GLOBAL INDICATORS Indicators Group Research Note GROUP World Bank Research and Development Center in Chile No. 2/October 2019 The involvement of third-party professionals in business registration and property transfer Cyriane Marie Coste, Marie Lily Delion, Adrián F. González, Frédéric Meunier, Nathalie Reyes Benjumea, Yuriy Valentinovich Avramov. Complex business regulations and bureaucratic processes tend to be In some economies, the law requires the use of third-party agents. In the obstacles for new entrepreneurs. To navigate these processes as smoothly Bahamas, for example, it is a legal requirement that a lawyer prepare and as possible, entrepreneurs might solicit the services of third-party notarize the company documents of all new business start-ups. Fifty-one professionals. Whether in business incorporation or land transactions, economies require by law that a third-party agent participates in the third-party agents provide professional assistance and ensure that certain process of starting a business. In 90 economies, including Chile and processes comply with the regulations in place. Depending on the Germany, the services of a notary are required to complete property economy and the specific regulatory process, these professionals can be transactions. Unless a notary witnesses the deed of sale, it cannot be lawyers, notaries or accountants, among others. registered in the land registry and is not, therefore, opposable to a third party. In other economies, the use of third-party professionals occurs in practice because, without their professional guidance, it would be overly This policy note explores the role of third-party professionals in the areas cumbersome for new entrepreneurs to comply with regulatory of starting a business and registering property in 168 economies1 and requirements. While it is optional to use an intermediary for the analyzes some of the differences in terms of time and costs for services incorporation of a new limited liability company in 117 economies, provided by third-party professionals, as well as trends and reforms over entrepreneurs tend to use a notary or a lawyer in only 31 of those time. The Doing Business indicator sets for these areas are used to economies. Likewise, in the area of real estate transactions, lawyer benchmark the steps, cost and time to incorporate a business and to participation is not legally required in 78 economies but used as a common transfer a property. practice in 37 of those economies, including Colombia and the Democratic Republic of Congo, to complete the process of transferring property. What is the role of third-party agents in business registration and property transfer? Third-party involvement is more common in real estate transactions than business incorporation processes. In 2017/18, 80% (134) of the 168 In the area of business start-up, third-party professionals typically play a economies studied in this policy note utilized third-party professionals for role in the preparation of the memorandum and articles of association, property transactions and 47% (79 economies) did so for the the verification of signatures, the request of the company’s tax incorporation of limited liability companies as measured by Doing identification number or the legalization of tax accounting books. In the Business. The two regions with the highest share of third-party area of property transfer, third-party agents are involved in verifying that involvement in real estate transactions are Latin America and the the seller is the rightful owner and has the legal right to sell the property, Caribbean and Sub-Saharan Africa (93% of economies in both regions). validating the identity of the parties and determining if the property is free These shares are slightly lower for business incorporation—76% and 47%, of encumbrances and liens. Third-party involvement is greater in respectively (figure 1). The regions with the lowest involvement of economies where real estate transactions are not transparent2—their third-party professionals are East Asia and the Pacific for business involvement can provide legal security to the parties involved and prevent incorporation and South Asia for real estate transactions. fraudulent transactions where the perception of corruption is high. Figure 1. Latin America and the Caribbean is the region with the highest share of economies with third-party involvement in business incorporation and property transfer Share of economies with third-party involvement, per region (%) 100 90 80 70 60 50 40 30 20 10 0 Latin America Sub-Saharan Europe & Middle East & East Asia & OECD high South Asia & Caribbean Africa Central Asia North Africa Pacific income Property transfer Business incorporation Source: Doing Business database. Note: The sample for this policy note is 168 economies. Affiliation: Doing Business, World Bank Group. Acknowledgement: We received useful comments from Karim Ouled Belayachi and Madalina G. Papahagi and helpful edits from Bronwen Brown. The Research and Development Center in Chile in provided financial support for this note. Objective and disclaimer: Indicator Group Research Notes present short analytical studies from the different teams of the Indicators Group including Doing Business; Women, Business and the Law; and Doing Business in Agriculture. The notes carry the name of the author and should be cited accordingly. The findings, interpretations and conclusions are entirely those of the author. