Meet the challenge of beneficial-ownership awareness

An international anti-money laundering body’s finding of serious gaps in how U.S. financial institutions can learn the true owners of shell companies gives U.S. firms a need to consider how they can shore up their own processes for determining beneficial ownership and establishing a risk-assessment procedure for clients.

With the prospect of new federal rules to close the gap, and considering that other countries have more stringent beneficial ownership systems in place, action now by U.S. firms could be prudent.
The inter-governmental Financial Action Task Force and the Asia/Pacific Group on Money Laundering (APG) conducted a detailed assessment of the U.S. anti-money laundering/counter-terrorism framework and published their findings in a report on December 1.

The report gave the United States good marks for fighting terrorism financing and investigating and prosecuting money laundering. But it detailed a significant weakness in what the FATF called “gaps in access to information on the ultimate owners of companies.”

As is becoming widely recognized, especially following the Panama Papers scandal, anonymously-held companies play a major role in furthering corruption and crime. They enable corrupt politicians and other criminals to hide, transfer and enjoy their illicitly obtained wealth and create a culture of impunity.
The FATF warned that weaknesses regarding beneficial ownership information undermine the effectiveness of U.S. preventive and supervisory measures and hamper financial institutions and other businesses in their efforts to tackle money laundering.

The FATF findings are similar to research released a year ago by Transparency International, which showed that the United States scored among the lowest of all G20 countries for its beneficial-ownership legal framework, which was deemed “weak.”

Additionally, FATF is critical of the weak supervision and limited anti-money laundering program requirements for gatekeepers, such as company-service providers, accountants, investment advisers, law firms and the real estate sector. In the United States the use of real estate as a vehicle for money laundering is well known, as a number of expensive residential properties in the United States are now purchased anonymously through shell companies.

Unlike banks, real estate agents in the United States are not required to notify authorities if they suspect a customer is trying to move dirty money through property.

Treasury Department rules

The U.S. Treasury Department (through its Financial Crimes Enforcement Network, or FinCEN) introduced a rule in May that would obligate banks to collect beneficial ownership information from companies, starting in 2018.

The new measures aim to enhance customer due diligence (CDD) for banks, broker-dealers, mutual funds, futures commission merchants and commodities brokers. FinCEN’s final rules target the identification and verification the beneficial owners of legal entities, along with the adoption of risk-based procedures for CDD.

The proposed rule identifies two types of beneficial owners — those who satisfy an ownership threshold, where they directly or indirectly own 25 percent or more of the legal entity’s equity interests — and those who satisfy a control threshold, where the beneficial owner is an individual who has significant authority to control, manage, or direct the legal entity customer.

The rule is designed to end the use of anonymous corporations in the United States and require disclosure of beneficial owners when foreigners deposit money or buy assets in the United States.
The rule does not impose any disclosure requirements on the companies themselves or on those non financial gatekeepers, and the rule’s fate remains uncertain in a new Republican-controlled Congress and White House.

The International Monetary Fund (IMF) criticized the FinCEN proposal as not strong enough to meet international standards. Like the FATF, the IMF recommends stronger requirements for identifying beneficial owners, and extending anti-money laundering requirements to such gatekeeper sectors.
Such inconsistencies between countries in their commitment to determine beneficial ownership details only creates more work for compliance departments.

Other countries’ standards

Former UK Prime Minister David Cameron in May announced steps to end the secret ownership of property in the UK by foreigners. “For the first time,” Cameron said in a statement, “foreign companies that already hold or want to buy property in the UK will be forced to reveal who really owns them.”
Any foreign company that wants to buy UK property or bid for central government contracts has to join a new public register of beneficial ownership information. The disclosure rules apply to companies that already own property in the UK and to new buyers.

“The new register for foreign companies will mean corrupt individuals and countries will no longer be able to move, launder, and hide illicit funds through London’s property market, and will not benefit from our public funds,” the PM’s statement said.

France, the Netherlands, Nigeria, and Afghanistan have agreed to launch their own public registers of true company ownership, and Australia, New Zealand, Jordan, Indonesia, Ireland, and Georgia have agreed to take the initial steps toward making similar arrangements.

A recent EU directive has also strengthened the due diligence banks must undertake to establish beneficial ownership.
As with the FinCEN proposal, covered financial institutions will need to collect beneficial ownership information in a standardized format by identifying and verifying any individual who owns 25 percent of more of a legal entity, and the individual who controls the legal entity.

Challenges, and good practice to consider

Some of the biggest challenges in capturing beneficial ownership information include an insufficient amount of accurate and accessible information relating to company registration.

As noted, many U.S. gatekeepers such as law firms and investment advisers are failing to meet their customer-due-diligence obligations, and the FATF has found poor enforcement of companies that fail to update information about their shareholders or members on company databases.

The FATF has also identified a range of legal obstacles, such as data protection and privacy laws, to timely information sharing by U.S. institutions.

Likewise, the U.S. Securities and Exchange Commission has cited beneficial ownership determination errors and omissions in Foreign Corrupt Practices Act cases (see here and here).

If companies need an impetus to tighten their own beneficial-ownership processes, they need only point to the growing international tide of legislation and regulation. Organizations that become early adopters of the new rules may enjoy competitive advantages that mitigate reputational risks.

One practice to consider is to perform entity due diligence alongside beneficial-owner due diligence. This keeps related entities — officers, directors and beneficial owners — together in the same investigation with the customer or counterparty being vetted.

Once it is established who the beneficial owners are, each individual should have a politically exposed person (PEP) check, sanctions check and adverse news search run on them, at a minimum.
Financial and regulatory technology tools exist to help perform these tasks, although care must be taken to not overly rely on tools at the expense of human judgment.

Encourage queries and suspicions from staff members, and have an appropriate and well-advertised mechanism for such reporting.

Customer risk profiles must be crafted and explicit procedures used depending on the risk involved in terms of the level of scrutiny and further documentation required and escalation to another team in the organization for further probing.

Several items to consider in terms of crafting a risk profile include:
• How complex the entity’s ownership structure is;
• The customer’s home jurisdiction and whether it is known for having high levels of corruption or other financial crime;
• The extent to which a customer’s business is cash-based;
• Whether the customer has taken any initiative to give the identities of its shareholders and other relevant parties or, on the contrary, has tried to mask them;
• Whether the customer’s identity has been determined and vouched for by a third party that your organization has not adequately vetted.
Documentation is imperative — detailed descriptions of all documents and tools relied upon for identity verification should be described in detail. Any resolution of discrepancies should be carefully noted.
As risk profiles change, all customer information must be updated and new procedures applied as appropriate.

By: Mark Hosenball of Reuters, Brett Wolf of Regulatory Intelligence and
Julie DiMauro, Regulatory Intelligence

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