This is the first in a four-part series analyzing the challenges and issues around beneficial ownership worldwide. Part one examines the global effort to bring transparency to anonymous legal entities and secrecy jurisdictions. Later parts will focus on regulatory developments in the US and EU, and private-sector initiatives related to identifying beneficial owners.
There’s a reason why so many countries, from large economies with robust anti-money laundering defenses to developing nations grappling with the finer points of financial crime trends, are still struggling to create a workable solution to capturing adequate beneficial ownership details.
That’s because solving the challenge of collecting, verifying and sharing beneficial ownership of legal entities has proven to be an enduringly complex and divisive issue that cuts across public and private sectors.
Amid a global push for increased corporate transparency, some countries are undertaking unprecedented regulatory changes around beneficial ownership, including a publicly accessible corporate registry in the European Union and new standards requiring financial institutions to identify beneficial owners in the US.
Getting to this point has required a mixture of pressure from international watchdog groups, efforts to harmonize standards across supranational, national and state lines, and the enactment of laws and regulations delineating which entity must collect what in the company formation chain. As nations and international standard-setting bodies mull their next steps around beneficial ownership and transparency, battle lines are being drawn.
On one side are countries and states that have built their foundation on corporate secrecy and don’t seem inclined to change without a fight. On the other side are investigators, regulators, and an increasing number of government officials, who argue that a lack of transparency can allow a wide array of criminals, from terrorist financiers to wealthy tax evaders, to move hundreds of billions of dollars with little resistance.
The reasons behind the ownership data dilemma are manifold, said Ross Delston, a Washington, D.C.-based anti-money laundering (AML) consultant who has taken part in country evaluations.
In the US, states like Delaware are actually in competition with other states and even offshore financial centers to see which region can offer the most airtight opacity. Areas adhering to international standards are put at a “competitive disadvantage,” Delston said.
The places with the fewest disclosure requirements “rely on the income from company registrations as part of their budget,” he said. “They have no interest in promoting transparency. They won’t go down without a major push by the [Financial Action Task Force (FATF)]. And because the stalwarts of the FATF also don’t have good [ownership] systems, it’s kind of hard for the US to press the little guys to do better.”
FATF, OECD train sights on higher standards
One of the biggest stumbling blocks to getting beneficial ownership data is that “in many jurisdictions, the US and elsewhere included, they just don’t have the information housed in a centralized registry accessible to banks, the public” or law enforcement, noted Delston
The lack of readily-available incorporation details “takes transactions that would otherwise be viewed as complex and suspicious and makes them impenetrable,” he said.
“If institutions aren’t looking for the natural beneficial owner, they will just accept what is put in front of them, allowing criminals to access the financial system through an avenue that would otherwise be closed to them,” said Delston.
The Paris-based FATF, which sets global AML standards, revisited the issue of beneficial ownership in guidance released last week, coming on the heels of announcements of new international agreements to share data by members of the Organisation of Economic Co-operation and Development (OECD), which also noted capturing beneficial ownership information would be vital for tracking down tax evaders.
The FATF, along with its regional-style bodies, is currently evaluating the broader financial crime countermeasures of countries, with a new focus on effectiveness in enforcement and regulation, rather than simply putting laws on the books.
A major deficiency across the board, for even the largest economies and strongest laws, was the inability to capture and house beneficial ownership data and make it available to law enforcement, or even make it public, the FATF and analysts have stated in recent weeks.
In its own guidance, the FATF set out three strategies to extract the information on owners behind legal entities: create a database of company registries, require companies to hold their own information, or rely on currently available information.
Corporate secrecy a magnet for organized crime
The reasons why the FATF and other international standard-setting bodies are pushing for greater corporate transparency are widely known. Shell companies and other anonymous legal entities are a fixture in a huge array of financial crime schemes, and when controlled by savvy criminals, the amount of money they can move is staggering.
The use of shell companies and fake owners, or proxy agents, was vital to one of the largest money laundering operations ever in Eastern Europe, according to the Organized Crime and Corruption Reporting Project (OCCRP).
Between 2010 and early 2014, organized crime groups and dirty politicians in Russia moved $20 billion in illicit funds through a virtual laundromat, a “complex cleanse-and-spin cycle made up of dozens of offshore companies, banks, fake loans and proxy agents,” said the OCCRP in an expose published earlier this year.
In the scheme, companies owned by the same groups of individuals would loan money to each other, then get a court judgment by judges in the Republic of Moldova, allowing the funds to appear legitimate and move freely across the European Union.
Shell companies and hidden beneficial owners have also aided blacklisted regimes like Iran in evading sanctions filters and gaining bank accounts to illicitly move hundreds of millions of dollars, including funds that ended up as part ownership in a Manhattan office tower, according to a former New York investigator.
The FATF’s latest round of mutual evaluations now underway partly explains “why the beneficial ownership issue is getting a lot of attention now,” said Robert Rowe, vice president and senior counsel with the American Bankers Association.
