by Marta Andreeva
The public grasped how big of a deal beneficial ownership is and how abuse of legal persons for money laundering and terrorist financing (ML/TF) affects us all perhaps in 2015 with the Panama Papers scandal. For the compliance geeks and practitioners, this hasn’t perhaps come as such a surprise, albeit the scale of it has undoubtedly shocked everyone. The hype surrounding scandals that involve faces familiar from Hollywood or the political arena makes topics from the anti-money laundering (AML) world the news headlines.
The idea of transparency of company ownership, however, isn’t new. The global money-laundering watchdog – the Financial Action Task Force (FATF) is the first international organisation to set up standards on beneficial ownership in 2003. In accordance with FATF Recommendation 24, countries should take measures to prevent the misuse of legal persons for ML/TF, and ensure that there is adequate, accurate and timely information on beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.
The FATF has recently published new guidance on Best Practices on Beneficial Ownership for Legal Persons to address shortcomings. It appears that there is no single solution good enough to tackle all the identified challenges that countries are experiencing. Instead, FATF recommends that countries adopt a ‘multi-pronged approach’. Under this approach, countries conduct comprehensive risk assessments and develop targeted measures, maintain company registers that record accurate and up-to-date information on beneficial owners, grant access of this information to competent authorities and develop dissuasive sanctions for non-compliance, among others.
Country risk assessment
Similarly to obligations imposed on financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) when they conduct their risk gap analysis, FATF has recommended that countries conduct comprehensive risk assessment taking into account their particular vulnerabilities, types of legal persons and potential abuse scenarios. Analysis of relevant court cases, filed suspicious activity reports and practical experience during the course of the national financial intelligence units’ investigations could be a useful source of data for developing specific measures.
Adequacy, accuracy and timeliness of information
Whilst the focus at large has been on achieving absolute transparency, transparency on its own wouldn’t go far as in combating financial crime. Rather, ensuring the adequacy, accuracy and timeliness of information on beneficial ownership need to go hand in hand with transparency. That’s why a multi-pronged approach whereby several sources of information are used to identify, verify and cross-check this information is a ‘must’. Furthermore, the study has identified that publicly accessible registers don’t necessarily provide true information, as the details entered upon registration aren’t necessarily verified. Among the best practices identified were having an obliged party (such as a notary, lawyer or accountant) verify and monitor the accuracy of the provided information at the incorporation stage, when opening a bank account or when filing annual submissions with the registry. In this scenario, the obliged party would serve as a gatekeeper and be under supervision of a designated supervisor itself.
On top of that, competent authorities, FIs and DNFBPs need to be granted access to beneficial ownership information from multiple resources and be able to cross-checks.
Verifications measures
Among the verification measures that countries have developed are automated solutions and blacklists where those listed would not be able to register, own or transfer ownership at all. Other countries identify certain red flags that suggest questionable behaviour and prompt them to conduct in-depth investigations to determine whether such behaviour is associated with ML/TF. For example, use of a single credit card or email address used in the incorporation of multiple companies would trigger an alert that the company register would report to the competent authorities.
In other countries, the company registers have the capabilities of detecting changes in the information submitted by companies, including increase in shares or transfer of ownership which is an excellent tool for maintaining the information up-to-date.
Another feature that’s aimed at ensuring that the information is up-to-date is concerned with reporting by external parties. Some countries have introduced a reporting functionality on the public register to encourage external parties such as NGOs, FIs and DNFBPs to report when they spot inconsistencies.
Bearer shares and nominee shareholder arrangements
According to the Interpretative Note to R.24, countries are required to take measures to prevent the misuse of bearer shares and nominee shares and directors. The FATF’s report shows that whilst such arrangements are usually not explicitly prohibited in the countries that were looked at, the requirements for traceability and lack of legal protection in practice render bearer shares and nominee arrangements obsolete.
