Companies interact with a large number of entities in the outside world – customers, third party intermediaries and vendors and suppliers to name the most significant ones. These relationships are the lifeblood of a company.
In today’s world, companies have to know with whom they are dealing – not just the name of the company, not just the officers of the company, but the natural person owners of the company. They are the beneficial owners of the customer, the third party intermediary, the vendor and the supplier.
Why do you need to know the beneficial owners?
The short answer is to ensure compliance with the law. Anti-corruption, sanctions, and anti-money laundering requirements dictate that you need to collect and analyze this information.
Starting with anti-corruption laws, a company has to identify third party intermediaries and vendors and suppliers that may include foreign government owners. This is a basic requirement. A third party may include government officials as owners. The presence of the government official is a big red flag that has to be addressed to prevent a corrupt payment to the foreign official. Internal controls and compliance remediation may be required to resolve the red flag.
The company has to verify that the third party does not include a foreign official in its ownership structure. The amount of the foreign government ownership may be small, as low as 5 or 10 percent (or even smaller) and can cause significant compliance headaches. As a result, companies have to drill down on the ownership of a third party entity to verify the absence of a government owner.
Companies that fail to do so are just asking for trouble. Companies that substitute a certification of lack of government ownership from a third party entity may reduce the risk but do not eliminate the risk. Certifications have turned out to be false – government owners may hide their interests and avoid detection.
The same concern of foreign government official ownership can create sanctions issues as well. The Department of Treasury’s Office of Foreign Asset Control (“OFAC”) maintains sanctions prohibitions against various countries and designated individuals – the Specially Designated Nationals (“SDNs”). Under existing policies, a company owned 50 percent or more by an SDN or a combination of SDNs is a prohibited entity under existing sanctions laws. This prohibition extends to customers, third parties, vendors and suppliers, and all parties with which a company may conduct a financial transaction. Given this limitation, companies have to verify the natural person owners of the entity to confirm the absence of SDNs or a combination of SDNs. Even if the company confirms an SDN’s ownership interest of below 50 percent, the company has to conduct an intensive due diligence of the other owners and implement controls to detect possible changes in the SDN’s ownership or role in the management of the company.
Money laundering compliance also requires the identification of beneficial owners. Financial institutions, a broad term, that encompasses traditional banks and other entities, have to comply with detailed customer due diligence requirements beginning in May 2018. Financial institutions are not waiting for the deadline and building systems before the effective date to identify beneficial owners and mitigate money-laundering risks.
Non-financial institutions are not subject to these detailed requirements but need to attend to the issue as well. Two significant risks exist for non-financial companies:
First, a company may collect third party payments from unknown companies on behalf of an existing customer or third party. This is not uncommon and often involves unknown entities from high-risk companies. The unknown entity may be engaging in financial transaction to launder proceeds from illegal activities.
Second, a company may be unwittingly completing a trade-based money-laundering scheme connected to a foreign government official or a known criminal.
In both cases, it is important to know with whom you are dealing and the risks that may become apparent once you confirm the identity of the natural person owners of an entity.