As an investor, I do my homework before determining that a certain investment is a good
decision. From risk assessments and market volatility to potential government or
regulatory hurdles, it's common sense to understand the full picture before committing
millions of dollars to a venture.
But there's one thing that is nearly impossible to verify, no matter where I'm doing
business: the real, ultimate owners of the majority of the companies that I do business with.
And that uncertainty can have a huge impact, not only on the bottom line of the deal, but on
the reputation of those involved.
Just take the case of Cobalt International Energy, a Texas-based company that went into a
joint venture with two Angolan companies in 2010. Cobalt may have vetted the companies,
looked at the potential returns, and even weighed the internal politics of Angola. It claims
to have even done extensive due diligence on its corporate partners; however, one of them
was later revealed to be secretly owned by three senior, powerful government officials--a
clear corruption risk that attracted the attention of the Department of Justice who has been
investigating the company for several years. The Securities and Exchange Commission
dropped an investigation of the company over the deal in 2015.
Cobalt has denied any misconduct or knowledge of the secret involvement of the Angolan
officials in the oil deal. Regardless, Cobalt may well have had a hard time verifying its
partners' true owners because there just isn't enough information being collected and
made public on companies' ownership across the world.
In almost every global jurisdiction, investors do not have access to information on the
beneficial owners of companies, in other words, the real people benefitting from and
controlling a company. That's because nearly all countries do not require that the beneficial
ownership information for companies created within their borders be made public. And
most countries, including the U.S., don't even collect the information to begin with.
When Cobalt revealed the news in 2014 that it was under investigation in the U.S. for
alleged violations of the Foreign Corrupt Practices Act (FCPA) and reported its quarterly
losses to investors, its share price dropped by 11%.
This is just one example amid a variety of cases where the lack of public beneficial
ownership information has caused serious financial and non-financial harm to investors
and businesses. 'Chancing It: How secret company ownership is a risk to investors', a recent
report from Global Witness and Global Financial Integrity, highlights the risks that secret
company owners pose to investors, and demonstrates why responsible investing includes
knowing who you are actually doing business with.
Luckily, there is a solution to this problem: public registers of beneficial ownership
information. With registers containing this information on hand, it would be far easier for
investors and regulators to know the full picture by using these registers as a starting point
for their own due diligence.
The consensus seems to be growing for this type of transparency, too.
A recent Ernst and Young survey found that 91% of Senior Executives said that it is
essential to know the beneficial ownership identities of the companies they are doing
business with. Leading business people such as Mo Ibrahim, Paul Polman, Richard Branson,
and Arianna Huffington, companies such as BHP Billiton and business associations such as
the B20 and The Clearing House have backed measures to increase beneficial ownership
transparency, as well.
But many of the largest financial jurisdictions in the world have the longest way to go.
The U.S. remains the easiest place in the world to create a company, while hiding the fact
that you own it, according to a 2014 academic study. In most states in the U.S. you can
create a company with less information than you need to obtain a library card. But
bipartisan legislation currently in Congress would help make the true owners of American
companies, more transparent making it much harder for fraudsters to take advantage of
the system.
At the International Anti-Corruption Conference this week in Panama, heads of state, civil
society, the private sector and more will convene to tackle the increasingly sophisticated
challenges posed by corruption - and the many vehicles, like anonymous companies, which
enable it.
We cannot achieve the larger goals on the global agenda - like the provision of quality social
services, environmental sustainability and equitable economic development - if we do not
address corruption. Developing countries suffer its worst effects, with 7.8 trillion USD
estimated to have been siphoned through illicit capital flows over the past decade,
depriving citizens of much needed investments in health, education, infrastructure and
public services.
Achieving those goals, and protecting business interests, will only be helped by having
access to information on who owns and controls companies to allow us to decide who to
put our trust (and invest our money) in.