Effective and proportionate fines and sanctions
The FATF’s report has highlighted best practices when it comes to effective, proportionate and dissuasive fines and sanctions for failure to disclose beneficial information or providing false information. These range from rejection of registration, liability to be struck off the register for failure to submit annual fillings, seizure of assets, to even dissolution by courts of legal entities involved in money-laundering schemes and personal criminal liability for obliged parties such as notaries. Such measures have been found to serve as strong deterrent, as they are capable of stopping the companies from doing business, obtain credits or go through restructuring.
International co-operation
When it comes to beneficial ownership of overseas entities, the exchange of information between countries is a critical component of AML efforts. Whilst it is less and less uncommon for beneficial information to be available online, the study has found that countries have encountered difficulties getting the required information when it is not. Requests for information upon request take time and involve significant levels of bureaucracy which hinders investigations. Further actions are therefore required in terms of international, co-operation.
Amongst the measures recommended by the FATF is rating jurisdictions’ level of cooperation, requiring re-registration with the local company registers or re-approval by domestic national authorities.
Recent international developments
At the level of the European Union, one of the key changes introduced by the Fifth Money Laundering Directive (5MLD) that comes into force in January 2020 is broadening access to information on beneficial ownership by making public companies registers mandatory.
In the UK and its Overseas Territories which, as seen from the Panama Papers were heavily used for incorporation of shell structures, the announcement made three years ago, that the Crown Dependencies will have public registers by 2023, have started to show results with the Cayman Islands publicly announcing in October this year their commitment to make information on beneficial ownership public. However, the Queen’s speech delivered on 14th October this year failed to address the Registration of Overseas Entities Bill. This has been disappointing for advocates of transparency of beneficial ownership information, as the UK Parliament isn’t expected to act on that bill in these parliamentary proceedings.
In the United States, the U.S. House of Representatives recently passed a bill requiring most limited liability companies and corporations to disclose their true owners and report to the Treasury Department’s financial crime division FinCEN. The so called Corporate Transparency Act of 2019 appears to be a step in the right direction with a potential to bring the US up to the EU standards. It is interesting to note, nevertheless, the Act doesn’t require companies with physical address in the U.S., over twenty employees and a turnover of five million US dollars per year to submit such information. The rationale is that the Act only targets anonymous shell companies. Yet, one could see how things may start falling through the cracks under if the Act is adopted as such.
Have we achieved enough in the past three decades
In light of the FATF’s 30th anniversary in April 2020 and the public pressure that’s accumulated in the past few years due to scandals in the media, popular TV shows and movies on the subject, one can’t help but wonder if we have achieved enough in terms of beneficial ownership of legal persons transparency.
The FATF’s recent findings show that generally countries have made progress in putting in place more robust frameworks in preventing legal persons from being misused. In the last couple of years, one can see countries across the globe are introducing laws and strengthening existing ones aimed at ensuring beneficial ownership transparency. It appears, therefore, that we do have stringent requirements in place already. However, fulfilling these requirements in practice is still challenging and it is not rooted in gaps in the standard itself but rather in its effective implementation.
One might argue that the FATF hasn’t fulfilled its role of leading global action to counter ML/TF in the most efficient way when it comes to beneficial ownership transparency in the past three decades. It may seem like the international community has strengthened its efforts in the area only recently. Could this be as a result of social and media pressure, why haven’t we been able to achieve better implementation results earlier?
Whilst movies such as the recently aired production the Laundromat or the Panama Papers scandal may put AML topics in the headlines from time to time, and are an excellent tool for rising public awareness, clearly a multi-pronged approach and an international public-private partnership is required if there is to be an effective system when it comes to beneficial ownership transparency and misuse of legal persons. The recent developments in different countries seem like good step forward and it is to be hoped that standards suggested by the FATF or other bodies such as the EU will become the global standard. No one institution and no one country can do it by itself though, we know that much.
The author Marta Andreeva (see photo) is an AML and financial fraud professional from Bulgaria.