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Research and Development Center in Chile The involvement of third-party professionals in business registration and property transfer Figure 2. The cost of third-party agents is highest in Latin America and the Caribbean for business registration, and in Sub-Saharan Africa for property transfer Business incorporation Property transfer Average cost of third-party involvement (% of income per capita) Average cost of third-party involvement (% of income per capita) Latin America & Caribbean Sub-Saharan Africa Middle East & North Africa Latin America & Caribbean OECD high income South Asia Sub-Saharan Africa OECD high income South Asia Middle East & North Africa East Asia & Pacific Europe & Central Asia Europe & Central Asia East Asia & Pacific 0 5 10 15 20 25 0 20 40 60 80 100 120 Source: Doing Business database. Note: The sample includes 79 economies for starting a business and 134 economies for registering property. What is the cost of this service? cost for business registration (figure 2). On average, the cost of third-party involvement represents 22% of income per capita, while in Europe and In economies where third-party agents are involved, the cost of Central Asia it represents less than 1%. Moreover, when it comes to transactions tends to be higher. Indeed, business incorporation is 2.5 property registration, on average the cost in Latin America and the times more costly in economies with third-party involvement than in Caribbean represents 64% of income per capita. However, the highest cost those without (12% versus 30% of income per capita, respectively) and, in of third-party agent involvement in property transfers is in Sub-Saharan economies where they are present, third-party agents represent 46% on Africa, representing on average 116% of income per capita. average of the total cost to start a business. In Chile, fees paid to the notary represent 18% of the total cost to start a business; in Peru, the Unlike lawyers, notaries’ fees are typically regulated and fixed by law, notary cost represents 42% of the total cost to start a business. which can lead to higher costs. When set by law, notaries’ fees can either be fixed and independent of the value of the transaction or variable and Across regions, the overall cost to start a business is lower in economies dependent on the value of the transaction. When the fees charged are where there is no third-party involvement. The most significant difference determined by the value of the transaction, they can be either progressive in cost is in Sub-Saharan Africa where the cost is 36% higher on average or regressive. Mexico has a cumulative and regressive fee schedule for when a third party is involved, followed by Latin America and the property transactions. In some other economies, fees are not regulated Caribbean where the cost increases by 23% of income per capita. and are negotiated—for example, depending on the number of documents or the hours that the third-party agent spends reviewing For property transactions, third-party agents represent on average 25% of them. In Argentina, entrepreneurs pay 440 pesos (about US$12) for each the total cost to transfer a property. In Chile, for example, where both signature that must be certified by a notary. lawyers and notaries are involved in the registration of property, 84% of the total cost goes to third-party agents; in Colombia, it is only 22%. What is the time needed for this service? Among all economies with third-party agent involvement, Latin America The time spent by third-party agents on business incorporation is longest and the Caribbean is the region where this involvement has the highest on average in Latin America and the Caribbean (figure 3). It takes almost Figure 3. Third-party involvement is most time-consuming in Latin America and the Caribbean Business incorporation Property transfer Average duration of third-party involvement (in days) Average duration of third-party involvement (in days) Latin America & Caribbean Latin America & Caribbean Sub-Saharan Africa East Asia & Pacific Middle East & North Africa Sub-Saharan Africa South Asia South Asia OECD high income OECD high income East Asia & Pacific Middle East & North Africa Europe & Central Asia Europe & Central Asia 0 1 2 3 4 5 6 0 1 2 3 4 5 6 Source: Doing Business database. Note: The sample includes 79 economies for starting a business and 134 economies for registering property. 