IMPACT ANALYSIS: FATF report on concealment of beneficial ownership, professions need to do more

A new joint report by the Financial Action Task Force (FATF) and the Egmont Group, entitled “Concealment of Beneficial Ownership”, has assessed the vulnerabilities linked to concealment of beneficial ownership. The report is designed to support risk analysis by governments, financial institutions and other professional service providers.

The report uses over 100 real-life case studies provided by law enforcement agencies and other experts in 34 jurisdictions to analyse and expose vulnerabilities associated with beneficial ownership, with a focus on the involvement of professional intermediaries. The main culprit in disguising beneficial ownership, according to the report, is the use of shell companies and nominee directorship services. Accountants are more likely to be complicit in their involvement to hide beneficial ownership, compared to legal professionals and company service providers.

However, money laundering through real estate is a major weakness for lawyers, with gaps yet to be filled. More work needs to be undertaken by professionals to reduce vulnerabilities. Overview The joint FATF/Egmont Group report exposes how beneficial ownership can be abused and the ease with which limited liability companies or shell companies can be used to build complex legal ownership structures.

Lawyers, accountants and other service providers frequently play a role in such structures. The use of nominee directors and shareholders is highlighted as exacerbating the risks by creating “barriers between the owner or individual and laundered proceeds”. The report highlights that often, professional intermediaries play a role in helping to create or operate the structures used to conceal beneficial ownership, either complicity or unwittingly.

Criminals use a range of techniques The report highlights how criminals use a range of techniques and mechanisms to obscure their ownership and control of illicitly obtained assets. Often, prosecutors and law enforcement agencies find it difficult to identify the true beneficial owner of an asset during investigations.

The report states: “Schemes designed to obscure beneficial ownership often employ a hide-in-plain sight strategy leveraging global trade and commerce infrastructures to appear legitimate”. The report takes a global view assessing how legal persons, legal arrangements and professional intermediaries can help criminals conceal wealth and illicit assets. It makes the point that the very structures such as limited liability companies designed to encourage business growth and development are being used to facilitate money laundering, tax evasion and corruption.

Countries are now facing a new national challenge of having to deal with a borderless commercial environment. However, although the vulnerabilities are highlighted, there is not a lot of discussion on how these gaps in the system can be dealt with by law enforcement agencies. A key feature of the report is the 106 case studies that use shell companies to disguise beneficial ownership. It is clear that “front companies” and bearer shares are less frequently used by criminals to hide beneficial ownership.

The case studies show that in many cases, the beneficial owner will maintain some level of direct control in a scheme but will rarely do so without also involving an intermediary or a “straw man” nominee director or shareholder. Use of professional intermediaries Trust service providers vulnerable to exploitation The use of specialist and professional intermediaries is an important feature of any scheme designed to conceal beneficial ownership.

Approximately half of all intermediaries involved in the case studies outlined were assessed as having been complicit in their involvement. However, case studies point to circumstances where professionals can be “unwitting or negligent in their involvement”. What is not new is that trust and company service providers (TCSPs) represented the highest proportion of professional intermediaries involved in the establishment of companies, bank accounts, nominee directorships and other management services.

It was found that TCSPs appeared less likely to be the architect of a scheme to obscure beneficial ownership and were more likely to be “wilfully blind than complicit”. The report found that TCSPs were “vulnerable to exploitation by criminals and other professional intermediaries involved in these schemes”.

What is interesting is that TCSPs were present in almost all case studies that involved intermediaries from multiple sectors. Only a few case studies involved multiple inclusion involvement of a lawyer and an accountant. TCSPs play a crucial role in establishing and managing local companies on behalf of clients.

Accountants Accounting professionals, according to the report, were the least representative in the case studies, yet represented the highest proportion of scheme designers and promoters in the case studies. Accountants are more likely to be complicit in their involvement, compared to legal professionals and TCSPs. They are more likely to promote their own scheme to clients than facilitate a scheme designed by their client.

The report found “It is likely that the financial acumen of the accounting profession and the ease with which accountants can identify suspicious financial activities, limit their vulnerability to being unwittingly exploited to facilitate the concealment of beneficial ownership”. Lawyers The role of legal professionals to facilitate schemes designed to disguise beneficial ownership varied, depending on the circumstances.

The report found that: “Lawyers were likely, of the three professionals, to be involved in the acquisition of real estate as a means of laundering the proceeds of crime and obscuring beneficial ownership”. Legal trust accounts and client accounts were frequently used as a means of disguising the beneficial ownership. Legal professional privilege was also identified as a barrier to the successful recovery of beneficial ownership information.

There was nothing in the report that indicated how these hurdles could be overcome. In the case studies analysed, legal professionals appeared to be unwittingly used or negligent in their involvement. The conclusion is that surprisingly, legal professionals are still not sufficiently aware of their inherent money laundering and terrorism financing vulnerabilities and allow gaps to manifest. Lack of awareness by professionals The case studies highlight a lack of awareness in the professions about money laundering and terrorist financing risks which can lead to them being exploited by organised crime.

Only four intermediaries involved in schemes reported suspicious transaction activity. It leads to the question whether the professions are turning a blind eye when it comes to business. Authorities have limited information available when it comes to obtaining information from lawyers and accountants. Schemes designed to obscure beneficial ownership often rely on a hide-in-plain sight strategy, which impairs the ability of financial institutions, intermediaries and government authorities to identify suspicious transactions.

The report points out that in most of the case studies analysed, the information held by financial institutions was invaluable in investigating the crime and those countries that require the reporting of threshold or cross-border transactions were instrumental in identifying the irregular financial activities. Factors that may assist in addressing concealment of beneficial ownership

The report highlights several vulnerabilities associated with the concealment of beneficial ownership:
• Consideration of the role of nominees including measures to limit their misuse;

• The need for regulation of professional intermediaries in line with FATF standards;

• Further work to identify solutions or measures to prevent misuse of legal professional privilege to conceal beneficial ownership;

• Ensure that financial intelligence units have access to the widest possible range of financial information;

• Increase sharing of relevant information in transaction records to support global efforts to improve the transparency of beneficial ownership;

• Further work is needed to understand what can be done to improve the quality and timeliness of cross-border sharing of information;

• Countries should make use of registers of beneficial ownership and to make sure all countries company registers are sufficiently resourced and maintained;

• There is a need for countries to consider and articulate the vulnerabilities and threats relating to domestic and foreign legal persons and arrangements.

Produced by Thomson Reuters Accelus Regulatory Intelligence 03-Aug-2018

Published 31-Jul-2018 by Niall Coburn, Regulatory Intelligence

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