Header image: Omar Flores on Unsplash

mySociety and SpendNetwork have been working on a project for the UK Government Digital Service (GDS) Global Digital Marketplace Programme and the Prosperity Fund Global Anti-Corruption programme, led by the Foreign & Commonwealth Office (FCO), around beneficial ownership in public procurement. This is one of a series of posts about that work

The idea of beneficial ownership is meant to address the problem that the official directors and board of a company may be different from the true owner or controller.

Without knowing the true owners of a business, you cannot understand who benefits from or controls its activities. In a procurement context, without beneficial ownership information about suppliers, it can be difficult to detect organised corruption or conflicts of interest.  Greater knowledge of ownership and control can give greater insight into supply chains and product quality. In the case of government contracts, collecting and using beneficial ownership data can have a very real impact on ensuring state funding is directed towards legitimate, high quality services and infrastructure for citizens.

Someone may not even be an ‘owner’ in the sense of having a significant proportion of shares to have ‘control’ over it. They might own no shares but still exercise control through a right to appoint board members. In most cases they would still be considered beneficial owners of the company.

Where this becomes interesting is when companies are owned not just by ‘natural’ (real) people, but also by other companies. For some companies, this can result in long chains of ownership, with many levels of companies owning other companies. But sooner or later, all ownership chains must terminate in real people, not corporate entities – those people are the beneficial owners.

Tools for visualising beneficial ownership structures are still quite varied, but most attempt to represent ownership as a network, with companies and people as nodes:

Diagram showing connections between companies and their eventual beneficial owners

An alternative approach is to think about only the ultimate owners in a chain. This can be particularly useful when you need to make quick decisions about who owns or benefits from a given company, regardless of how many ‘steps’ they are removed from the company itself:

Diagram showing the same network, but with ownership information displayed seperately

Perfect vs practical definitions

A broad definition of beneficial ownership (such as ‘deriving significant benefit from or having control over a company‘) is useful for an investigator trying to understand whether specific individuals can be said to be beneficial owners of an organisation. It is less useful when an organisation is being asked to declare who their beneficial owners are. This requires concrete disclosure requirements that may approach, but are likely to fall short of a broad definition. For instance, it might be decided that stockholders who have more than 25% of voting rights qualify for disclosure. In the terminology used by the World Bank/STAR Puppet Masters report, this is a “formal” rather than “substantive” approach to understanding the beneficial ownership of companies.

When talking about beneficial ownership, it is important to keep in mind this distinction between the concept of a beneficial owner and the inherently imperfect ways of identifying them. Better management of procurement risks means knowing more about who benefits from a company receiving a contract. But on the other side, the people hoping to subvert the process will want to maintain secret ownership ties in order to control or benefit from the company.

Closing the gaps in knowledge with additional beneficial ownership disclosure addresses the current state of evasion, but not how dishonest actors will react to new requirements. Introducing new requirements will address some amount of fraud and corruption, but also creates a strong incentive to find new ways to conceal conflicts of interests. This arms race dynamic means there is no one ‘good’ formal definition of beneficial ownership, but a number of different criteria that need to react to the practices of concealment in evidence in a country at a particular time.

As such, the best way to think about the long term impact of beneficial ownership on public procurement is not as a silver bullet, but as a tightening net. Future escalations may involve changed definitions, or improving the means by which information is validated. Underlying tools and standards need to be flexible to a range of national contexts, as well as a potential for change over time.

Beneficial ownership is part of a solution to several different problems

Several different frameworks promoted by inter-governmental bodies or international transparency/anti-corruption groups push towards more collection of beneficial ownership information.

The Extractive Industries Transparency Initiative (EITI) required as part of their 2016 standard that all participating countries mandate the disclosure of beneficial owners within extractive industries (oil, coal, gas, mineral extraction), and recommend publication in public registers or through the country EITI report.

The Financial Action Task Force (FATF) 2012 recommendations include the importance for financial institutions of discovering the beneficial owner as part of customer due diligence when establishing a new business relationship, and apply enhanced diligence if a beneficial owner is also a politically exposed person (PEP). While not calling for an open register, they do recommend that there are timely forms of accessing accurate beneficial ownership available for ‘competent authorities’.

The Open Government Partnership (OGP) supports the Beneficial Ownership Leadership Group with the aims of strengthening disclosure requirements and verification processes,  supporting a common data standard and allowing public access to enable citizen monitoring. Over 40 countries (including Mexico, South Africa and Indonesia) have incorporated commitments related to beneficial ownership transparency in their OGP plan.

On the practical side of how international ownership data should be processed and stored, OpenOwnership is an organisation with the goal of making beneficial ownership data more widely available through technical development, partnerships and research. They are the key developers of the BODS data standard and host a global open registry of beneficial ownership data.

More directly related to public procurement, as part of their COVID-19 response, the International Monetary Fund (IMF) has asked countries requesting emergency assistance to make commitments to publish information on the contracts with and the beneficial owners of companies benefiting from the emergency funds.

Ownership in public procurement

The problem beneficial ownership data can address in public procurement is corruption or subversion of the procurement process, but it also has a bearing on procurement efficiencies, risk profiling and enactment of preferential procurement policies.

Making beneficial ownership data available to procurement officers helps them discriminate between bidders for work in a current procurement process. For instance, a problem described by several interviewees in our research on this area is bidding cartels. This is where multiple bidders (who are in reality controlled by the same owner) coordinate to drive up the price and raise the chances of winning. Knowing more information about the ownership of the companies in this bidding cartel would make it easier to detect.

Better visibility of who is benefiting from public procurement contracts can be beneficial even when companies are behaving perfectly within rules. Entirely legitimately, a set of apparently independent companies may have won many bids. However, in reality these are part of a broader group with a set of common owners. Beneficial ownership data can make it easier to understand the connections between these companies (either because chains of corporate ownership have been revealed, or the final owners directly revealed). This can allow identification of where procurement contracts are ultimately flowing. Where beneficial ownership data is broadly available for organisations, this also allows identification of other businesses in which owners have an interest. This can be used to risk profile broader corporate structures.

Explicitly collecting the data required to catch violations of existing rules can also create a chilling effect, by making potential bad actors aware of the scrutiny that may be given to the information, especially if combined with more effective enforcement. A government official (elected or otherwise) with power over the procurement process may have significant involvement in a company bidding for a contract, but this fact would be undeclared and invisible on official paperwork. Greater visibility of the beneficial owners of these companies leaves fewer places to hide, and raises the risk of detection and costs of attempting to subvert the process.

See all posts in this series.

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Original source – mySociety

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