But Passage of Pending U.S. AML Reform May Reduce Perceived Deficiencies in Beneficial Owner Identification
Last week, Transparency International (“TI”) released an updated assessment of the “beneficial ownership legal frameworks” in the G20 countries, entitled “G20 Leaders or Laggers?” Since TI’s 2015 assessment of this same issue, the international anti-corruption organization found that “progress across the board has been slow.” The 2018 Report lauds France, Germany and Italy for making “noticeable improvements since 2015.” Other countries made more modest upgrades during that time period, including the United States, whose beneficial ownership transparency framework assessment rose from “Weak” in 2015 to “Average” in the 2018 Report.
This post begins with a few observations regarding TI’s methodology in composing the 2018 Report. The post then reviews certain of the areas where TI found the United States lacking as compared to its G20 peers, and examines whether Congress’ recent draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), about which we blogged in a January 2018 two-part series (here and here), may address these identified deficiencies.
TI’s 2018 Report assesses 10 principles that it believes are fundamental to an adequate beneficial ownership transparency legal framework: Beneficial Ownership Definition; Identifying and Mitigating Risk; Acquiring Beneficial Ownership Information; Access to Beneficial Ownership Information; Beneficial Ownership Information of Trusts; Access to Beneficial Ownership Information of Trusts; Financial Institutions & Designated Non-Financial Businesses and Professions (“DNFBPS”); Domestic and International Cooperation; Beneficial Ownership Information and Tax Evasion; and Bearer Shares and Nominees.
According to TI, the Report is a result of research conducted by “pro bono lawyers or Transparency International national chapters” who filled out uniform questionnaires for each of the G20 countries and four G20 guest countries. The draft questionnaires were also shared with government officials from each country, and these officials were provided the opportunity to review the data collected, provide feedback and propose corrections. Officials from the United States and many other countries provided feedback in response to TI’s queries.
While the United States obtained a score of 50% or below in TI’s assessment of 7 of the 10 principles, we focus here on 3 areas where the county received particularly low marks: (1) Acquiring Beneficial Ownership Information; (2) Access to Beneficial Ownership Information; and (3) Financial Institutions & DNFBPS.
Acquiring Beneficial Ownership Information
First, with respect to the “Acquiring Beneficial Ownership Information” principle, TI focused upon what, if any, requirements a legal entity is subject to when recording information about its shareholders. In this area, the United States scored a 0%, just as it did in 2015. The U.S. shared this ignoble distinction with only two other countries, Canada and China.
The CTIFA, if enacted, has the potential to dramatically alter the status quo with respect to this issue. As we noted in our analysis of the draft bill, corporations and LLCs, with some exceptions, will be required to identify their beneficial owners and obtain certain basic information about them. For corporations or LLCs that form after passage, the draft bill requires submission of a list of beneficial owners to FinCEN that includes their name, address, and passport or driver’s license number. For corporations or LLCs already in existence, the bill requires (1) an update of beneficial owner information 60 days after any changes, and (2) submission of an annual filing to FinCEN containing beneficial owners and their name, address, and passport or driver’s license number.
If the CTIFA’s changes are implemented, one would expect to see a more favorable assessment of the United States by TI with respect to this issue in the future. Take, for example, the first question in TI’s questionnaire in this area: “Are legal entities required to maintain beneficial information?” In TI’s 4-point scale for this question, a “0” signifies there is “no requirement to hold beneficial ownership information, or the law does not make any distinction between legal ownership and control,” while a “4” means that the country requires legal entities “to maintain information on all natural persons who exercise ownership or control of the legal entity.” Given the United States’ 0% mark for this issue as a whole, it is safe to assume TI scored this question as a “0” for the country. Under the CTIFA, however, one would expect a score at or near “4,” given the draft bill defines “beneficial owner” as a “natural person” who either (i) “exercises substantial control over a corporation” or (ii) “owns 25 percent or more of the equity interests . . . or receives substantial economic benefits from the assets.”
Access to Beneficial Ownership Information
We next examine the “Access to Beneficial Ownership Information” principle, another area in which the United States fell far below a passing grade, scoring only an 18%. On this topic, TI’s analysis highlights the state of Delaware, and how it impairs transparency by not including information about a company’s shareholders in its register, thereby “making the identification of the beneficial owner more difficult.”
Here, again, the changes proposed in the CTIFA could bring the type of transparency that TI endorses. The most notable change proposed by the CTIFA in this area is the collection of beneficial ownership information to create the United States’ first national directory. Under the draft bill, this directory will be accessible: (1) upon criminal subpoena from a federal agency; (2) upon request by a federal agency on behalf of law enforcement of a foreign country; or (3) upon request by financial institution, but only with customer consent, as part of compliance with the BSA, the PATRIOT Act, or other law. Implementing such a directory would be a huge step forward in TI’s eyes. TI highlights the importance of “central beneficial ownership registers” and credits the six countries in the study that currently have one: Brazil, France, Germany, Italy, the United Kingdom and Spain. Of those six countries, five appear to provide access to the database in much the same manner as the CTIFA—that is, to “competent authorities.” The sixth country, United Kingdom, allows the public to freely access the database, a feature TI considers the “most effective and practical way to record information on beneficial ownership.”
Due Diligence for Financial Institutions & DNFBPs
Finally, for the “Financial Institutions & DNFBPs” principle, TI examined customer due diligence requirements across a wide range of industries. TI’s 2018 Report recognizes the United States as having made some improvements in this area. Even with a modest jump, however, its 2018 score is only 29%. This low score is primarily due to low marks in issues relating to DNFBPs. Specifically, TI identified its concern that lawyers, accountants and real estate agents in the United States are generally not obligated to identify the beneficial owners of their customers/clients. On this point, TI found that only a small number of the countries examined in the Report shared the United States’ less transparent approach.
While the CTIFA would further enhance due diligence requirements relating to financial institutions, the draft bill does not appear to address what TI collectively refers to as DNFBPs. The absence of any regulation of lawyers, accountants or real estate agents in the CTIFA is particularly notable given recent legislative effort in this country. In contrast to 2018’s CTIFA, the Corporate Transparency Act of 2017, about which we blogged in September 2017, would have, if enacted, expanded the Bank Secrecy Act’s definition of a “financial institution” to include formation agents. A “formation agent,” in turn, was defined as “any person who, for compensation . . . acts on behalf of another person to form, or assist in the formation of, a corporation or [LLC] under the laws of a State; or . . . purchases, sells, or transfers the public records that form a corporation or [LLC].” According to our analysis, this definition potentially could have applied to lawyers, accountants, and many other businesses and individuals, thereby subjecting them to reporting obligations under the BSA.
In sum, TI’s 2018 Report offers a damning but familiar critique of the United States’ secrecy surrounding ownership and control of its legal entities, which has led to the United States as being labeled as a haven for money launderers and tax evaders. Recent proposed legislation would address certain of the key principles identified by TI as lacking, but one is left to ponder whether an even more comprehensive set of obligations is necessary to achieve, in TI’s parlance, a “strong beneficial ownership legal framework.”
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.