Disclosure of State of Beneficial Ownership is Important to Reduce Illicit Financial Flows

By Elinami John

Recently It is heartening to see that some commendable development is taking place in Tanzania in terms of revealing beneficial ownership of companies. The efforts can be attributed to progress toward improving financial systems, which will play a role in reducing illicit financial flows. Intergovernmental and civil society organisations have played an important role in establishing standards for countries to adopt to improve their legal frameworks, which could aid in revealing the ultimate owners of the entities. The standards are viewed as a global solution for improving transparency.

In 2020, the government of Tanzania through the Finance Act amended several laws to reflect the Beneficial Ownership concept such as the definition of beneficial ownership and the required information regarding Beneficial Ownership.  One of the statutes amended is the Companies Act 2002 followed by its regulations “The Companies (Beneficial Ownership) Regulations, 2021.”

Despite the government's efforts to add rules and a definition of beneficial ownership, the amendment of laws and regulations does not guarantee public access to information regarding the ultimate owners of the companies. The only institutions permitted by the Companies Act 2020, Section 451B, and its regulation to access information on beneficial ownership are government agencies responsible for combating money laundering and terrorist financing, national competent authorities that have the function of investigating or prosecuting offenses related to money laundering and terrorist financing, or of tracing, seizing, freezing and confiscating criminal assets, the Financial Intelligence Unit and the Tanzania Revenue Authority.

Tanzania's lack of provisions for public access to beneficial ownership information runs counter to the Extractive Industries Transparency Initiative's (EITI) standards for disclosing information about the ultimate owners in the extractive industry, of which Tanzania is a member.

To play a global critical role in the fight against Illicit Financial Flows (IFFs), Tanzania must amend its current legal framework, particularly the Companies Act 2020 and its regulations, to allow public access to beneficial ownership information while maintaining a balance between privacy and transparency, as provided by the Beneficial Ownership Data Standard.

Globally, there is a growing recognition that an effective framework for beneficial ownership transparency that is, a disclosure mechanism that is accurate, up-to-date, and accessible has the potential to provide enormous value in the fight against corruption. However, as an emerging policy area, there is an ongoing debate about how to achieve those goals in different country contexts.

Beneficial ownership data includes information about individuals, the majority of whom may be operating their businesses responsibly and would prefer that their interests not be made public. Advocates for access to information, on the other hand, argue that the right to privacy is not absolute and has been limited in many cases, particularly when the public interest or national security is at stake. International law acknowledges that limiting privacy expectations may be required to achieve legitimate policy objectives. Stopping illicit financial flows is an obvious policy goal. Disclosure systems must strike a balance between transparency's accountability goals and rapidly evolving concerns about privacy.

To balance privacy and transparency, for example, it is common in the United Kingdom (UK) to publish enough personally-identifying information to differentiate between beneficial owners and other officers, while withholding sensitive information (birthdate and residential address) for access by law enforcement only for official purposes. The public can only see the month and year of birth, as well as the registered address.

According to the Companies (Beneficial Ownership) Regulations, 2021, Tanzania's requirement for the provision of beneficial ownership information is based on the company approach. This is the model that requires the companies to collect and hold information about their own beneficial owner(s) and provide it to authorities when requested. However, evidence from a global money laundering and terrorism financing watchdog, Financial Action Task Force (FATF) suggests that countries that use this model face challenges in ensuring that beneficial ownership information collected directly from companies is accurate and up to date. Reliance on this model alone, without any due diligence conducted by an independent party, is not considered effective in guaranteeing accurate beneficial ownership information, as corrupt beneficial owners of shell companies are unlikely to self-report their ownership interest to authorities or a government registry.

A recent FATF report emphasises that a multi-pronged approach to beneficial ownership information disclosure and access has proven more effective in preventing the misuse of legal persons than any single approach. Given that ensuring the accuracy of the disclosure is a critical component of effective beneficial ownership disclosure, the ability of authorities to cross-check data across different sources or the requirement that licensed intermediaries grant the reliability of disclosed information is clearly more useful than frameworks that rely on company self-reporting.