Orphan structures: holding companies accountable when owners don’t exist

Recently, Ciara Dowd and Elodie Aba examined what they refer to as “a crisis of impunity for corporate human rights abuse” and cite increasingly insuperable attack strategies on human rights defenders using defamation lawsuits. As an international human rights and commercial lawyer in what others call a tax haven—an unusual combination, to be sure—I am on the inside, looking out. In my work, I’ve documented and exposed the various ways in which corporations avoid accountability through legal loopholes, and over the years I have noticed several alarming trends.

In a post-2008 Great Recession world of increasingly complex criminality, corruption, fanaticism and state terrorism, the distinction between legitimate tax avoidance and illegitimate tax evasion has been blurred. Similarly, the lines are fuzzy between privacy and confidentiality on the one hand, and secrecy and concealment on the other.

As a result, there has been a growing global initiative to identify beneficial owners of corporations—meaning owners of specific property rights even though the legal title may belong or be assigned to someone else. From October 2006, when the Financial Action Task Force (FATF) published “The Misuse of Corporate Vehicles Including Trust and Company Service Providers”, to November 2014 and the G20 Brisbane Summit—which endorsed the FATF initiative and issued the G20 High Level Principles On Beneficial Ownership Transparency—the mantra has been that “someone, somewhere must know who owns something or everything”. But the High Level Principles were half-hearted in their conception, and the G20 has made no attempt to take criticism on board. Having passed the baton to national governments, the transparency debate has simply fallen off the G20 radar.

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The core problem is that these Principles are long on exhortation but very short on detail, stemming from the use of the term “beneficial ownership” without any attempt to define it or any concrete implementation strategy. It is no surprise, then, that they have attracted equally half-hearted political responses worldwide. However, even if the Principles were fully fit for purpose (something on which the jury remains stubbornly out) no enforcement mechanism—no matter how robustly crafted—will be of the slightest use if the structure has no beneficial owner at all. When investigators get there, the cupboard is bare. This, by analogy with current tax enforcement thinking, is beneficial ownership avoidance.

For human rights defenders, this development is a sinister trend: a growing global market in so-called “orphan structures” allows the creation of commercial entities which have no beneficial owner. These “non-charitable purpose trusts” (NCPTs) are set up to have no beneficiary but instead exist for a non-charitable purpose of some kind (often not defined). These trusts are promoted not only by tax haven governments (such as the British Virgin Islands, Barbados, Cayman Islands, Cook Islands, Mauritius, the Turks and Caicos Islands), but even by the USA (e.g., Delaware, New Hampshire, South Dakota and Wyoming). They are designed by leading legal, corporate and trust professionals, and are (if the wave of new legislation adopting them worldwide is any indication) very popular. The Executive Entities Act 2011 in the Bahamas is arguably the most blatant example of embracing orphan structures, but the universality of NCPTs, their continuing spread, and the undisguised enthusiasm for ownership avoidance are the strongest illustrations of the phenomenon.

Three “certainties” are required for the creation and constitution of any kind of trust.

To illustrate this complexity, three “certainties” are required for the creation and constitution of any kind of trust: 1) certainty of having an intention to create a trust; 2) certainty as to what property is to be placed in the trust; and 3) certainty of the identity of who will benefit. That is, a trust is a simple triangle: a Settlor, wishing to benefit a Beneficiary, transfers property to a Trustee, who takes that property into their name but manages it for a Beneficiary (e.g., a trust for a child beneficiary that is managed by an adult). The Beneficiary has no ownership rights over the property, and the Trustee has no right to benefit from the property either in law or in equity. The Beneficiary does not control the trust but expects to receive the property in equity (or the income it generates, or both).

Yet this analysis falls apart in the case of a non-charitable purpose trust, under which the third corner of the triangle is sliced off: there is a complete absence of beneficial ownership of any asset held. Indeed, in all jurisdictions where NCPTs have been introduced, the enabling legislation states clearly that a NCPT cannot be for the benefit of any individual or identifiable group of legal or moral persons, but exists simply for its own stated purpose. That purpose may simply be the holding of the very shares in a company which form the trust fund. They are like hot air balloons, aloft but with no passengers in the baskets. There is also no national or international register of NCPTs, making identification even more difficult.

The problem from a human rights perspective is that when there is no beneficial ownership, there is no possibility of transparency—because there is no way to tell who is actually profiting from the corporation or who is responsible for potential human rights violations made by that corporation. The G20 High Level Principles on Beneficial Ownership Transparency—and in particular Principle 5 on trust structures—can be wholly sidelined and disclosure of beneficial ownership defeated. Legislation promoting beneficial ownership avoidance is advancing apace and unchallenged, and as growing legislation in various US states indicates, this is not merely a pattern in the tax haven micro nations.

When human rights defenders cannot identify the specific human rights violator(s), taking action against these violators becomes nearly impossible. Who can be prosecuted or held to account when there are simply no names? Where states themselves facilitate beneficial ownership avoidance, the professional activist seeking to identify the source of abuse—whether that abuse is tax evasion, money laundering, fraud, the financing of terrorism, the breach of human rights—are confronted by complicit jurisdictions. Those who benefit from such abuse are actively encouraged by those same jurisdictions. Such jurisdictions are themselves—to the extent that it even crosses the minds of their legislators—the agents of obscurity.