In recent years, secret financial documents have been occasionally made public (for example, Panama or Pandora Papers), which confirms that public officials throughout the world often utilise anonymous ownership of companies in order to avoid the restrictions on entrepreneurial activities imposed upon them. Anonymous ownership of companies is also often used by the world’s richest people for the purposes of tax evasion, money laundering and for making secret deals.

This problem is relevant for Georgia as well.

Problem No 1 – We are frequently unaware of the ultimate recipient of public financial resources and services

Quite a few of the notable companies operating in the country are owned by companies registered in the so-called offshore zones. For this reason, their ownership cannot be traced due to anonymity. These companies are awarded public contracts, are given important licenses and permits, participate in state programmes, benefit from exemptions granted by the state, while who stands behind these companies is completely unknown.

There are about 3,200 companies registered with the Business Registry of Georgia that are fully or partially owned by an offshore company. Offshore companies own Tbilisi Energy, Beeline, IDS Borjomi, Chiaturmanganum Georgia, Rustavi Steel, Silk Road Group Holding, Batumi International Container Terminal, Rustavi Automarket, Poti Grain Terminal and up to 160 other big and medium enterprises.

Problem No 2 – Concealing the origins of money and its possible use for corrupt purposes

Large amounts of money in Georgia are handled using anonymous ownership of companies. For example, according to official statistics, up to USD 5.2bn of FDI came into Georgia in 2011-2020 from the countries with offshore territories, which is 38% of all foreign investments made during this period.

It is interesting that, on 13 September 2019, then Georgian Finance Minister Ivane Machavariani said when commenting on FDI: “According to various assessments, throughout Georgian history, some 60-70% of foreign investments coming into Georgia every year were in fact Georgian, local investments that were removed from the country and then brought back from other countries or from offshore.”

Considering this statement, a legitimate question arises whether anonymous ownership of companies is used to conceal the origins of money and then use it for various corrupt purposes, or whether the money of unknown origin is being poured into politics.

Problem No 3 – Secret, unhealthy influence of private business interests on state institutions and strategically important facilities

A serious problem in Georgian reality is an unhealthy overlap of business and public interests which is expressed in secret business deals and provides a fertile ground for high-level corruption. Bidzina Ivanishvili is the key example of this as his influence over the country’s government and the majority of public institutions despite his formal withdrawal from politics should be assessed as state capture – a situation when state institutions, instead of being accountable before the country and its citizens, are serving private interests of certain influential individuals.

Like the world’s richest people, Bidzina Ivanishvili, too, actively utilises anonymous ownership in the form of a network of offshore companies to manage his assets and promote business interests. The documents made public at various times show that he is a beneficial owner of at least 20 offshore companies (see interactive chart). As of today, 12 of these 20 companies own 26 companies in Georgia alone; these 26, in turn, own other companies. As a result, Bidzina Ivanishvili’s 12 offshore companies directly or indirectly own 70 companies in Georgia.

Interestingly, 31 directors of these 70 companies donated the total of GEL 2,972,572 to the Georgian Dream ruling party in 2012-2021. Detailed information about the companies mentioned in this report can be found in the attached document.

The following question arises: what is the problem here? The problem is that the decisions and deals made in the conditions of anonymous ownership could inflict enormous economic or political harm on a country. For example, the Pandora Papers published in 2021 confirmed that Bidzina Ivanishvili has personal business interests in developing the port of Poti, which is a competitor of Anaklia Port. Considering the influence that Bidzina Ivanishvili has over the Government of Georgia and the fact that the Anaklia project was suspended as a result of the government’s effort, a legitimate question arises whether the project geopolitically important for the country was suspended to favour the interests of a private person. This is why it is important for such interests to be public and open: to prevent informal influence on the government and individual public institutions.

Problem No 4 – The system of asset declarations is ineffective with regard to anonymous ownership

Officials in Georgia are under the obligation to annually submit asset declarations whereby they have to publicise their assets and business interests. The current declaration system cannot detect and reveal anonymous ownership, due to which it is entirely up to the personal integrity of an official whether or not they would indicate in their declarations the companies that they anonymously own or control.

For example, Bidzina Ivanishvili’s connection to 20 offshore companies became known accidentally, as a result of publishing of secret financial documents. When he had an opportunity and obligation to officially declare these companies when he was submitting his declaration as a prime minister in 2013, he did not do so. Thus, there would be no public knowledge about these business interests if not for the leaked papers. This directly indicates that, when the information about ownership is opaque, officials and other influential persons might have potentially problematic, hidden business interests.

What Is the Solution?

