Second Post in a Two-Post Series

As we blogged yesterday, the issue of the beneficial ownership of entities and the potentially pernicious role of shell companies in perpetuating money laundering is the primary anti-money laundering (“AML”) concern across the globe for both enforcement officials and the financial industry.  Consistent with this concern, the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, has issued a document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities, and sets forth some high-level recommendations.  Meanwhile, and as we just blogged, the U.S. House passed H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If enacted, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties.

However, it has been difficult to implement in practice beneficial ownership requirements in countries that already create repositiories of such information for law enforcement to access — as envisioned by the CTA.  The FAFT Best Practices Guidance represents an evaluation of historical efforts by the member countries’ approaches to the collection and maintenance of beneficial ownership information, followed by certain recommendations for going forward.

As background, FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). The Best Practices Guidance was issued as a result of the FATF’s mutual evaluation, a peer review process by which it evaluates each member’s implementation of the FATF recommendations. This mutual evaluation indicated that many of the covered jurisdictions were finding it challenging to achieve a satisfactory level of transparency regarding the beneficial ownership of legal persons, which FATF defines as any entities, other than natural persons, that can establish a permanent customer relationship with a financial institution or otherwise own property.

Three Options for Cooperation

FATF previously released its Guidance on Transparency and Beneficial Ownership in October 2014. In it, FATF provided guidance on what steps countries should take to prevent the misuse of legal persons for ML/TF. FATF did not dictate the mechanism by which countries should implement the beneficial ownership collection requirements – rather FATF gave three options for facilitating the cooperation of companies with the competent authorities and ensuring the availability of beneficial ownership information on companies. The three options are:

  1. Registry Approach – this approach requires company registries to obtain and hold up-to-date information on the companies’ beneficial ownership. This information is made publically available and would facilitate access by financial institutions, designated non-financial businesses and professions (DNFBPs) and other competent authorities.
  2. Company Approach – under this approach, companies are required to obtain and hold up-to-date information on the companies’ beneficial ownership or companies to take reasonable measures to obtain and hold up-to-date information on the companies’ beneficial ownership.
  3. Existing Information Approach – under this approach, existing BO information is gathered from existing sources, including: (i) information obtained by FIs and/or DNFBPs; (ii) information held by other competent authorities on the legal and BO of companies; (iii) information held by the company as required; and (iv) available information on companies listed on a stock exchange, where disclosure requirements ensure adequate transparency of beneficial ownership.

FATF judged the effectiveness of these three approaches by the analyzing them in relation to three targeted outcomes:

  • Legal persons are prevented from being used for criminal purposes.
  • Legal persons are sufficiently transparent.
  • Accurate and up-to-date basic beneficial ownership information is available on a timely basis.

These immediate outcomes could be met, according to FATF, if countries are working to ensure two fundamental principles– (1) companies are obtaining information on beneficial ownership and make such information readily available in a specified location in the country, OR (2) there are mechanisms in place for the timely determination of beneficial ownership information by a competent authority.

Challenges to Tracking Beneficial Ownership

The mutual evaluation revealed the following common challenges in implementing beneficial ownership measures across countries.

