By Brian Monroe
October 12, 2016
The world’s leading financial crime watchdog will be pressuring countries around the globe to update laws and implement requirements for a host of sectors, from company formation agents to financial institutions, to capture beneficial ownership data and make it available to domestic and international authorities.
That is a new, more focused goal of the Paris-based Financial Action Task Force (FATF), which sets the international anti-money laundering (AML) agenda, in a just-announced initiative. It calls on the world’s 20 largest economies to lead the way by making a public commitment to meet stronger standards on beneficial ownership laws, ensure their effectiveness and issue penalties for non-compliance.
In this new effort, the FATF will give added scrutiny to how companies are gathering beneficial ownership data in its mutual evaluations and put more emphasis on the issue in the follow-up process, releasing public reports on these efforts to hasten compliance.
The group will also deliver “clear and consistent recommendations” to countries on how to improve implementation and overcome obstacles to creating a regime that embraces corporate transparency and international data sharing among law enforcement agencies.
“Many countries have already put in place adequate legal frameworks to collect and maintain beneficial ownership information as part of CDD processes,” according to the FATF, which will consider the current spate of initial proposals at its next meeting in Paris next week.
FATF focuses on availability of data for law enforcement
“However, improving effective implementation of these measures remains key, particularly in relation to the requirements to ensure that adequate, accurate and up-to-date basic and beneficial ownership information is available to the authorities in a timely manner.”
The move by FATF is partly in response to recent scandals like the Panama Papers, which highlighted the risks of shell companies and anonymous ownership structures, and a greater realization by world powers that any regions or firms specializing in corporate opacity can cloak of array of illicit activities, including money laundering, corruption and tax evasion.
The group also notes that more broadly, countries are failing to update laws, keep beneficial ownership data current and sanction entities that are flouting these relatively new duties.
FATF notes that of the nine countries so far reviewed under the a new, more stringent “effectiveness” regime adopted in recent years, only “two countries were found to have a substantial level of effectiveness in preventing the misuse of legal persons and arrangements. Major improvements are required in the other seven countries assessed.”
Onerous ownership duties and the shame game
The effort by FATF, however, could cause challenges for some nations, including the United States, Canada and other jurisdictions that have yet to require the collection of beneficial ownership information at the time of a company’s formation, or create publicly accessible registries that include this information.
Failure to improve beneficial ownership standards in a timely manner – such as before a country’s mutual evaluation – could result in poor FATF reviews on key issues. FATF reviews countries on 40 recommendations in the areas of countering money laundering, corruption and terror finance.
As well, the FATF could “name and shame” countries, both members and non-members, if the group perceives some counties are tarrying too long on cracking open corporate secrecy.
The FATF is calling on the G20 members – including countries like the Australia, Canada, China, Russia the United States, the European Union and others – to lead by example by meeting the FATF Standards on legal and beneficial ownership and ensuring they are properly enforced, including:
- Fully and effectively implement FATF Standards on transparency and beneficial ownership, particularly recommendations 24 and 25, without further delay.
- That entails effectively monitoring key gatekeepers, including company formation agents, lawyers, and trust-and-company-service providers, for compliance with their customer due diligence obligations, and enforcing those requirements – including identifying and shutting down those who facilitate misuse of corporate structures.
- Taking action at the national and global level to address barriers to information-sharing, e.g. reviewing data protection and privacy laws.
- Taking action to facilitate the timely sharing of basic and beneficial ownership information at the domestic and international level, including ensuring that such information is accurate and up-to-date.
The FATF, at the behest of the G-20, issued a report to finance ministers and central bank governors last week laying out the gaps around beneficial ownership it has uncovered in its most recent round of evaluations, and its plan to force recalcitrant countries into line.
The request for assistance and analysis came in April, when the G-20 called on FATF and the Global Forum of Transparency Exchange of Information for Tax Purposes to craft proposed plans on how countries can make beneficial ownership information available, exchange it within and without countries, keep the information current and sanction countries or companies that won’t get on board.
Evaluations evince transparency tribulations
Improving transparency has been on the FATF agenda since 2003 when it first introduced international standards on beneficial ownership.
“Subsequent assessments of countries highlighted weaknesses in the way many countries had implemented these standards,” according to the group.
In 2012, the FATF strengthened the standards and addressed vulnerabilities such as bearer shares, in a bid to “set out comprehensive measures to ensure transparency to prevent the misuse of corporate vehicles.”
Using fulcrum for full transparency
FATF’s leverage for change on beneficial ownership standards – a knotty issue for many countries that don’t have the laws, resources of technical capacity to capture, share and update such data, or conversely, must change entrenched data privacy regulations – comes from its status as an influential, inter-governmental body comprised of 37 members, and much like the G20, includes many of the most powerful economies on the planet.
Moreover, FATF heralds a global network of nearly 200 jurisdictions that have all committed to implementing the group’s standards and, in tandem with full-fledged FATF members, undergo rigorous mutual evaluations.
Those reviews are carried out by groups like the International Monetary Fund and Moneyval along with regional-style bodies covering Europe, Asia and the Caribbean, giving FATF significant insight and oversight into regions considered to be at a higher risk for financial crime.
The group’s latest exams cover both technical compliance, such as the basics of having the foundational “laws on the books,” and have added a new nuance in the latest round of reviews.
Now FATF is analyzing the actual effectiveness and implementation of laws to counter financial crime, corruption and terrorism, which look at metrics including the value of seized assets, complexity and scope of cases and penalties against intransigent institutions.
That has resulted in particularly poor results when it comes to beneficial ownership initiatives.
As reported to the G20 in July 2016, the FATF has “identified some significant implementation challenges on beneficial ownership based on recent peer reviews,” including:
- Insufficient accuracy and accessibility of basic information relating to company registration;
- Less rigorous implementation of customer due diligence (CDD) measures by key gatekeepers such as company formation agents, lawyers, and trust-and-company service providers;
- Lack of sanction on companies which fail to update information held by national company registries, or to keep information about their shareholders or members up-to-date; and
- Obstacles to information sharing such as data protection and privacy laws which impede competent authorities from getting timely access to adequate, accurate and up-to-date basic and beneficial ownership information.
Pitfalls ahead in information sharing, data accuracy
The FATF says that it has noted, and is trying to come up with solutions for, some of the “practical challenges” recurring in the “context of different legal and administrative systems, for example: how to ensure the accuracy of ownership information held in a company registry, or how to enable ownership information to be exchanged between fiscal and law enforcement authorities, in both directions.”
To better address the issue, FATF has “taken stock of recent research on the misuse of corporate structures to identify the most important methods and vulnerabilities, looking at the risks posed by different types of legal persons and arrangements, and the challenges related to identifying their beneficial owners.”
The FATF Secretariat is also “conducting a horizontal review of fourth round mutual evaluations to identify specific obstacles to effective implementation, and best practices in overcoming those obstacles.”
“The challenge today is not the lack of international standards to improve transparency,” according to FATF. “The challenge lies in the effective implementation of these measures.”