In order to resolve the problem of abuse of anonymous ownership, a global consensus has emerged that corporate ownership needs to be completely transparent and the best mechanism to achieve this is to create a register of beneficial owners. Currently, over 100 countries of the world have undertaken this obligation, and in 21 out of 27 countries of the EU such a register has already been introduced at various levels. Most importantly, the beneficial owners registries have already started producing tangible results – high-level corruption, conflict of interest and money laundering cases have been uncovered at the international level.

A beneficial owner is a concrete individual – a person, who ultimately owns company shares or assets, or controls and makes decisions concerning its activities. It is precisely the “control” component that distinguishes a beneficial owner from a company owner in the standard meaning of the word. There is often a direct link between a company and its beneficial owner but, sometimes, an ultimate beneficial owner is hiding at the end of a chain consisting of many different companies.

Transparency of beneficial ownership can have the following important uses:

• Journalists and watchdog organisations are provided with a new mechanism for uncovering corruption-related crimes (especially, high-level corruption) and to control officials.
• Business is provided with means to check whom it is dealing with and thus reduce its risks. In addition, due to the reduction of the risk of informal deals, the business environment becomes more equal and competitive.
• Investigative bodies receive the means to more easily locate perpetrators and seize stolen money.

The local non-governmental organisations in Georgia have been asking to create a register of beneficial owners for many years. The Organisation for Economic Co-operation and Development (OECD), too, recommended that the country create such a register, but the recommendation has not been enforced. An obligation to create the register is part of the EU anti-money-laundering directive, too. The Financial Action Task Force (FATF), in which Georgia participates, is also considering the introduction of this obligation.

At the Anti-Corruption Summit which took place in London in 2016, the Government of Georgia said that it would consider the possibility of creating a register of beneficial owners, however, no effective steps have been taken in this direction since then. The adoption in 2019 of the Law on Facilitating the Prevention of Money Laundering and Financing of Terrorism merits a positive assessment: it contains the concept of a beneficial owner and obligates financial institutions to evaluate suspicious clients and gather information about their beneficial owners to this end. The law creates a precondition for processing the collected information and publishing it in the form of an open register.

What Needs To Be Done

In order to reduce corruption risks resulting from anonymous ownership in Georgia, including unhealthy connections between business and the government, it is important to create a register of beneficial owners. The following steps need to be taken to this end:

Step 1 – The Government of Georgia should clearly express the political will to create a register of beneficial owners and identify a body responsible for coordinating and implementing the reform.

Step 2 – A working group, involving all interested parties, including the civil society, should be created  to develop reforms.

Step 3 – The responsible body should contact the international organisations which establish the standards of openness of beneficial ownership (these are: Open Ownership and Extractive Industries Transparency Initiative) and conduct the reform in cooperation with these institutions.

Step 4 – The obligation to implement the reform needs to be reflected in the documents on anti-corruption reforms, such as the National Anti-Corruption Strategy and Open Government Partnership (OGP) Action Plan.

In addition to these specific steps, the following will be necessary to ensure the success of such reforms:

1. Full adherence to open ownership principle:

The process of elaborating the reforms needs to be based on the principles of open ownership and other countries’ experience in this area, more specifically:

• Beneficial ownership needs to be defined clearly by the law and a low threshold (of ownership of control) should be set for the obligation to disclose beneficial ownership to arise;
• The obligation to disclose [beneficial ownership], if possible, should apply fully to all relevant types of companies and individuals;
• The information to be presented should be as detailed as possible;
• The data should be gathered at the central register;
• The data should be publicly available;
• The data should be structured and interoperable;
• The data included in the register should be verified;
• The data should be constantly updated while the archive entries should be stored;
• Reasonable sanctions and their enforcement should be in place in the event of a failure to present the data.

2. Coverage of foreign/non-resident companies

A particularly problematic issue in Georgia’s case is the opacity of ownership of such companies which are owned by non-resident – foreign companies. This is why we consider the application of an obligation to disclose beneficial owners to non-resident companies to be a necessary precondition for a successful introduction of a register of beneficial owners in Georgia.

3. Imposing restrictions on access to budget funds

Companies whose beneficial owner(s) are unknown should be restricted from accessing budget funds. Such companies should not be able to participate in public procurement, should not be benefiting from economic and relief programmes (for example, those related to COVID-19), should not be able to receive extractive industries and other types of licenses and permits and so on. The Government and the population of Georgia should know who the ultimate recipient of the budget money is.

Such a restriction will, on the one hand, decrease the possibility of using budget funds for corrupt purposes and, on the other, will encourage companies to comply with the requirement to disclose beneficial owners.

4. Transparency of joint stock company shareholders

The goal of the reform concerning transparency of beneficial owners is to put an end to anonymous ownership of companies. Considering this goal, part of the reform in the Georgian context should be an improved access to the information about shareholders of joint stock companies, too. Currently, it is nearly impossible to establish who runs joint stock companies registered in Georgia.

Detailed information about the companies mentioned in the study can be found in the attached document.