Corporate transparency

Experts release a guide for beneficial laws in Uganda

Kampala, Uganda | THE INDEPENDENT | Corporate opacity presents a key vulnerability in the Ugandan economy,  contributing to the Shs2 trillion (US$550 million) in illicit financial flows (IFFs) lost each year, according to a joint report released by Global Financial Integrity (GFI) and Advocates Coalition for Development and Environment (ACODE).

“The ability to use anonymous companies  enables criminals to conduct illegal activities, such as tax evasion, corruption, money laundering, and financing of terrorism, while staying out of the view of law enforcement authorities,” said Kaisa de Bel, Policy Analyst at GFI. “To increase transparency in business transactions and curtail IFFs, the Ugandan government should require companies to disclose beneficial ownership information, that is, reveal the identity of individuals who ultimately enjoy the benefits of an entity”.

Leaks such as the Pandora and Paradise Papers have exposed how Ugandan and other African government officials used shell companies and offshore trusts to stash and hide wealth identified by financial institutions as high risk.

According to GFI and ACODE, these and many other case examples demonstrate how the failure to collect beneficial ownership information is frequently exploited by individuals looking for a convenient way to move illicit proceeds and hide their criminal activity.

In the new report, `Corporate Transparency: A guide for beneficial ownership laws in Uganda’, GFI and ACODE use a series of case examples where Ugandan and other African government officials used shell companies and offshore trusts to stash and hide their wealth to demonstrate how the failure to collect beneficial ownership information is frequently exploited by individuals looking for a convenient way to move illicit proceeds and conceal their criminal activity.

In one case, in 2017, several employees of Stanbic Bank (U) Ltd used inside information to buy out a mortgaged property that a client was defaulting on.

It started when the bank extended a loan facility of Shs1.06 billion (US$294,000) to enhance the working capital of MacDowel Foods and Beverages Ltd; a company in the business of bread, pastry, and cake manufacture.

The loan was secured by mortgaging several plots of land in Kampala. The company subsequently failed to pay back this loan and in 2019 the bank sought to dispose of the mortgaged properties. The company reached an arrangement with the bank through a consent judgement but again defaulted on the consent judgment.

Not much later, the property was acquired by another company, Myriad Investment Club Ltd at the low price of Shs1 billion (US$277,000), even though valuation reports showed a much higher market price of Shs4 billion (US$1.1 million).

It later turned out that Myriad Investment Club Ltd. had been opportunistically incorporated in 2020 as a shell company by seven employees of Stanbic Bank to purchase the properties mortgaged with the Bank, dealing on their inside information that the bank’s client, MacDowel, had defaulted on their mortgages.

Myriad Investment Club was formed for the sole purpose of purchasing these properties and to defeat the Mortgage Act, which prohibits the lender, its agents and employees, their family members or another person in position of any other privileged information with regard to the transaction, to purchase mortgaged property or land without permission of the court. MacDowel Foods and Beverages Ltd. sued the Bank and Myriad Investment Club Ltd to recover the properties.

If it had been mandatory for legal persons in Uganda to file BO details, the beneficial owners of Myriad Investment Club Ltd could not have hidden behind the secrecy cloak of a company to buy mortgaged property from its employer. It would also have been easier for the bank to determine from the central registry and know that it was dealing with its own employees disguising under Myriad Investment Club Ltd.

No laws yet

Uganda does not currently have a BO law that requires companies to proactively record and register their beneficial owners in a central registry.

The main laws that cover BO are the AML Act 2013, and the Mining Act, 2003, which will be overhauled by the Mining and Minerals Act. Under the AML Act, certain ‘accountable persons’, such as financial institutions and legal professionals, are required to collect BO information from their clients as part of their Customer Due Diligence (CDD) obligations. However, this information is held by these accountable persons themselves. Uganda does not have a BO registry at present.

Although the Mining and Minerals Act will require the Minister for Minerals to establish a public registry for companies operating in the extractives sector, this will not cover companies operating in other sectors, where the risks of illicit financial flows are equally significant.

According to GFI and ACODE, as the Myriad Investment Club was incorporated for the purpose of acquiring real property, this case proves that it is equally important to identify beneficial owners of a company created for purposes of holding assets rather than doing business.

In another case, in 2013, EUTAW Construction Company Inc., a Ugandan company that claimed to be the subsidiary of an identically named construction company based in Mississippi, United States, was awarded a contract worth UGX 165 billion (US$63.5 million) by the Uganda National Roads Authority (UNRA) to construct a 74 km Mukono-Katosi/Kisoga-Nyenga road. The company subsequently subcontracted the work to CICO Construction Corporation, a Chinese company, and work commenced in 2014. It later turned out that the Ugandan subsidiary company was in reality a shell company that did not exist. Both the tender documents that supported the bid, as well as the insurance bond that was used to allow for an advance payment to the company amounting to Shs24.7 billion (US$9.5 million), had been forged.

Uganda’s procurement body, The Public Procurement and Disposal of Public Assets Authority (PPDA), in December 2021 directed contractors bidding for government tenders to reveal the real owners.

Benson Turamye, the PPDA Chief Executive, while discussing the importance of strengthening of monitoring compliance of procuring and disposing entities, said, “This will help the Government of Uganda to understand and know the persons it is dealing with for purposes of risk mitigation, curb corruption, fraud, and tax evasion, to achieve greater transparency.”

This is not sufficient to curb corruption which is the main source of Illicit Financial Flows. As per the report, adopting a centralised register for all companies operating in Uganda will be the most effective to ensure transparency and accountability. A centralised Beneficial Ownership makes it easier for authorities to investigate and prevent the use of anonymous companies to hide proceeds of crime.

The Corporate Transparency Guide report recommends that beneficial ownership legislation covers all legal entities, including limited liability companies (LLCs), limited liability partnerships (LLPs), trusts and multinational companies operating in Uganda.

“Beneficial ownership information will be instrumental in Uganda’s extractives sector where the mining sector has been subject to corporate secrecy severely undermining domestic revenue mobilization efforts, environmental protection and stifling economic growth,” said Onesmus Mugyenyi, Deputy Director at ACODE.

Collecting ID information will accurately identify the real individuals behind companies in Uganda, reducing procurement risks and corruption and ultimately curbing illicit financial flows. Additionally, the guide recommends verification and updating the beneficial ownership data.

This will be key to improving the ability of government authorities and other users to trust and rely on the recorded data.

GFI and ACODE, in this report, advocate for the adoption of streamlined procedures, which are essential for economies as they implement new transparency policies. It provides specific recommendations for stringent and comprehensive beneficial ownership legislation in Uganda that prevents loopholes for financial criminals to exploit.

The two organisations will continue to coordinate with other civil society groups and key institutions to tackle the opacity of company ownership and curb illicit financial flows.

Global Financial Integrity (GFI) is a Washington, D.C.-based think tank, producing high-caliber analyses of illicit financial flows, advising governments on effective policy solutions, and promoting pragmatic transparency measures in the international financial system as a means to improve global development and security and reduce inequality.

Advocates Coalition for Development and Environment (ACODE) is an independent public policy research and advocacy Think Tank based in Uganda, working in the Eastern and Southern Africa Sub-regions on a wide range of public policy issues.

****