NOTE NUMBER 339 80611 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY JUNE 2013 Ownership Anonymity Leora Klapper, Karim O. What Is the Effect on Company Formation? Belayachi, and Ana Priscilla Ortiz I s it p ossib le to r e g is t e r a lim it e d lia b ilit y c o m p a ny a no ny mo u s l y ? Leora Klapper (lklapper@ Accord ing to d at a f r o m t he 2 0 1 2 Wo r ld B a nk Ent r e p r e ne ur s h i p worldbank.org) is a lead Datab ase, a maj o r it y o f t he e c o no m ie s s ur v e y e d r e q uir e t he n a m e o f economist in the World the p rincip al owne r o f a lim it e d lia b ilit y c o m p a ny a t t he t im e o f Bank’s Development Research Group. Karim O. Belayachi re gistration. But a la r g e s ha r e o f t he e c o no m ie s d o no t r e q u i r e (kbelayachi@worldbank.org) f urther p roof of t he id e nt it y o f t he p e r s o n lis t e d a s t he p r in c i p a l is a private sector development specialist in the owne r. Analysis o f t he d a t a f ind s a p o s it iv e r e la t io ns hip b e tw e e n World Bank Group’s greate r ownership a no ny m it y a nd ne w f ir m r e g is t r a t io ns . Investment Climate Department. Ana Priscilla The L’Oréal heiress Liliane Bettencourt, the The main reason for wishing to shield the Ortiz (portiz@batalla.cr) is wealthiest woman in France, is involved in one identity of those who own or control a company an associate attorney in the of the country’s biggest tax evasion scandals. It from company registries, tax and other authori- business and commercial law practice of Batalla Abogados, stems from 2010 allegations that the 90-year-old ties, and the public at large is privacy. Ownership in Costa Rica. heiress had planned to hide money in Swiss bank anonymity ensures privacy when developing any accounts through an anonymous shell company kind of business transaction, such as protecting More information on the (a corporate structure that holds assets but has a trademark secret. But ownership anonymity Entrepreneurship Database, no business activities).1 also reduces corporate transparency and can be as well as complete data, Corporate ownership anonymity allows a misused as a way for company owners to evade tax can be found at http:// company to hide or disguise the identity of its liabilities. Indeed, a recent World Bank report THE WORLD BANK GROUP www.doingbusiness.org/ ultimate beneficial owner or its shareholders. that investigated 150 cases of grand corruption entrepreneurship. In some jurisdictions those registering a limited between 1998 and 2010 found that the vast major- liability company (a legal form of corporation ity involved the use of shell companies or other that protects its shareholders from personal mechanisms (such as nominee shareholders) to bankruptcy by protecting their personal assets) shield the identities of the owners and commit are allowed to preserve the anonymity of its own- fraud, corruption, and money laundering (van ers. Nominee directors, nominee shareholders, der Does de Willebois and others 2011). and bearer shares are all instruments that make This Note looks at the identity requirements it more difficult for competent authorities to to establish a corporation in 92 economies determine who, in the final analysis, owns and with available data: 28 high-income economies controls a company. and 64 developing (low- and middle-income) O ATWTN AR RE CSTH INIPG AFN DO HY IN M IM OW TU DA YC HW H O TE S I S I NTVHEES T EMFEFNE TC T C LOI N M A CT O EM M PAN TT FO YER ? RMATION? economies. The data are from the 2012 World Where is ownership anonymity allowed? Bank Entrepreneurship Database. Building on The information on company registration earlier editions of the data, the 2012 database requirements reported by business registries incorporates improvements in methodology and shows that the vast majority of economies require includes data from additional low-income econo- the name of the principal owner when a limited mies. It includes data from 130 economies in liability company is being registered (figure 1): all, with 23 economies participating for the first among 92 economies surveyed, 82 require the time. In almost all economies data are collected name of the owner, while 10 do not. directly from business registrars. The survey also requested information on 2 The main indicator of interest is entry den- requirements for legal proof of identity—that is, sity, defined as the number of newly registered whether the principal owner of a limited liability companies per 1,000 working-age people (ages company that is being registered is required to 15–64) per year. As in the World Bank’s annual show legal documentation verifying his or her Doing Business report, the units of measurement identity. Of the 82 economies in the sample that are private, formal sector companies with lim- require the name of the primary shareholder in ited liability (the data thus exclude informal order to register a