  1. Lack of adequate risk assessment concerning the possible misuse of legal persons. Specifically, the mutual evaluation revealed that not all types of legal persons were covered in the risk assessment, relevant risk assessment were not consistent with the results of national risk assessments, and only domestic threats and vulnerabilities associated with legal persons were considered. Finally, FATF concluded that registries, companies, FIs and DNFBPs and competent authorities did not demonstrate a good understanding of the risks involved in using legal persons.
  2. Adequacy, accuracy and timelines of information on beneficial ownership. The evaluation revealed that beneficial ownership information collected was not accurate and there were no systems in place to actively verify, test or monitor the information. Nor were there requirements of legal persons to update their beneficial ownership information or inform the registry that there were changes to beneficial ownership. Countries did not coordinate among different sources of information to cross-check information for accuracy. Moreover, the parties responsible for updating the information lacked rigorous customer due diligence (“CDD”) measures and were unable to identify beneficial ownership information when complex structures or foreign ownership was involved. Finally, there were no record retention requirements.
  3. Access by competent authorities. The evaluation found that there were inadequate mechanism to ensure that competent authorities had timely access to beneficial ownership information. This was so because of the obstacles to information sharing caused by data protection and privacy laws. Moreover, FATF found that competent authorities did not share information and had no procedures to seek information from parties obligated to provide information. The lack of registration and licenses mechanisms caused competent authorities difficulty in identifying the source of information. Finally, competent authorities lacked sufficient resources to carry out investigations
  4. Bearer share and nominee shareholder arrangements.  The evaluation determined that countries did not place risk mitigating measures in place to address money laundering concerns, particularly because ownership of the bearer shares and share warrants were not sufficiently accessible or transparent. FATF found that the use of nominee shareholders obscured the ultimate control and ownership of the companies.
  5. Fine and sanctions. The evaluation found that there was generally a lack of effective, proportionate, and dissuasive sanctions directed at companies that failed to provide accurate and up-to-date information on beneficial ownership and reporting entities which failed to apply specific CDD measures required for legal persons. As we previously blogged, many countries in the EU have failed to prosecute people for money laundering offenses and has in general lagged behind the US on enforcement actions against money launderers.
  6. International Cooperation. The evaluation found that there were inadequate mechanisms for monitoring the quality of assistance received from other countries. Specifically requests for information often took a long time to fulfill when they involved multiple international agents and complex legal issues. This concern was amplified by the fact that not all countries keep beneficial ownership information.

As to the specific approaches, mutual evaluation revealed the following issues:

  • For countries implementing the Registry Approach, the challenges existed at the institutional level: there was a failure to establish methods to collect accurate and updated information on beneficial information in part because there were questions about whether the registry was empowered to do so and whether it had sufficient resources to achieve its particular purpose.
  • For countries implementing the Company Approach, the mutual evaluation found that the lack of regulatory frameworks that would require companies to gather accurate and up-to-date information prevented companies from seeking the required types of beneficial ownership information.
  • For countries implementing the Existing Information Approach, the mutual evaluation found the lack of established mechanisms in obtaining existing information by competent authorities and the lack of mechanisms on information sharing among competent authorities presented significant challenges. FATF noted that this approach hinges on the implementation of other FATF Recommendations, including international cooperation and across the board implementation of CDD procedures to identify and verify the identity of beneficial owners; the failure of which to implement greatly limits the stores of said “existing information.”

Proposed Solutions

As a result, FATF has recommended a multi-pronged approach. This approach involves gathering information from several sources, which increases transparency and access to information and helps mitigate accuracy problems. Competent authorities are urged to access to information on beneficial ownership through different sources and should ensure the accuracy of information by cross-checking. Through this process, there are key stakeholders who are responsible for requesting information from different sources, seeking clarification from companies, and if necessary report suspicious activities.

The suggested key features of an effective system were laid out as follows:

  • Risk assessment – FATF encourages countries to designate an agent to analyze risks by reviewing relevant court cases, suspicious transaction reports, practical experience of competent authorities, and patterns and trends in ML/TF amongst various crime syndicates.
  • Adequacy, accuracy and timeliness of information in beneficial ownership:
    • The appointment of a “Gatekeeper” who would verify or/and monitor the accuracy of the information.
    • Cross-checking information against a supplementary information platform in addition to a company registry, such as a tax database.
    • Ongoing obligations to update beneficial ownership information to the reporting entities or company registry.
    • Verification of information through cross-checks, red flags or suspicious activities, sample testing with public and non-public data, coordination among authorities, or voluntary reporting by external parties when errors are suspected.
    • Enhanced measures for companies with foreign ownership/directorship.
    • Highly effective law enforcement authorities with adequate resources.
    • Using technology to facilitate checking and validation.
  • Giving competent authorities direct access to beneficial ownership information.
  • Forbidding bearer shares and nominee arrangements.
  • Effective, proportionate and dissuasive sanctions ranging from administrative sanctions to prosecution actions against corporate entities that fail to comply with information filings.

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