Secrecy as an essential factor of corporate security
Maintaining secrecy of key factors related to enterprise assets is a crucial instrument of asset protection by the owner. In most cases, information about the owner of a certain asset or the person or entity controlling it is the first step towards planning a takeover of this asset by hostile persons. An attempt of illegal takeover almost always looses its sense without information about the asset structure of the takeover target and its real owner.
This article is focused on legal aspects of business practice and does not deal with technical aspects which are the task for in-house or outsourced specialists in economic safety and industrial espionage prevention.
There are two major channels of classified information leakage. The first channel is the state. Any state wants to have access to information about all major business developments occurring within this state and around it because information means control and any government in any country aims at strengthening its control as much as possible. The government wants to know the owners of all assets having any significance and major players in all areas of business activity. Each year new regulations are adopted at the national and international level aimed at increasing the transparency of business transactions and ownership relations, and these are presented as a measure to fight crime or are declared as a way to improve economic forecasting etc. All public registers and databases are a powerful, valid and rather convenient channel for obtaining, comparing and processing information etc.
The second channel is the owner of business as such. A significant portion of information about business owners, company assets or business performance figures is disclosed by respective owners on their own initiative. The point is not in information disclosure to comply with requirements of the law as, for instance, in case of public information of joint stock companies. Often advertising materials or web-sites of companies directly or indirectly provide crucial commercial information in the quantity which makes the basis for hostile takeover thus allowing the potential raider to avoid the need of using business intelligence services. Often crucial information is disclosed by an owner in the course of negotiations or contacts with partners/contractors or in similar cases by way of bravado and not with the aim of maintaining a good credit rating and trust or clients and business partners.
Only by combining various legal instruments and regulating the quantity of information disclosed voluntarily will an owner be able to achieve a desirable level of secrecy of key parameters pertaining to his/her property, among which the following can be mentioned: real owner’s name, any co-owners, asset list, income level, investment targets.
Secrecy can be an efficient instrument of asset protection only provided that the facts which it protects from strangers do not contain anything illegal. Otherwise, the owner may easily become the target of blackmailing or any other pressure, if the interested person knows or suspects that some illegal aspects are concealed. Therefore, secrecy as an instrument of protection has sense even if after full information disclosure there are no grounds to make any of the persons involved liable. In actual business practice, secrecy is just an additional measure to protect legal business in situations when the government is unable or unwilling to help the owner protect his or her business efficiently.
Furthermore, over the last several decades there is an undisputable global trend towards increased transparency of financial and corporate information, simplification of data exchange between law-enforcement bodies and tax authorities of different countries and this trend continues to grow. Actually, today it is impossible to create a more or less confidential commercial structure. Therefore, the owner should build the corporate structure of its business in such a manner as to ensure that in case of full disclosure of information about this structure, about assets forming it or about management structure no portions of information so disclosed can give law-enforcement bodies of tax authorities the grounds for criminal prosecution or imposition of fiscal sanctions on real owners of business and/or the persons who built this structure. Another question of no less significance is the origin (cleanliness) of capital invested in the corporate structure of business.
As far as secrecy of information relating to business and assets is concerned, it should be clearly understood that while almost every country has laws guarantying the inviolability of certain information, such secret information is often “an open secret” for persons interested therein, including the government itself.
Thus, banker’s duty of secrecy requires a bank to deny access to information about an account/deposit if such access is requested by any person, except the client, and lawyer’s duty of secrecy prohibits a lawyer to disclose information which came to his or her knowledge in the course of providing legal services to clients. It is also declared that the rule of commercial secret allows a company to decide at own discretion which information it may disclose via its staff/employees and contractors, and which information it wants to keep in secret.
Certainly, the measures provided for by the law may and should be used for the purpose of building business and asset protection strategies but they should in no way be relied on as an actual factor of protection. Each of the mentioned “duties of secrecy” is accompanied by a reservation stipulating that the general rule does not apply, for example, if the information is requested by the government. And here it does not matter that sometimes secret information may be disclosed only subject to a court decision, or a request of law-enforcement bodies, or instituted criminal prosecution or the fact that some special investigation activities are held – it does not change the main point. In the current realities of Ukraine, a hostile party may enlist the help of governmental structures at any time – obtain an “appropriate” court decision, inquiry etc. Therefore, from the very beginning it is necessary to proceed from the fact that secrecy laws as such will not protect the owner and business. This is the reason why there is a demand for nominee owners and directors in Ukraine because such positions make the procedure of establishing a “connection” between an asset and its real owner more complicated.
However, in cases when nominee owners and directors are involved, real owners face another challenge – control over nominee owners and/or directors. The following recommendations can be taken into account in such cases:
Use of “cutters”. “Cutters” are legal instruments which provide a guarantee to a real owner that a nominee owner will not be able to perform certain actions in respect of assets concerned (alienation, encumbrance etc.) or, if such actions are performed, they will not have any legal consequences and respective deals will be acknowledged invalid. The function of “cutters” may be performed by supervisory bodies of companies or by special-purpose provisions of incorporation documents or, better yet, by both of these mechanisms. Rather good results may be achieved by introduction of a minority owner having title to a part of a certain asset since the law provides that in the majority of property alienation cases a minority owner has the preemptive right or may participate in the majority of court proceedings in respect of the property concerned as a third party. For nominee owners, “cutters” are a significant restricting psychological factor.
Control of key documents. One of efficient measures to enhance beneficiary’s security in the situation when another person has title to an asset is real owner’s physical control (keeping) of original documents unavailability of which makes the exercise of owner’s functions by the nominee owner impossible. For example, incorporation documents (articles of association), original documents of title etc. In such a situation the owner may keep company’s internal documents on absolutely legal grounds – for this purpose, it will be sufficient to include a respective provision into the company’s articles of association, and the articles of association should also stipulate the procedure of issue of such documents or copies thereof. The majority of countries with well-developed economy appoint corporate secretary for these purposes, but this is absolutely untypical for Ukraine, although there is no imperative ban on appointment of such an official in a company.
Minimization of nominee owner’s inheritance risks. If a nominee owner dies, this may create some difficulties for the real owner if the latter decides to return the assets or re-register the title thereto in the name of another nominee owner in case legal mechanisms of protection are not envisaged in advance. Since in Ukraine the institute of nominee owners is rather undeveloped and is actually not accepted by the national fiscal authorities, the list of available instruments which can protect the assets of a real owner is rather meager, therefore, such a situation should be envisaged in advance.
Minimization of nominee owner’s “marriage” risks. According to the law, nominee owner’s property purchased by him or her during the period when he or she is married or lives with someone as one family without registration of marriage is deemed to be joint property of spouses and, therefore, may be divided within the framework of divorce proceedings or even when the spouses are still married. The real owner bears the same risks as in case of inheritance risks and it is also advised to envisage such a situation in advance, like in the situation discussed in the preceding clause.
Use of undated documents. These may be any declarations, including declarations of relinquishing certain powers. As such, these documents may not help to resolve every single situation, however, an undated document may be quite successfully used as an additional instrument.
Summarizing this article, we would like to emphasize that development of an efficient strategy of assets or business protection depends on many factors and is unique for each particular business. But anyway, legal strategies of business protection developed before any problems arise are always more efficient and cheap in terms of the final result than in case the initiative is on the side of a raider and the owner just tries to “catch up” with the raider and responds to problems in the manner of a reflex.
Author: Kydalov Igor
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