We often hear, “if you have nothing to hide, you have nothing to fear”? Were it true, we would not object to the idea that some gentleman from the secret service might listen as we whisper sweet nothings, joke with close friends in a politically incorrect manner, or discuss a private business deal?
Privacy and secrecy are very much a part of business. Confidentiality is fundamental in professional life. Businesses work hard to create contact lists, customer lists, know-how and techniques, and guards them jealously. Sometimes a non-disclosure agreement is needed to enter into any discussions with companies. So let us not pretend that transparency in business is widely accepted as beneficial. It has long been established that there is a need for a balance between the right to privacy, and the public’s right to protection.
But on which side of this balance do the new People of Significant Control Regulations sit?
Why do we need transparency?
Transparency suits government (as long as government need not be transparent), as knowledge is power, and financial knowledge can give rise to tax. And it suits the Press, of course, whose main objective is to disclose things to the public that are either interesting to them or in which the public may have an interest.
More generally, public disclosure of information on businesses came about when the concept of limited liability was introduced, as a way to protect people doing business with these companies. Until then, business was considered private (consider the phrase, “it’s not your business”). But as business expanded in the early Twentieth Century, funding requirements meant that new business vehicles were needed, and the Limited Liability Company was born. Investors could invest in shares, secure that if it all went wrong, they could not lose more than they put in. With limited liability came a shifting of risk from business owners to people who did business with them, and the counter-balance was seen as disclosure: financial accounts and general ownership details needed to be available on the public record.
Transparency was conceived of to protect the public from improper, illegal, or misleading behaviour by companies.
How is transparency damaging?
Striking a bargain relies on negotiators not having full or transparent knowledge. For example, a few years ago, I advised on a transaction where my client desperately needed to liquidate his assets. Had the buyer known this, they would have driven a much harder bargain, I am sure. The deal benefitted all parties, but transparency may have prevented it.
Secrecy sometimes encourages investment. I know of several companies which have received investment from people who don’t want to be seen to be investors. In some cases this is because of conflicts, in other cases because their investment is philanthropic but would create disapproval. Sometimes secrecy is for personal privacy. Sometimes, a person may not want their spouse to knows about their business activity.
On a very different level, it has been alleged that, in their early career, the Beatles’ manager, Brian Epstein, bought large numbers of records to fix the music charts, bringing the band into the public eye. Had he not done so, perhaps this iconic band would not have made it. Whether or not you like their music, they certainly had an enormous influence on pretty much everything that came after them. I do not know if this legend is true, but it illustrates that even slightly dirty dealing can have benefits.
People of Significant Control
According to Government guidance
, the Regulations were introduced to protect investors, and to make it clear who controls companies. Oh, as an aside, it will help the prevention and detection of Money Laundering. The guidance is issued by HMRC which might give a clue as to the real motivation. We could consider the difference between “mis-leading” and “spin”, but who can blame HMRC for trying to collect tax – it’s their job.
Spin is needed because the Regulations place onerous responsibilities on everyone, and companies must now:
- Actively find out who actually controls them, and publish it on the public record;
- Ask if shareholders are People of Significant Control;
- Report the answer if it is a yes;
- Punish those who fail to confess;
- (Disappointingly, the “ducking stool” has yet to be re-introduced, but give it time).
And a whole heap of new offences have been created to back this up, which can lead to fines and prison. News media are unlikely to criticise if this is all in the name of the holy grail of transparency, but if t is about tax, they may feel less excited. Unfortunately, the public will be taken in.
There are also technical issues which have been addressed badly in the legislation relating, for example, to trusts, people acting in concert.
Government would have us believe that these Regulations are about prevention of money laundering, funding for terrorism and the like, and not about tax collection. We have no choice but to believe them, and then we must ask, is the imposition of yet another set of draconian rules on business a proportionate response to the problem?