The leading international standard-setting organization for anti-money laundering policies and procedures took aim at one of the most persistent challenges in financial crime investigations and due diligence this week, issuing new guidance on how countries can better collect beneficial ownership information.
Released on Monday by the Paris-based Financial Action Task Force (FATF), the “Guidance on Transparency and Beneficial Ownership” is likely to be welcomed by the growing chorus of advocacy groups and law enforcement agencies pushing for increased corporate transparency. While the guidance largely clarifies and codifies existing recommendations from the FATF, experts say it could still prove too difficult for many nations to implement, and may impact the current round of FATF country evaluations which grade regions, in part, on efforts to evaporate corporate opacity.
The guidance comes in the context of greater awareness of how misused corporate vehicles and a patchwork of international standards on collecting ownership data can aid criminals in accessing the global financial system and stymie investigative efforts. The FATF sets out three main stratagems for countries to obtain information on the actual, or “beneficial” owners behind legal entities, and potentially make it public: create a database of company registries, require companies to hold their own information, or rely on currently available information.
“The company is in the best position to collect and make available its own information,” to law enforcement, said Robert Palmer, a campaign leader focusing on banks and corruption with advocacy group Global Witness. He notes that in current FATF evaluations, most jurisdictions, even those with otherwise robust financial crime regulatory and enforcement regimes like the United States and Europe, may struggle mightily when it comes to beneficial ownership standards.
Of the three methods being proffered by the FATF, requiring companies to collect the information themselves could be the strongest and least fraught with peril, he said, stating that databases may lag in being updated regularly and simply trying to cobble together available data in a more cohesive form could result in threadbare results.
“What is interesting about the new guidance, though, is that it really sets the bar quite high about what the FATF will expect countries to do in order to implement” any of the three options set out by the group, Palmer said. “Countries are going to struggle in some ways to do this. It can’t just be an updated version of the status quo.”
New financial data sharing agreements add impetus to transparency reform
The latest FATF guidance builds on prior revised recommendations released in 2012, and is an additional acknowledgement that in financial crime, “almost all roads lead back to an ownership structure that conceals the true beneficial owner of the funds,” said Kelvin Dickenson, vice president of compliance solutions for New York-based Alacra, a business and financial information aggregation firm.
It also comes at a time when global tax reporting systems are placing increasing demands on institutions to identify the natural persons behind their legal entity customers. On Wednesday, officials from 51 jurisdictions signed onto the Organisation for Economic Co-operation and Development’s (OECD) automatic tax data exchange system, formalizing their commitment to share data starting in 2017 and 2018 to better ward off tax evasion. The OECD also for the first time stated that beneficial ownership details should be shared as well.
The action follows a move by OECD member-states in July to craft a finalized version of the intergovernmental sharing plan. Dubbed the Common Reporting Standard, it requires financial institutions in participating nations to identify accounts held by persons and entities in other participant nations and report them to their tax authorities. Tax agencies will then swap this data with their counterparts on an automatic, ongoing basis.
The move is a broader version of what the U.S. has finalized with its Foreign Account Tax Compliance Act, or FATCA. The sweeping tax evasion law requires a wide range of non-US financial institutions to search for U.S. customers and transmit data on their accounts either to the IRS directly or to their own tax agency, which can then pass it on to the IRS under the terms of “intergovernmental agreements” on FATCA compliance.
In its guidance, the FATF stated that beneficial ownership data collected on legal entities should not just be made available in a timely manner to law enforcement. The group also urged the information be available publicly, which could offer a critical resource for customer due diligence functions.
Though the OECD data sharing agreements are a major step forward, it is crucial that authorities in these regions don’t miss a “massive opportunity for leveraging the information for a broader array of financial investigations,” said Heather Lowe, legal counsel and director of government affairs with Global Financial Integrity in Washington, D.C. She added that, in many countries, data gathered for tax-related offenses is “pretty much walled off” from investigators tracking down other financial crimes.