limited liability company, 15 firms and firms without limited liability). In report that they do not require legal verification addition to measurements of entry density, the of this name. This opens the door to potential database includes information on the follow- fraud, by making it possible for people registering ing areas: a limited liability company to provide a fictitious ■ Can a business register in locations other than name for the principal owner. the main business registry? Can a business reg- ister remotely (such as online, by phone, or Differences in perspective through kiosks in government locations)? Is The data show that ownership anonymity is more there a follow-up system to monitor the reg- commonly allowed in high-income economies istration process? than in developing ones. Some OECD high- ■ Are data available on newly registered corpora- income economies, such as Australia, Canada, tions as well as total registered corporations? and Denmark, do not require any kind of legal Is information on legal requirements, regis- documentation to verify the identity of the princi- tration procedures, and fees available to the pal owner. By contrast, many economies in Latin public? America and the Caribbean and in the Middle ■ Is it possible to register a limited liability com- East and North Africa are much stricter and do pany anonymously? require legal proof of the identity of the princi- pal owner. Several OECD economies that do require legal High-income and developing economies by identity requirements for registering verification of the principal owner’s identity con- Figure a limited liability company sider this a tool to prevent fraud. A spokesman 1 Name requirement only High-income economies Identity verification requirements No requirements Developing economies from the Kamer van Koophandel Nederland (the Netherlands Chamber of Commerce) reported that “to prevent any abuse of the register the law says that we need to be convinced that the person is who they 8% 18% 21% 14% say they are. We demand legal identity documents to convince ourselves of someone’s identity.”2 Other economies consider requirements for legal documentation of the principal owner’s 61% 78% identity an unnecessary burden for new entre- preneurs or have eliminated such requirements so as to allow online registration of firms. For Note: Figure includes 28 high-income economies and 64 developing ones, including offshore jurisdictions. example, the director general of Corporations Source: Entrepreneurship Database, 2012 edition. Canada stated that “for several years now, we have offered streamlined electronic filing processes Offshore and other economies by identity requirements for registering a for incorporation and certain other types of trans- Figure limited liability company actions. The objective is to minimize unneces- sary regulatory burdens, helping to reduce costs for business clients. Online processes have also allowed us to realize efficiencies in our internal 2 Name requirement only Offshore economies Identity verification requirements No requirements Other economies operations.”3 11% 13% Though many countries consider identity veri- 13% fication an unnecessary burden, a need remains to balance ease of incorporation with the integrity 60% 27% of the registration system. 76% The case of offshore financial centers Offshore economies are commonly known for having fewer restrictions when it comes to com- Note: Figure includes 17 offshore economies and 75 other economies. Source: Entrepreneurship Database, 2012 edition. pany registration.4 Results show that 27 percent of offshore economies in the sample have both name and identity verification requirements, Data from 62 economies (excluding offshore while 60 percent require only a name and 13 economies)5 show a correlation between higher percent require neither a name nor proof of entry density and lack of requirements for verifi- identity (figure 2). Compared with other econo- cation of identity (figure 3). The average entry mies in the sample, offshore economies are less density for the economies that have no require- likely to require verification of the identity of ments for verification of identity is significantly the principal owner named in the registration higher than in the economies that do have such of a company. An important caveat, however, is requirements—indeed, it is more than three and that service providers that set up companies and a half times as high. trusts in offshore economies are subject to much Consistent findings emerge from a compari- more stringent requirements for performing due son of entry density in the 16 OECD economies diligence reviews of company owners than those in the sample that have name requirements, that do so in other economies (Findley, Nielson, 2 of which have no requirements for identity veri- and Sharman 2012; see also Sharman 2010). fication (see figure 3). Results also show that the Other ways