FATF Issues White Paper Addressing Challenges Facing Beneficial Ownership Collection

First Post in a Series on the FATF Plenary Outcomes

 The Financial Action Task Force (“FATF”) held its fourth Plenary, virtually, on June 21-25.  Delegates representing 205 members of the Global Network and observer organizations, including the International Monetary Fund, the United Nations, and the World Bank attended.  They discussed numerous topics, including the financial flows linked to environmental crime; financing of ethnically or racially motivated terrorism; risks relating to the financing of proliferation of weapons of mass destruction; virtual assets and virtual asset service providers, or VASPs; technological innovations; and asset recovery outcomes.  Many of these topics will be the subject of forthcoming reports from FATF.  Significantly, the group also discussed transparency surrounding information on the beneficial ownership of entities, which of course is the focus of the Corporate Transparency Act (“CTA”) recently passed in the United States.

Here, we will focus on (i) the white paper on beneficial ownership issued by FATF as a result of the Plenary, and (ii) developments in FATF’s country-specific measures in place to combat money laundering.  Future blog posts will discuss other outcomes and related reports produced by this wide-ranging Plenary, such as the report regarding money laundering and environmental crime.

As we will discuss, the beneficial ownership white paper seeks to obtain guidance on numerous legal and logistical challenges to the collection of such information, such as verification and access.  Many of these same challenges exist for U.S. regulators and the regulated community in regards to the CTA.  As to the country-specific measures, FATF has subjected Haiti, Malta, the Philippines, and South Sudan to increased monitoring, whereas Ghana’s status has improved.

White Paper on Beneficial Ownership

FATF released a white paper on transparency of beneficial ownership, which has been a key component of FATF’s agenda since 2003, and the focus of the CTA.  Yet as recognized by recent evaluations, and as acknowledged by G7 Ministers, countries are still not doing enough to properly gather and maintain beneficial ownership information.  FATF’s objective is to strengthen international standards to ensure greater transparency, provide authorities access to adequate, accurate, and up-to-date beneficial ownership information, and to mitigate the risks of misuse.

Potential amendments to FATF’s Recommendation 24, Transparency and Beneficial Ownership of Legal Arrangements, include:

  • Adequate, accurate, and up-to-date information. FATF is considering how to best provide competent authorities with access to information in a timely manner.  The information should be collected in a way that identifies the beneficial owner and means of ownership, is verified using documents or other methods on a risk-sensitive basis, and updated within a certain period following any changes.  Thus, FATF is asking for commentary related to (1) who should play a role in verification, (2) the effectiveness of discrepancy reporting, (3) possible verification approaches that balance the need for accuracy and compliance costs, (4) beneficial ownership registries and whether they should follow a risk-based approach, and (5) the frequency upon which information should be updated.  Verification of beneficial ownership information is an important issue relating to the CTA, for which the Financial Crimes Enforcement Network still must issue regulations.
  • Access to information. FATF is also considering who should have access to beneficial ownership information and how confidentiality should be protected.  This proposal includes questioning whether entities like financial institutions should have access to beneficial ownership information, and what measures should be taken to address concerns related to privacy, security, and potential misuse of information.
  • Risk-based approach for foreign legal persons. Cross-border ownership structures require a framework that allows jurisdictions to not only understand risks posed by legal persons within the country, but also risks associated with certain foreign-created legal persons with “sufficient links” to that country.  FATF is asking (1) whether countries should be required to apply measures to assess risks of at least some foreign-created legal persons and take appropriate steps to manage and mitigate the risks, (2) what would constitute a sufficient link with the country, (3) how countries should determine which foreign-created legal persons have a sufficient link to the country, (4) whether there is an alternative standard to “sufficient link,” and (5) what are the practical issues of identification and risk assessment of foreign-created legal persons.
  • Multipronged approach to collection of beneficial ownership information. FATF is evaluating countries’ creation and operation of beneficial ownership registries to develop core elements and supplementary measures to be included in a multi-pronged approach of information collection.  Factors that are being considered include: benefits of registries and other approaches to law enforcement and other competent authorities, the costs and compliance burden associated with registries, value of information, risks around the introduction of registries and other approaches, and other requirements and challenges for each of these approaches to be successful.  In relation to this proposal, FATF is asking for commentary on (1) key benefits and disadvantages of a beneficial ownership registry, including lessons learned, (2) alternative approaches and their benefits and disadvantages, (3) key attributes of ensuring the registry has adequate, accurate, and up-to-date information available for competent authorities, (4) a process to confirm the accuracy of information, (5) the role the private sector should play, if any, in ensuring that the information is adequate, accurate, and up-to-date, and (6) potential ways to reduce compliance burdens on low-risk companies.
  • Bearer shares and nominee arrangements. FATF is considering possible measures to strengthen controls on bearer shares and nominees to prevent them from being used to conceal the beneficial owners of legal persons.  Questions related to this proposal include (1) whether issuance of new physical bearer shares without any traceability should be prohibited, (2) whether existing physical bearer shares should be immobilized or converted, and (3) whether nominees directors and stakeholders should declare their status and alternative measures that would offer the same level of transparency.

