A beneficial owner is an individual that controls or owns more than 25% of a company. Shell companies have long been a trick of the trade used in laundering proceeds of crime, and complications in determining beneficial ownership allow criminals a certain degree of anonymity in evading law enforcement.

In 2003, the Financial Action Task Force (FATF) set global standards on beneficial ownership, requiring countries to ensure that their authorities could obtain timely and accurate information about the beneficial owners of companies, foundations and other legal persons.

To date, this has proven to be a challenge for many countries, and as a result criminals and terrorists are still allowed to hide behind the cloak of their shell companies.

In a recent report, the FATF identifies the root of the problem as weak implementation of the existing standard, and provides practical advice to help countries establish an effective system.

A multi-pronged approach

The FATF recommends a multi-pronged approach, where authorities can gain access to information on beneficial ownership through several different sources. Experience shows that this helps to ensure greater transparency and provides less opportunity for criminal misuse of companies and legal persons. Cross-checking between these sources also helps to ensure the accuracy of information.

There are 3 different approaches that may be combined to form a multi-pronged approach:

  • Registry Approach – requiring company registries to obtain and hold up-to-date information on the companies’ beneficial ownership.
  • Company Approach – requiring companies to obtain and hold up-to-date information on the companies’ beneficial ownership, or take reasonable measures to do so.
  • Existing Information Approach – using existing information such as that held by financial institutions, authorities, the company, or publicly listed information.

To effectively implement the multi-pronged approach, it is important that the responsibilities of various parties are clearly defined. These include verification and monitoring of information, carrying out customer due diligence, identifying and reporting suspicious activity, and taking enforcement action.

Common challenges

The report identifies a number of common challenges in implementing beneficial ownership measures.

  • Inadequate risk assessment of possible misuse of legal persons for money laundering or terrorism financing (ML/TF).
  • Inadequate measures to ensure information on beneficial ownership is accurate and up-to-date.
  • Inadequate mechanisms to ensure competent authorities have timely access to beneficial ownership information.
  • Inadequate measures to address the ML/TF risks of bearer shares and nominee shareholder arrangements.
  • Lack of effective sanctions on companies to provide beneficial ownership information.
  • International cooperation – inadequate mechanisms for monitoring the quality of assistance received from other countries.

Best practices for establishing an effective system

In addition to implementing a multi-pronged approach, an effective system will address the common challenges head on to identify the beneficial owners behind legal persons.

Risk assessment

Countries should conduct a comprehensive risk assessment of legal persons to develop a more thorough understanding of vulnerabilities and potential of abuse of legal persons for ML/TF.

In some countries, there is a designated agent commissioned to analyse the ML/TF risks posed by all types of legal persons, including reviewing relevant court cases, suspicious transaction reports and case studies. The sharing of identified trends and typologies with authorities and relevant parties helps to mitigate risks and can also assist in identifying potential red flags at the incorporation stage.

Quality and timeliness of information

The adequacy, accuracy and timeliness of beneficial ownership information can be ensured through a variety of methods, including:

  • Having an obliged party verify/monitor the accuracy of the information – in some countries this is an authority subject to AML/CTF obligations, such as AUSTRAC in Australia.
  • Having a supplementary information platform in addition to a company registry.
  • Ongoing reporting by companies to reporting entities or company registries.
  • Verification through different means including cross-checking, identifying red flags, targeted audits and coordination amongst authorities.
  • Implementing enhanced measures for companies with foreign ownership/directorship, which present specific challenges in tracing beneficial ownership. For example, applicants may be required to provide registry authorities with certified copies of passports and certificates of incorporation. In some cases, international cooperation may be required to obtain beneficial ownership information of foreign legal persons.
  • Highly effective law enforcement authorities with adequate resources.

Access by competent authorities

Allowing authorities direct access to beneficial ownership information held in company registries or any other relevant databases will ensure timely access to information. Authorities can also compel the provision of beneficial ownership information through available investigative measures such as production or disclosure orders.

Addressing bearer shares and nominee arrangements

Bearer shares refer to equity securities owned by whoever holds the physical stock certificate, whilst a nominee arrangement occurs where one person consents to acting as a director of a company which is owned by someone else.

The FATF recommends forbidding or immobilising bearer shares and nominee arrangements, as they are both open to significant misuse by criminals.

Sanctions

“Effective, proportionate and dissuasive” sanctions are recommended against companies that fail to provide information on beneficial ownership. Sanctions may range from administrative sanctions such fines and the rejection of business registrations, to prosecution action which may involve criminal penalties and the seizure of assets.

Conclusion

Despite the progress made by some countries, criminals and terrorists continue to hide behind shell companies and present a global threat. Through implementing the identified best practices, countries will be able to improve their systems to ensure that accurate beneficial ownership information is available to authorities in a timely manner, helping to identify and shut down those who misuse corporate structures, and those who facilitate them.