Australia’s evaluation was just recently completed and is expected to be released early next year – and the review of the United States is coming later this year, putting added pressure on the country to patch beneficial ownership gaps before evaluators arrive.
Domestically, the issue has been a sore point since the last US evaluation more than a decade ago, Rowe said, adding that the nation’s financial intelligence unit, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), has been wrestling with how to collect the data and ensure it’s available for law enforcement through several agency directors.
FinCEN’s focus first turned to company service providers and US states to get beneficial ownership information, seeking to create a central repository and require some kind of timeframes for updating. Because states varied so greatly in terms of political power and technical abilities, the lens then shifted to banks to request the information at the time a customer opened an account, Rowe said.
That move was formalized in FinCEN’s recent Notice of Proposed Rulemaking (NPRM) on Customer Due Diligence Requirements for Financial Institutions.
The NPRM quelled some fears for banks in terms of having to somehow get the information from third parties or piece it together from a threadbare patchwork of sources. Instead, based on the proposed rule, institutions would request details on beneficial owners directly from a legal entity customer, and could largely rely on the customer’s own self-certification.
However, there are still significant gaps in FinCEN’s proposed system. Customers can lie and banks have few easy ways to verify the information, Rowe noted. Alternatively, a company can give correct beneficial ownership details, then the next day, change up the ownership structure, making the information given to banks “not worth the paper it’s printed on,” Rowe said.
Ownership details can aid risk scoring
Based on public statements made during the rulemaking process, FinCEN and other US government agencies recognized the burden involved in requiring a financial institution to collect beneficial ownership information of its own accord. Prior to the notice of proposed rulemaking issued by FinCEN, in August, the duty of getting beneficial ownership details was reserved for foreign banks subject to Patriot Act section 311 measures, also known as designating an institution to be a “primary money laundering concern.”
The latest iteration of the AML interagency manual, released in 2010, also touched on beneficial ownership, noting that such information could be needed when entities require enhanced due diligence.
Even so, the inability of countries to prod corporations to make beneficial ownership data available or nudge company service providers to record such details and house it centrally is “not a new problem,” Delston said. “It’s one of those persistent gaps, persistent deficiencies in the international AML/CFT framework that no one jurisdiction has been able to solve completely.”
Lack of transparency extends to major corporations, developed nations
Transparency is a challenge for companies and jurisdictions large and small, public and private, according to a report released this week by Transparency International, an international anti-corruption advocacy group.
In a ranking of 124 firms, culled from the Forbes list of world’s biggest publicly-traded companies, United Kingdom businesses were among the most ready to disclose more financial and ownership details, the report found. Meanwhile, Chinese companies and even US technology giants would be hard-pressed to yield details on subsidiaries, holdings, payments and taxes that could evince possible instances of corruption.
The top three “most transparent” companies were Italian energy group Eni, Britain’s Vodafone and Norway’s Statoil, while the least transparent were China’s Bank of Communications, Japanese carmaker Honda and Bank of China.
The United Kingdom is currently crafting legislation establishing a public database of beneficial ownership information, including such information as names, addresses and the percentage ownership of persons with controlling interests.
In addition, 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 AML Directive. It is still unknown, however, if the information will be public as it could clash with data privacy rules.
In its Financial Secrecy Index rankings, released in November 2013 by the London-based Tax Justice Network, which pushes for greater financial transparency, the group stated that as much as $32 trillion in assets could be held in “secrecy jurisdictions” worldwide, with places like Switzerland, Luxembourg, Hong Kong and even the United States at or near the top of the list.
Awaiting regulation, US institutions adopt own standards
Even without any beneficial ownership rules finalized in the United States, some institutions are requiring such information to be divulged before any accounts are opened, said Jerry Sanchez, senior counsel in the Dallas office of Cox Smith.
“Some banks are going to the 20 percent ownership level, which is even beyond what the proposed [FinCEN] regulations require,” at 25 percent, he said. “These banks are being conservative because they want to err on the side of caution. Banks realize you can’t just look at the customer, you have to look at least one level beyond” to better glean more details about ownership, including parent companies, business practices and partners.
When the details of actual humans, or natural persons, are uncovered, the [institution] can then run them through automated screening and filtering systems. Depending on the institution and the risk of the customer, this screening might include sanctions lists, lists of persons tied to known frauds, or other negative news hits, Sanchez said.
In addition, an institution may conduct more intensive due diligence depending on a legal entity customer’s risks.
This could include copies of passports for key, top ranking individuals or authorized signers, copies of incorporation documents and certifications stating that the company is “still in good standing,” with domestic oversight agencies, and potentially also include requests for minutes from board meetings, he said.
All of those details are critical to prove to regulators the bank did the proper amount of due diligence to know the customer and properly feed those data points into a related risk assessment and monitoring rules, Sanchez said.
“We have had situations where a retired Mexican housewife opened an account and started sending and receiving large wire transfers,” he said. “That didn’t make sense with the stated purpose of the account or the customer’s source of wealth.”