FATF is requesting input on requirements by August 20, 2021, as recommendations and feedback will be discussed at its October 2021 Plenary meeting.  FATF recognizes that potential changes to beneficial ownership requirements will impact companies and other legal persons, and thus, is particularly interested in learning their views.  Responses should be submitted to  FATF.Publicconsultation@fatf-gafi.org with the subject-line “Comments of [author] on the draft Amendments to Recommendation 24.”

Country-Specific Measures

The Plenary of course examined and discussed several country-specific anti-money laundering (“AML”)/combating financial terrorism (“CFT”) measures.  Since February 2021, FATF examined the AML/CFT measures of Albania, Barbados, Botswana, Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Uganda, and Zimbabwe.  According to FATF, these jurisdictions have strategic deficiencies – some of which are briefly described below:

  • The Cayman Islands has applied sanctions, administrative penalties, and enforcement actions to ensure that AML/CFT breaches are remediated. The Cayman Islands should continue to address its strategic deficiencies by implementing penalties for inadequate/false beneficial ownership information and prosecuting all types of money laundering.
  • Malta has made progress on investigating, sanctioning, and prosecuting financial crimes, including, but not limited to improvements in financial intelligence, police and prosecutorial resources, confiscation policies and laws, and increased Malta should continue to work on several measures, including collecting and maintaining accurate beneficial ownership information, assessing sanctions for inaccurate information, and enhancing financial intelligence to support authorities pursuing financial crimes.
  • Morocco should continue to implement its action plan to address its strategic deficiencies, including, but not limited to improving risk-based supervision, taking remedial actions and applying effective, proportionate, and dissuasive sanctions for non-compliance, ensuring that beneficial ownership information is adequate, accurate, and verified, and prioritizing the identification, investigation, and prosecution of financial crimes.

Furthermore, several countries were placed under increased monitoring by FATF, meaning they are actively working with the FATF and FATF-style regional bodies to address strategic deficiencies in their AML/CFT measures.  A country under increased monitoring commits to resolve strategic deficiencies within an agreed timeframe and is subject to additional reviews.  New jurisdictions subject to increased monitoring include Haiti, Malta, the Philippines, and South Sudan.  Ghana, however, was removed from increased monitoring as a result of its significant progress.

Finally, the Plenary evaluated Japan and South Africa’s measures in place to combat money laundering and terrorist financing, concluding that while South Africa has a “solid framework” and Japan has “demonstrated good results,” both countries have room for improvement.  For instance, South Africa needs to proactively seek international cooperation, improve beneficial ownership requirements, better use financial intelligence products, and improve the application of the risk-based approach.  And, Japan needs to improve investigating and prosecuting money laundering and terrorist financing, preventive measures by financial institutions and designated non-financial businesses and professions, and the prevention of misuse of legal persons and arrangements.

If you would like to subscribe to Money Laundering Watch, please click here. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.