2 Indicators Group Research Note No. 2 Figure 4. Starting a business tends to be faster without third-party agents, but time to transfer property without third-party professionals varies by income group Business incorporation Property transfer Average total time (in days) Average total time (in days) 30 120 25 100 20 80 15 60 10 40 5 20 0 0 High income Middle income Low income High income Middle income Low income Economies with third party agent Economies without third party agent Economies with third party agent Economies without third party agent Source: Doing Business database. Note: The sample includes 168 economies. four days for a lawyer or notary to prepare all the required documents to In low-income economies, while transferring property, individuals typically register a new business in Latin America and the Caribbean—nearly a full do not disclose sensitive private information such as financial or business day longer than in Sub-Saharan Africa, which has the second-longest records. Instead, they tend to rely on professional agents, such as lawyers duration globally. In Haiti, it takes 17 days on average for a third-party and notaries, to review the records and keep the information confidential. professional to register a business—10 days for the lawyer to prepare the In this regard, third-party agents play a role in building trust between company articles and memorandum of association, and seven days for the individuals (buyers and sellers) and verifying, for example, the identity of notary to notarize the company deeds and articles of association. In the parties involved in the transaction, the ownership of the seller and his Tanzania, by contrast, notaries take only one day to notarize the right to sell the property, and conducting the due diligence to determine if declaration of compliance. the property is free of encumbrances and liens. This approach limits the exposure and risks for individuals but also adds more steps to the overall Latin America and the Caribbean also has the highest average time spent process and increases the cost of the transaction. In high-income by third parties on property transfers, with a lawyer or notary taking more economies, the availability of reliable online services and different forms than five days on average to perform their respective tasks. These of ledger technologies create a secure and efficient environment for procedures take almost 60% longer to complete in Latin America and the property transactions, thereby reducing the need for third-party Caribbean than in Sub-Saharan Africa (three days). In Argentina and involvement. Uruguay—two economies with the longest time to complete property transfers in Latin America and the Caribbean—it takes 20 days on average What has changed over the past 12 years? for notaries to comply with all requirements. In the area of starting a business, the participation of third-party The time to start a business tends to be lower in economies where there professionals changed significantly between 2006 and 2018. Several is no third-party involvement, regardless of income group. In the economies made third-party involvement optional for business high-income group, the time to start a business is eight days shorter in incorporation and property transactions. The number of economies with economies without third-party agents than those with them (figure 4). third-party involvement in the process of starting a business declined by The highest difference in time, however, is in low-income economies 47—from 126 economies (75% of the total) in 2006 to 79 economies where the time to start a business increases by 12 days on average when (47%) in 2018. Over the same period, the average time to start a business a third-party is involved. The role of third-party agents in business in those 47 economies dropped from nearly 47 days to just 12 days. The incorporation appears to be waning in response to the increasing use of most notable changes occurred in Europe and Central Asia, where the standardized company documents and online services. share of economies with third-party agents declined from 90% in 2006 to 40% in 2018, and in Sub-Saharan Africa where this figure fell from 91% to The time to register a property with third-party involvement varies by 49% (figure 5). income group. Within the high-income group, the process of transferring property is faster where third-party professionals are not involved. In the This dramatic decline was facilitated by the introduction of standardized middle-income group, the difference is marginal. However, in the forms for business incorporation and the creation of one-stop shops low-income group, the process of transferring property becomes faster (whether virtual or physical) for starting a business. By contrast, little when there is a third-party professional involved. In the high-income change took place in Latin America and the Caribbean between 2006 in group, it takes less time (11 days on average) to transfer property in 2018 in this regard. Only four economies—Colombia, the Dominican economies without a third-party agent than with one (38 days). Republic, Jamaica and Trinidad and Tobago—reformed to make it possible Conversely, in the low-income group, it takes significantly more time (100 to start a limited liability company without the involvement of a notary or days) to transfer property in economies without a third-party agent than lawyer. in economies with a third-party agent (58 days). A lack of transparency and the high complexity of property transfer processes in low-income Change has been slower in the area of property registration. Economies economies are possible explanations for this disparity. began by streamlining processes and introducing standardized deeds, and 3 The involvement of third-party professionals in business registration and property transfer Figure 5. Economies in Europe and Central Asia and Sub-Saharan Africa have reduced third-party participation in business start-up the most Share of economies with third-party involvement in starting a business (%) 2006 