May 2018 will stand out as red-letter month on the calendar of Governance Risk and Compliance (GRC) leaders.  

Firstly, on 11 May 2018 the new FinCEN Customer Due Diligence (CDD) Rule, providing for beneficial ownership, became effective in the US. Secondly, the UK announced in the first week of May 2018 that the 14 British Overseas Territories will be required, by 31 December 2020, to have created public beneficial ownership registers for companies registered in their jurisdiction. Thirdly, the Council of the EU formally adopted the 5th Money Laundering Directive (MLD5) on 14 May 2018 and, fourthly, to just really spice GRC up even more, the European Union’s new General Data Protection Regulation (GDPR) became effective on 25 May 2018.

We have in previous alert articles drawn attention to the vanguard role adopted by the UK in anti-money laundering (AML) and anti-bribery and corruption (ABC). The UK Bribery Act as a model for ABC has become very popular with other jurisdictions. The offence in s7, failure to prevent bribery of foreign officials, was followed by two new “failure-to-prevent” offences namely failure to prevent facilitation of UK tax evasion and failure to prevent facilitation of foreign tax evasion, which became law in September 2017. The UK has also demonstrated its role as global leader in transparency by publishing an open data register of real estate owners and controllers of companies, i.e. beneficial owners. The latest development in the UK will, if the legislation is promulgated, prove that the UK is very serious in its commitment to eradicate money laundering and to curb illicit financial flows (IFF).

The tax havens of the world have been accused of facilitating money laundering by supplying anonymity and thereby enabling the activities of corrupt politicians and tax evaders, which in turn deprives developing countries of billions of dollars in tax revenues and cheating people in developing countries out of much-needed funds for eradication of poverty. Thabo Mbeki, chairperson of the African Union’s High Level Panel on Illicit Financial Flows, estimated that Africa loses annually over USD 50 billion through IFF and he stressed that financial secrecy was a problem. Mbeki observed in 2015 that tax havens and financial secrecy jurisdictions are at the centre of the IFF problem and that there is no global architecture to ensure the required concerted global action to combat IFF. If the UK implements tax-haven transparency in British Overseas Territories (BOTs) it will go a long way in establishing a foundation for the architecture referred to by Thabo Mbeki. The covert world of anonymous shell companies will have to endure financial transparency.

The Financial Action Task Force (FATF) has been concerned about misuse of corporate vehicles as long ago as 2011 when the World Bank published the Puppet Masters Report. The FATF has therefore established standards of transparency but has conceded that implementation thereof has been challenging resulting in the publication of a Guidance Paper on Recommendation 24 and 25, encapsulating the FATF standard.

The 4th Money Laundering Directive (Directive), which was adopted on 20 May 2015 and which came into force in the EU on 26 June 2017, bolstered transparency measures throughout Europe addressing the definition of beneficial owner and also introduced central registers for corporate entities. The Directive will now raise the bar even more. In the Preamble the Directive states that “the prevention of money laundering and of terrorist financing cannot be effective unless the environment is hostile to criminals seeking shelter for their finances through non-transparent structures. The Directive is a response to the terrorist attacks of 2015 and 2016 in Paris and Brussels and also to the Panama Papers leaks. Citizens will enjoy the right to access information on the beneficial owners of firms which operate in the EU and this transparency will definitely curtail the criminal use of letterbox companies abused to launder money, hide wealth and avoid paying taxes, the latter clearly exposed by the Panama Papers. Persons with a “legitimate interest”, such as investigative journalists and non-governmental organisations (NGOs) will be provided with access to data on beneficial owners of trusts and “similar legal arrangements”. Member states have the right to provide broader access to information, in accordance with their national law. The Directive also provides for a tightening of rules regulating anonymous prepaid cards and virtual currencies. The Directive shall enter into force twenty days after it has been published in the Official Journal of the European Union after which date transposition into national law by member states will roll out in 18 months.

South Africa endorses the FATF standards on AML/FATF as well as the G20 High-level Principles on Beneficial Ownership Transparency. The Financial Intelligence Centre Amendment Act which has been enacted in stages since June 2017 introduced the legal definition of “beneficial owner” as well as a risk-based approach to customer due diligence. This was done to ensure that South Africa implements measures as required by the FATF arising from the 2009 Mutual Evaluation by the FATF. The next Mutual Evaluation takes place in 2019.

Focusing on transparency in AML globally not only serves to detect and facilitate investigation of money laundering and IFF but also becomes a powerful deterrent for criminals seeking to launder proceeds of crime.