25 per cent or more, with significant control (PSCs), available for public inspection.  The objective here is AML territory – and legislation should thus be under the direction of the Treasury not the BIS.

First of all, this leglisation represents a breach of privacy, with little or no consultation, to no end.  The important point is that details of all beneficial ownership of businesses should be made available to the tax authorities or the police on request.  The BIS Impact Assessment estimates that there will be no financial benefit for the Treasury from public registers, given “little quantified data about the benefits resulting from this policy proposal”.

A proposed exemption for foreign companies renders the Bill ineffective and avoidable.  For those sensitive to privacy issues and the administrative burden imposed by the Bill, it will lead to a migration of UK investment through UK companies to investment by way of UK branches of foreign companies.  But the proposals will be bad for investment and business.

China and Middle Eastern countries, in particular, like to be discreet about their overseas investments. Publication of ownership would be anathema to them from both a business and cultural perspective.  The proposals will be very costly for business.  They will affect 2.4 million companies with costs to business of £1.1 billion and, potentially, much more if verification were, in due course, required.

Public registers are unprecedented, and not required by the Financial Action Task Force (FATF).  They are, moreover, likely to be counterproductive in securing information for law enforcement purposes, as they may degrade reporting candour.  To meet FATF objectives, effective means of data verification are required by the FATF, but are absent from the Bill.  The legislation will thus not comply with FATF standards, since it will rely on sporadic error spotting by the public.  The irony here is that the justification for these further costly regulation measures is to meet FATF requirements – which the legislation does not do.

Transparency, “playing to the public gallery”, has been urged by NGOs. But, ironically, they are under no such comparable requirements, and yet have, in one or two cases, had some exposure to terrorist funding.

Yet again, we have proposals which will be a costly hassle for the overwhelming majority of innocent, law-abiding people, but easily avoidable by the guilty.  It is also unlikely to produce benefits for the business community, which is frequently cited as justifying “transparency” data publications.  Here, again, the BIS Impact Assessment found that only 10 per cent of respondents indicated that the proposed reform would ensure that they know with whom they are doing business.

Many of the companies affected will be small companies, in which the lead entrepreneur will likely own more than 25 per cent of the shares.  How many such will understand that they need to keep such a publicly available register, disclosing their shareholdings – even though these will often be registered with, and publicly available at, Companies House.  Yet failure to comply will be a criminal offence.

The relevant G8 Agreement concluded that companies should know who are their shareholders – so it is the “companies” who should have this information, and not commercial competitors, direct marketeers, spammers, media folk looking for a story and others who could misuse the private information available under these provisions.

A recent G20 communique was also not accompanied by a call for share registers to be made public.  There has been a wholesale disregard of the material impact the provisions will have on privacy.  People can buy assets privately unless the asset is corporate, but they may not want other people to know what they own; they may have cultural, security or religious-based concerns about people knowing that they own part of a company.  The Government has offered little justification or consultation in destroying the right of privacy.

Surely the sensible approach, already followed in some other jurisdictions, is for beneficial ownership registers to be kept and to be accessible for matters of national security, personal safety issues and tax investigations.  Bona fides inquiries could then be made speedily, but the registers would still protect privacy.  As the proposals stand, they do not meet their objectives since, for either bona fides or improper reasons, they can be avoided by trading through UK branches of foreign companies.

What on earth is a Conservative – albeit Coalition – Government doing, introducing such half-baked proposals?

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