Know Your Customer (KYC), Anti-Money Laundering (AML), beneficial ownership rules and financial crime legislation place a spotlight on financial institutions (FIs) to understand and verify exactly who they are doing business with at all times. However, the widespread abuse of complex ownership structures to conceal the identities of Ultimate Beneficial Owners (UBOs) has complicated the process of AML/KYC compliance in this regard.
Both the Panama Papers and the subsequent Paradise Papers leaks in 2017 have served to highlight the complex nature of ownership structures of multinational companies and the onerous task often faced by compliance professionals in identifying UBOs [BIIA Reports on the Panama Paper leak]
To help put an end to financial crime and corruption, one of the most important steps regulators and governments can take is to ensure that effective beneficial ownership transparency rules and procedures are in place. In reference to this, the G20 Anti-Corruption Action Plan 2017-18 quoted, “transparency over beneficial ownership is critical to preventing and exposing corruption and illicit finance.”
The Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes AML/KYC, initiated work to identify best practices on beneficial ownership in February 2019. This work is expected to be finalized by October 2019 and will provide additional insight to improve transparency and uncover UBOs.
Who is a beneficial owner?
According to the FATF, “beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” In other words, FIs need to know who they are doing business with — the real person (or group of people) who owns or controls that business.
What is beneficial ownership transparency?
Beneficial ownership transparency is a requirement for legal entities to disclose information about the people who ultimately own or control them. This person or people are the beneficial owner(s) of the legal entity.
Why does beneficial ownership transparency matter?
Anonymous shell companies enable corruption, fraud, organized crime and tax evasion. Anonymity undermines trust in companies and impedes investment. Public access to high-quality data on who owns companies is essential to improve the business environment by reducing risk, and it helps businesses and governments understand who they are doing business with.
Beneficial ownership around the globe
The U.S. government has long recognized that the ability to create legal entities without accurate beneficial ownership information as a key vulnerability of the U.S. financial system. In 2006, the U.S. Government Accountability Office (GAO) published a report titled “Company Formations: Minimal Ownership Information Is Collected and Available,” which described the challenges of collecting beneficial owner data at the state level. In its 2016 Mutual Evaluation Report (MER) of the U.S. government’s AML/CFT regime, the FATF noted that the “lack of timely access to accurate beneficial ownership information remains one of the most fundamental gaps in the U.S. context.”
The 2018 risk assessment additionally clarified that such vulnerability is further compounded by shell companies’ ability to transfer funds to other overseas entities. The report later noted that “complex ownership structures featuring layers of corporate entities, trusts, or nominee owners—punctuated by the involvement of foreign natural or legal persons—also present challenges.” Such ongoing vulnerabilities have placed the U.S. under domestic and international pressure, including from the FATF, to tighten its AML/CFT regime with respect to beneficial ownership disclosure requirements.
In the UK, the 5th Anti-Money Laundering Directive (5AMLD) is a major step forward for beneficial ownership transparency. While G8 and G20 countries have not committed to publish their registers en bloc, the Directive requires that EU members provide public access to their registers by 2020. All registers must list the Ultimate Beneficial Owner (UBO) and include the same basic information: name, month of birth, nationality, country of residence, and nature/size of the interest held. Overall, several countries have centralized registers, but only a handful — including the UK, Denmark and Ukraine — have made their registers publicly available.
Worldwide, there is increasing momentum on beneficial ownership reform. The G8, G20 and EU member states agreed to establish registries in 2013, 2014 and 2015, respectively. In 2016, various countries at the Anti-Corruption Summit in London came forward to pledge to establish public registries of beneficial ownership (for example, Britain, Afghanistan, Kenya, France, the Netherlands and Nigeria).
Improving beneficial ownership information
Moving forward, countries have started taking required action to ensure the availability of transparent beneficial owner information by:
- Strengthening the collection of beneficial ownership information
Reinforcing underlying legal and regulatory requirements for disclosure of different types of ownership across various legal vehicles is fundamental to more effective, transparent processes
- Improving the interoperability of information
Applying common standards such as the Beneficial Ownership Data Standard and linking ownership information with other policy areas can help to track money and assets across sectors and jurisdictions
- Building strong verification systems
Open beneficial ownership data, coupled with strong verification systems, helps ensure that data is accurate and useable
- Engaging citizens in monitoring and accountability
Informal and formal channels for accountability enable citizens to actively use ownership data to help uncover networks of corruption
Some financial institutions have also joined forces in collecting and holding beneficial ownership information directly from companies. All these measures aim to enhance Customer Due Diligence (CDD) for banks, broker-dealers, mutual funds, trusts, futures commission merchants and commodities brokers by identifying and verifying the beneficial owners of legal entities, along with the adoption of risk-based procedures for CDD. Restrictions (such as penalties) exist for both the company to hold and make available the beneficial owner information, as well as the shareholders (or other responsible persons) for failure to provide the company with necessary information regarding the beneficial owners.
Best practices for beneficial ownership compliance
- Assess the risk
Business customers have different risks attached than individuals. Entities may have opaque and complex ownership structures. This complexity can make it difficult to determine their beneficial owner(s) and therefore achieve AML/CTF compliance. It is essential to assess the ML/TF risk posed by the beneficial owners of customers in accordance with AML/CTF program customer risk assessment methodology.
- Determine ownership
Identify the threshold and individual beneficial owners of business customers. The FATF does not mandate a threshold for determining controlling participation, but in guidance and through its assessment process has found a 25 percent threshold to be acceptable. As a result, “25 percent” or “more than 25 percent” is used in many BO definitions, such as the Common Reporting Standard (CRS) for AEOI, and the EU’s Anti-Money Laundering Directives. It is important to understand, however, that the FATF merely gives a threshold as one example of how to determine beneficial ownership. For example, Argentina and the Dominican Republic use a threshold of 20 percent; Uruguay, 15 percent; Barbados, the Bahamas, Belize and Jersey, 10 percent; and Colombia, 5 percent.
- Collect and verify owners’ identities
Collect and take reasonable measures to verify information on each beneficial owner. In accordance with KYC/AML procedures, collect and verify the full name, date of birth and/or address of the beneficial owner and perform a KYC check.
- To verify a beneficial owner, FIs can use reliable and independent electronic data that demonstrates that the identity information collected about the beneficial owner is correct.
- What counts as reasonable measures for verification purposes depends on the AML risks identified in relation to providing the designated service to the relevant customer.
- Document and maintain records
Keep records of the identification processes performed on the beneficial owners of business customers. The beneficial owners may change over time, so FIs need to regularly monitor and update UBO information throughout the customer life cycle.
Traditionally, the onboarding of business entities and their UBOs was conducted through manual checks, which are complex and time consuming. FIs need to examine how they can automate the KYB process to help reduce compliance costs, save time and improve compliance procedures for beneficial ownership rules. To mitigate the risk of AML noncompliance, they can consider artificial intelligence and modern solutions to verify the authenticity of business entities in real time.