‘Low baseline’ for gathering ownership data
The most recent round of FATF mutual evaluations, or reviews of a country’s AML regime, have focused not just on whether jurisdictions have the right legal and regulatory framework, but how effective those laws and regulations have been at preventing financial crime.
In prior analyses and reports, the OECD and FATF have noted that, even in evaluations that didn’t focus on effectiveness, most countries “did not properly comply with the recommendations,” Palmer said.
“Countries have been doing a bad job even getting the laws in place, let alone making sure they are implementing them properly” in terms of collecting and verifying beneficial ownership data, he said. “Almost every FATF and OECD country scores badly on beneficial ownership. It’s a low baseline.”
In the United States, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), earlier this year proposed a beneficial ownership rule of its own requiring banks to identify beneficial owners of legal entities at account opening using a two-pronged system.
The bank must collect details on any person who owns 25 percent or more of the company, and must get information on an individual who has “significant responsibility” to control the entity. The proposal, though, still has a significant gap in that the bank has no other way, such as a national database of ownership details, to verify the information the firms provided.
No excuses this time around
The guidance is a an attempt by the FATF to take the esoteric concepts of corporate secrecy and complex ownership structures and strip them of the layers, down to bedrock practices that are “fantastically practical to implement,” said Lowe.
In many cases, jurisdictions have cried wolf, and told FATF officials that their laws would prevent them from coming up with a framework that would allow beneficial ownership details to be collected, housed or verified, she said. “With the guidance, the FATF is taking that excuse away and saying now there are a lot of options for something that will fit within your legal system.”
In its guidance, the FATF stated that the misuse of corporate vehicles could be “significantly reduced if accurate information regarding both the legal owner and the ultimate beneficial owner, the source of the corporate vehicle’s assets, and its activities were readily available to the authorities.”
Criminals “make use of this lack of access to beneficial ownership information. By setting up one or more corporate vehicles, they are able to hide their identity, the true purpose of the account and the source or use of funds or property associated with the corporate vehicle,” according to the FATF.
The information can also be critical for rooting out entities and individuals potentially engaged in corruption and are part of mergers and joint ventures or larger business deals in regions prone to graft, Lowe said. By having such information available, “we are talking about going after more than just money laundering and terrorist financing,” Lowe said.
The guidance also reiterates that nominees can’t be used to hide ownership and requires legal professionals, such as lawyers and accountants that are also company service providers, to engage in an adequate depth of due diligence to ferret out the needed ownership details. This issue may become increasingly controversial if these sectors rebel and challenge the objectives when they are transposed into national laws, said Lowe.
Evaluations evince ownership expectations
The United Kingdom is currently working on legislation that would establish a public database of beneficial ownership information, including such data points as names, addresses and the percentage ownership of persons with controlling interests, though some of those details may not be made widely available in the finalized rule.
The European Union is considering a similar EU-wide corporate registry that would include beneficial ownership information on legal entities as part of the pending 4th Anti-money laundering (AML) Directive. It is still unclear if the information will be made public as it could clash with data privacy rules.
The FATF’s details on how transparency around beneficial ownership can be concretely legislated and implemented “pushes the agenda forward,” said Dickenson. He added that the goal on the horizon is to “pull back the curtain and expose ownership structures in a more efficient manner. That is welcome and very constructive.”
Countries will be keen on analyzing this area when new evaluations are released, as it will give more solid evidence of the FATF’s “approach to the new standards around effectiveness and what kind of evidence they will use,” Palmer said.
“My sense is this could be a real sore point for countries during the evaluation process, to prove that law enforcement, and possibly others, have timely access to the information,” he continued.
Even so, though countries more broadly are attempting to tackle the issue of corporate transparency, there will also invariably be a “conflict and tension with data privacy laws,” Dickenson said.
“That is a fairly complex problem,” he noted. “There must be a balance between transparency and the reasonable privacy rights of citizens. But you also have to keep in mind that keeping certain things too private is a money launderer’s friend.”