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Best Practices on Beneficial Ownership for Legal Persons

Insight

The Financial Action Task Force (“FATF”) is the international body which sets international standards on anti-money laundering and counter-financing of terrorism. FATF recently published Best Practices on Beneficial Ownership for Legal Persons.  It aims to help countries solve the common challenges faced in implementing measures to identify beneficial owners.

Countries should use one or more mechanisms at country level to ensure that information on the beneficial ownership of a company is obtainable and made readily available.  Company Approach, Registry Approach, and Existing Information Approach are mechanisms to identify owners behind companies, foundations and other legal persons.

 

Financial criminals are adept at using often multi-layered and multi-jurisdictional legal structures, including shelf and shell companies, to launder illicit funds.  Carefully constructed layers of complexity can muddy the waters and obscure the identities of the real beneficial owners of these entities, allowing financial crime to flourish.

Understanding a customer’s ownership structure and identifying their Ultimate Beneficial Owner (UBO) has long been one of the pillars preventing money laundering and terrorist financing globally.  The consequences of poor governance, controls and practices in the area were highlighted in several examples over recent years, resulting in large scale investigations, fines, loss of license and criminal prosecutions for the firms involved in facilitating crime activities.  Yet despite efforts around the globe to enhance transparency of UBOs, several challenges remain for firms in managing their risks including the adequacy of public registers and ensuring compliance with identification and verification of UBOs requirements.

Key challenges to Implementing an effective beneficial ownership system

The FATF identified a series of challenges found in the current system structure preventing the identification of beneficial ownership.  The challenges identified include the following areas:

  • Risk Assessment: Member States are found to have inadequate risk assessments, which on occasion are found to omit certain types of legal persons as well as only considering domestic threats and vulnerabilities.
  • Adequacy, Accuracy, and Timeliness of Information on Beneficial Ownership: Hindrances on the provision of accurate and up-to-date information are found to have included limited communication and coordination among sources of information.
  • Access by Competent Authorities: Competent authorities are found to suffer from inadequate processes which would have allowed them timely access to beneficial ownership on legal persons.  These tend to be obstacles such as information sharing, data protection and privacy laws.
  • Fines and Sanctions: There is a lack of effective, proportionate, and deterrent sanctions.
  • The assessments of 25 Member States found more than half failing to maintain compliance with standards.  This is largely due to the weak implementation of the current standards as opposed to gaps in the standard itself.

 

Multi-Pronged Approach

The multi-pronged approach identifies the beneficial owners behind legal persons, such as companies and foundations thru:

  • Existing Information Approach: Countries should use existing information available to them to comply with FATF requirements.  Existing sources of information include financial institutions, company, land, property or other types of registries, other authorities (tax authorities, stock exchanges), and commercial databases.
  • Registry Approach: Company registries are established and required to obtain and hold up-to-date information on the beneficial ownership of each company.
  • Company Approach: Companies themselves are required to obtain and hold up-to-date information on shareholders and members, or alternatively, take reasonable steps to do so proportionate to the levels of money laundering/terrorist financing risk they present.

FATF believes a multi-pronged approach, whereby several sources of information are, used would often prove to be more effective in increasing transparency and preventing the misuse of legal persons for criminal purposes.

Using multiple sources will also increase the accuracy of information held on the beneficial ownership of a company by enabling cross-checking and providing for increased pressure on companies to ensure they fulfill their obligations correctly and honestly.

Key Features of an Effective System

Below are the  key features of an effective system to identify the beneficial owners behind legal persons, such as companies and foundations :

  • Risk Assessment;
  • Access by Competent Authorities;
  • Adequacy, Accuracy and Timeliness of Information in Beneficial Ownership:
    • Verifying and/or monitoring the accuracy of the information;
    • Use of supplementary information platform in addition to company registry;
    • Ongoing reporting at company level / to the reporting entities or company registry;
    • Verification through different means;
    • Enhanced measures for companies with foreign ownership/directorship;
    • Highly effective law enforcement authorities with adequate resources;
    • Using technology to facilitate checking and validation.
  • Forbidding or Immobilizing Bearer Shares and Nominee Arrangements;
  • Effective, Proportionate and Dissuasive sanctions.

Information on Beneficial Ownership of Overseas Entities

  • No Specific Prior Requirements:
    • Not applying specific ex-ante requirements on legal persons registered abroad, but only seeking mutual legal assistance when there is a problem.
  • Re-Registration:
    • Requiring re-registration with a local beneficial ownership.
  • Rating Jurisdictions’ Level of Cooperation:
    • Rating jurisdictions based on the availability and extent of their cooperation.  Impose defensive measures, such as restriction of certain business activities, accordingly.
  • Re-Approval:
    • Requiring re-approval by domestic national authorities based on detailed investigation of the relevant legal entities.

How Sia Partners Can Help

Sia Partners has extensive records helping companies reinforcing their ethical Policies, Procedures, and Standard. Our Centers of Excellence have developed technical AI solutions to support initiatives.

Change Management: With the outlined process above, our consultants take a detailed, thoughtful approach to implementing change for success in each organization. A roadmap is designed to ensure that a multi-step plan is in place to leverage all available resources, develop clear steps with measurable targets, and risk analysis to the organization.    

Scalability and Success: building a culture of integrity, compliance, and ethics. By proactively building this into a process, it provides a more sustainable baseline of trust with consumers, and preservation of quality authentic content.