Very Bottom of G20’s Beneficial Ownership Transparency

Very Bottom of G20’s Beneficial Ownership Transparency

Sanghak Lee (Transparency International Korea)

South Korea ranks last among the G20 countries and G20 guest countries on beneficial ownership transparency level based on the research conducted by Transparency International. Transparency International’s research measures the extent to which the G20 countries implemented “Beneficial Ownership Transparency Principles.” South Korea is on the bottom level among the G20 countries (including the G20 guest countries).

Moreover, Transparency International’s research in 2015 put South Korea on the same level as the United States, China, Brazil, and Australia. The same research conducted in 2017 put South Korea and Canada together similar to the past ranking, while the other countries mentioned moved up to the top rankings. While Australia, China, and the United States went up one level and Brazil went up two levels, South Korea and Canada remained on the bottom level. Although many countries are making institutional arrangements for the sake of improving their transparency, the research shows that South Korea has not done well on this issue.

South Korea disregards such international guidelines and is out from the international trend. In particular, during this period, the DAS beneficial ownership concealment and the profiteering by authorities and leaders turned out to be the subject of significant public attention. However, the country did not address these issues properly.

Let us take a more in-depth look. The G20 has adopted ten principles to help enhance the transparency of any property’s true beneficial owner. The principles include risk assessment, confirmation of ownership information, and public disclosure of information, the role of experts such as financial institutions and lawyers, and cooperation between domestic and foreign institutions. If we compare South Korea with the G20 countries’ and G20 guest countries’ average score per principle, South Korea has not scored higher on any of the principles (see the figure below). Specifically, there are significant differences between South Korea and the G20 countries regarding the relevant principles such as ownership information collection (Principle 3), information disclosure (Principle 4), and the financial institutions and expert obligations (Principle 7).

Principle 3 deals with information on company/property ownership and its respective shareholders confirming the beneficial ownership. While Principle 4 is the principle for disclosure of information collected by Principle 3 to relevant institutions. To be able to collect and provide information, the European Union requires the member states to establish beneficial ownership registers. Including the United Kingdom, many countries have already created such beneficial ownership registers. They are already under operation.

Principle 7 ensures that financial institutions and lawyers, and other relevant professionals abide by their duty in providing their clients with’ beneficial ownership information. In Korea, the financial institution is obligated to check the beneficial owners. However, on experts, this obligation is imposed to a very limited extent.

The gathering of beneficial ownership information and providing such information to relevant institutions including the related parties are the core elements of the G20 principles. Principle 3 obliges companies to confirm their beneficial ownership, Principle 5 requires trusts (companies) to verify their clients’ beneficial ownership information, and Principles 4 and 6 are made to provide that collected information. In addition, Principle 7 obliges the financial institutions and various specialists to obtain the beneficial ownership information of their clientele. However, South Korea scored lower compared with other countries in this very important principle. Through the principles, we can know that South Korea is much weaker compared with other countries.

(see further details at http://www.ti.or.kr/xe/board_oKbG36/101806)

[G20 Countries and South Korea’s Scores Comparison (%) ]

In the past ten years, people have repeatedly asked, “Who truly owns DAS”. The answer to that old question is now being revealed. Perhaps, we should be glad about this truth revelation. Alternatively, it may be just a coincidence. Had the relevant person remained silent, the truth would have never been revealed. Had the truth of DAS been kept hidden, it would have forever remained as only a suspicion. Perhaps, there are still many hidden cases similar to DAS. Definitely, much more money is being kept hidden behind borrowed names using the same methods as DAS.

In big corruption cases, the borrowed name always appears as a regular customer’s name. Why is it like this?

I think the most important point is that it is not easily detectable. For people, who intend to hide or use any property for various illegal activities, borrowing names could be the safest and easiest means.

In a case like DAS, identifying the real user of borrowed names is not an easy task to accomplish. Of course, there are issues including willingness and capability to investigate, but the more fundamental problem is that such cases are difficult to find because they are done in a covert and complex way. Although there are many suspicions raised, we have properly identified only a few cases. Mainly, if there were no whistle-blowers, it would be very difficult to find such cases.

The next most important reason is concealing large amounts of assets, evading taxes, and using them for corrupt activities. The Panama Paper, which surprised the world in 2016, revealed information on more than 200,000 offshore companies.  It mentioned many famous politicians, people in business, and sports stars, including the Russian President, the Ukrainian President, Lionel Messi, and movie star Jackie Chan. Then, a few years later, the so-called Paradise Paper that was disclosed in 2017 named many individuals including Queen Elizabeth II, US Treasury Secretary Ross, and Madonna. Even though they are not all considered criminals, it is a fact that they are being suspected of such activities.

So, what are the ways to stop borrowing names? We already have answers. Although the possible solutions are not perfect, they are considered quite effective. The Korean government is participating in international organizations that adopt such measures. The FATF and G20 are such international organizations. The guide of the FATF (Financial Action Task Force), that prevents money laundering, and the G20 principles, that try to identify the real owners (Beneficial Ownership) behind the borrowed names, are the essential international guidelines.

The G20 countries are actively promoting activities employing these international guides to their domestic market. The European Union and the United Kingdom are the most prominent examples. The European Union has adopted anti-money laundering directives and pushes governments to identify real beneficial owners, assess risks, and establish registers for beneficial ownership information registration. Great Britain is the first country to establish and operate a beneficial ownership register. In addition, the G20 countries, among many countries, are making efforts to disclose the beneficial owners behind the borrowed names.

South Korea is one of the top 10 big economies in the world. However, South Korea obtained low scores in many indicators related to transparency in the financial sector. The country also scores very low in the transparency of beneficial ownership information disclosures.

It is precisely due to using borrowed names that two former presidents were arrested and sent to jail. In addition, the issue of the borrowed name also appeared at the Candlelight Movement, which led to the impeachment of President Park. The recent ruling issued by the president to eradicate the illegal offshore property activities and the transparent disclosure of the information of beneficial owners hidden behind the borrowed names plays a decisive role.

Introducing this particular system could be a very challenging process. The resistance to the system will be strong because the real beneficial owners have money and power. However, in order to implement the system introduced by the Candlelight spirit and achieve economic justice, we have to prevent usage of illegal and borrowed names. This is directly related to South Korea’s status and credibility in the international community, and its national competitiveness. In addition, this can play an important role in recovering the citizens’ trust through eradicating the widespread distrust of the upper class in society.

In order not to shout out again, “Who owns DAS?” we need to establish the relevant guidelines. Therefore, we need to establish systems so that the internationally agreed principles and guidelines can be applied in our country.