2018 100 90 80 70 60 50 40 30 20 10 0 Sub-Saharan Europe & Latin America OECD high South Asia Middle East & East Asia & Africa Central Asia & Caribbean income North Africa Pacific Source: Doing Business database. Note: The sample includes 168 economies. later implementing online platforms for property transactions. Only seven with regards to property transactions. In 2018, for example, it became economies (4%)—mostly in Europe and Central Asia—made it optional to mandatory for notaries in France to file property transfer applications use a third party in property registration during 2006–18.3 However, these through the electronic platform, Tele@actes. In the United Kingdom, seven economies have reaped the rewards—their average time to register lawyers can search for encumbrances using various electronic databases a property fell from 60 days in 2006 to just seven days in 2018. and then register a new property transaction on the land registry website in a matter of hours. In one of these economies—Portugal—the use of third parties was made optional for both business incorporation and property registration. The Conclusion status of notaries was changed from public to private, and clerks were In recent years, the role of lawyers and notaries has evolved significantly given the option to remain as a public servant or move to the private in the area of starting a business, but less in the area of transferring sector. Most of them remained as public servants and implemented the property. While entrepreneurs need the assistance of a third-party agent Empresa na hora (a one-stop shop for business incorporation) and Casa to start a business in less than half of economies, lawyers and notaries Pronta (a one-stop shop for property registration). The use of notaries remain involved in 80% of the economies to transfer a property. became optional—entrepreneurs could complete the required steps directly at the one-stop shop—leading to efficiency gains and cost savings for entrepreneurs. The time to transfer a property in Portugal fell from 81 Latin America and the Caribbean is the region with the highest share of to 10 days, and the cost to incorporate a business in Lisbon was reduced economies using third-party professionals for both company from 8% of income per capita to just 2%. incorporation and real estate transactions. The time and cost to deliver such professional services are also highest in the region. Even in those economies where third parties continue to be involved, their associated costs have declined dramatically. Between 2006 and 2018, Increasing the transparency of regulation, simplifying registration third-party costs declined by half on average in the area of business processes and making the use of third-party agents optional could reduce incorporation and 15% in the area of property transactions.4 In Indonesia, the cost of formalizing businesses, promote opportunities for all and for example, legal fees for the establishment of small and medium-size create a level playing field for entrepreneurs. limited liability companies were reduced in March 2018. As a result, the cost to notarize the deed of incorporation was reduced by half—from 4 NOTES million rupiah (US$284) to 2 million rupiah (US$142). Likewise, after 1 This policy note builds on the available historical data of Doing Business over the past twelve Poland liberalized the notary profession the cost of executing the years. To make consistent comparisons over time, the following economies are excluded from the sample: Angola; the Bahamas; Bahrain; Barbados; Brunei Darussalam; Cyprus; sale-purchase agreement was reduced by about 10%—from 6,724 zlotys Eritrea; Kiribati, Kosovo; Liberia; Libya; Luxembourg; Malta; Marshall Islands; the Federated (US$2,155) to 6,167 zlotys (US$1,966). States of Micronesia; Myanmar; Qatar; San Marino; Somalia; South Sudan; Timor-Leste; and República Bolivariana de Venezuela. 2 Monkkonen 2016. Where third-party professionals continue to play a role in transactions, the 3 These seven economies are Belarus, Georgia, Namibia, Portugal, the Russian Federation, Turkey, and Uzbekistan. use of online systems helped to increase their efficiency and reduce their 4 Third-party costs for business incorporation declined from an average of 28% of income per costs. To eliminate time-consuming visits to a notary to draft and sign capita in 2006 to 13% of income per capita in 2018; third-party costs for property transactions fell from an average of 69% of income per capita in 206 to 60% of income per articles of association, Chile introduced an electronic system to register capita in 2018. specific types of legal entities. In Peru, entrepreneurs can prepare the deed of incorporation online (through the Portal de Servicios al Ciudadano y a las Empresas), select a notary and send the information required for References incorporation electronically. In other economies, third-party professionals Monkkonen, Paavo. 2016. “Are Civil-Law Notaries Rent-Seeking Monopolists or Essential Market can use electronic databases to reserve the company name or file a new Intermediaries? Endogenous Development of a Property Rights Institution in Mexico.” Journal of Peasant Studies 43 (6): 1224–48. application on behalf of their client. Similar advances have taken place 4 Research and Development Center in Chile