to identify owners Figure Entry density by identity requirements for registering a limited liability company In some countries anti-money-laundering laws and other banking regulations allow regulators to trace the identity of the principal owner of an anonymous company. For example, under 3 Name requirement only Identity verification requirements Newly registered firms per 1,000 working-age adults 12 Bangladesh’s Money Laundering Prevention Act, 10 article 8, banking activities such as opening a new checking or savings account require iden- 8 tification documents for the beneficial owners 6 of the firm opening the account (Bangladesh 4 Bank 2012). Firms that choose not to use formal financial services may preserve the anonymity of 2 their owners, however. 0 All economies OECD economies What is the relationship with firm registrations? Note: Figure excludes offshore jurisdictions. Data cover 16 OECD economies and 46 non-OECD economies. Entry density is the average for the economies in each category. Besides offshore jurisdictions, figure also excludes 4 OECD and 4 non-OECD economies that have no What is the relationship between identity verifi- requirements and 1 OECD and 7 non-OECD economies for which no entry density data are available. Source: Entrepreneurship Database, 2012 edition. cation requirements and new firm registrations? OWNERSHIP ANONYMITY WHAT IS THE EFFECT ON COMPANY FORMATION? average entry density in OECD economies with- the current list of these economies, see “Offshore out identity verification requirements is more Financial Centers (OFCs): IMF Staff Assessments,” than three times as high as in those with such IMF, June 16, 2011, http://www.imf.org/external/ requirements. NP/ofca/OFCA.aspx. The analysis cannot ascertain whether the 5. Offshore economies are excluded from this analysis higher registration rates reflect greater business because they often require entrepreneurs to register viewpoint activity, however, or whether economies that have a business to take advantage of tax exemptions. For lower registration requirements also attract more additional information, see World Bank (2010). is an open forum to shell company registrations. encourage dissemination of References public policy innovations Conclusion Bangladesh Bank (Central Bank of Bangladesh). 2012. for private sector–led and Data from the 2012 Entrepreneurship Database “Guidance Notes on Prevention of Money Launder- market-based solutions for show that a majority of the economies surveyed development. The views ing and Terrorist Financing.” http://www.ban require the name of the principal owner of a published are those of the gladesh-bank.org/aboutus/regulationguideline/ limited liability company at the time of registra- authors and should not be aml/16sep2012guideline.pdf. tion. But a large share of the economies do not attributed to the World Findley, Michael, Daniel Nielson, and J. C. Sharman. require further proof of the identity of the person Bank or any other affiliated 2012. “Global Shell Games: Testing Money Laun- listed as the principal owner of the company. organizations. Nor do any derers’ and Terrorist Financiers’ Access to Shell Analysis of the data finds a positive relationship of the conclusions represent Companies.” Political Economy and Development between greater ownership anonymity and new official policy of the World Lab Working Paper, Brigham Young University, firm registrations. Bank or of its Executive Provo, UT. Directors or the countries Sharman, J. C. 2010. “Shopping for Anonymous Shell they represent. Companies: An Audit Study of Anonymity and Crime in the International Financial System.” Jour- Notes To order additional copies nal of Economic Perspectives 24: 127–40. The authors are grateful to the Ewing Marion Kauffman contact Naoki Ogiwara, van der Does de Willebois, Emile, Emily M. Halter, Foundation for financial support. managing editor, Robert A. Harrison, Ji Won Park, and J. C. Sharman. 1. BBC News, “L’Oréal Heiress Bettencourt Sells Sey- Room F 4P-256B, 2011. The Puppet Masters: How the Corrupt Use Legal The World Bank, chelles Island,” August 1, 2012, http://www.bbc Structures to Hide Stolen Assets and What to Do about It. 1818 H Street, NW, .co.uk/news/world-europe-19084125. Washington, DC: World Bank. Washington, DC 20433. 2. Kamer van Koophandel Nederland (the Netherlands World Bank. 2010. Doing Business 2011: Making a Differ- Chamber of Commerce), Bureau Handelsregister, ence for Entrepreneurs. Washington, DC: World Bank Telephone: email message to the World Bank, September 6, Group. 001 202 473 1871 2012. Email: 3. Marcie Girouard, Corporations Canada, email mes- nogiwara@worldbank.org sage to the World Bank, September 14, 2012. 4. Economies categorized by the International Mon- Produced by Carol Siegel etary Fund (IMF) as offshore financial centers. For Printed on recycled paper This Note is available online: http://www.worldbank.org/fpd/publicpolicyjournal