Beneficial Owners
25 October, 2012

The new team is looking at how it can fix things. Here is an idea. Let's pass a law preventing people from hiding ownership. That has become a very popular activity in Georgia and not just in Georgia. It used to be that setting up a company was so difficult and bureaucratic that nobody wanted to do it. Now it is so easy, in Georgia and in many other places, that somebody can set up a company in Georgia so

it is owned by another company in another country and that company is owned by another company in another country. That can be done in a day for not too much money. This makes it so difficult to find out who owns the actual company, that a potential business parter or journalist or anybody else gets discouraged or runs out of money and gives up.



The wealthier Northern European countries have developed a way to deal with that. They require that when one company is owned by another, the owning company must list all its beneficial owners. These are the people that stand behind the companies. They require that a company give full disclosure of the names and shareholdings of all of its ultimate beneficial owners – the last people down the line, however long that paper line is. These are actual human beings or "natural persons" who own the company, rather than companies or "legal persons". Because now, more often than not, the companies are empty shells, there to conceal the individuals that actually own things, they have no other reason for being there.



There is a big opportunity to do this now. The longer the wait the more current members of the majority will wonder if they want themselves to be held to this degree of transparency. It was very convenient to have shell companies concealing ownership. Remember how difficult it was to get a law passed to figure out who owned Rustavi 2 and Imedi? Can anybody think of a good reason not to do that for all companies and property?



One reason for offshore companies is tax. Certainly some places have better tax regimes than others but to be honest that is not a very good reason. If people or companies want to pay less tax in other places, no problem but we should still be able to know who owns them. Another reason given is that some investors won't invest in Georgia if they have to be public about it. Fine. Don't invest in Georgia. Do we really want investors that want to remain anonymous? Where did they get the money in the first place? The island of  Jersey – a famous offshore jurisdiction – has some of the most demanding company ownership transparency laws in the world.



This was a big problem when things were being privatised after Shevardnadze resigned. Every large privatisation ended up being owned by shell companies, so that for citizens of Georgia, it is not clear who owns those entities. For example, who owns Tbilisi Water? Go spend a great deal of time and you will go all over the world to get nowhere. Normally when a big state asset is privatized, the state must know the beneficial owners and be sure they can run the asset well, have money for future investment, and have a good reputation. Georgia in the last nine years has been unusual in that it has not required this.



But there were reputable international companies who were interested in buying. They are traded on important stock exchanges like New York, London or Hong Kong where the amount of disclosure is so great that everybody knows who owns the companies and what their finances are like. Those are companies that plan for the long term and that can't be pushed around by the government. It would be very easy to say that any international company that bids on any privatisation contract must have beneficial ownership known, or be traded on an important stock exchange.



These days the international anti-money laundering laws are so strict that any business who wants to use a Georigan bank must disclose its beneficial owners to the bank, and the National Bank has access to that information already, so it would not be that difficult for the public to have access to that information as well.

This would be a clear early signal that the new team wants to run things right.