Institutions, companies hope to duck new beneficial owner duties but see handwriting on the wall

“Beneficial owner” is a term that is much discussed, vaguely defined, but very important in controlling financial crime and its constant tag-along component, money laundering, at financial institutions and commercial corporations. One generally accepted definition of this ubiquitous term is “someone who has a level of control over or use of, funds or assets in an account, or has control of a company, which allows that person to directly or indirectly control or manage the account or company.”

Determining the beneficial owner of accounts or companies is vital for financial institutions and commercial corporations. Obtaining the information that will allow identification of beneficial owners has become more important as international standards place greater emphasis on obtaining detailed ownership information.

The Financial Action Task Force (FATF), in Paris, addressed the issue in its 2012 revisions to its 23-year-old 40 Recommendations. In Recommendation 24, it said, “Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.”

Industry guidelines, business norms, international standards, and many financial regulators stress that having information on the ultimate owner or user of an account or company leads to more effective combat of financial crime, including money laundering and terrorist financing.  It also allows them to better assist law enforcement and more fully understand the anticipated activity of the customer.

Various devices hide true ownership

Criminals often hide behind nominees, shell organizations, shelf companies and other ownership structures in order to hide behind layers of ownership. They often take advantage of national privacy and confidentiality laws to hide behind shell companies and other structures. Different types of structures provide better walls for hiding than others do.

A strong money laundering control program has a foundation whose elements include a thorough, detailed know your customer (KYC), customer due diligence (CDD), and enhanced due diligence (EDD) processes. The processes are among the best ways to identify financial crime and related suspicious activity.

In addition to obtaining basic information, like the purpose of the account, source of funds and wealth, occupation or type of business, the pertinent trade area and a description of the business operations, the processes should take into account the following subjects that are related to beneficial ownership:

  • Is the customer acting as a trustee? If so, the institution or company must obtain sufficient information about the trust to fully understand its ownership and structure.
  • Is the customer a private company? If so, there will be limited public information about it, so the institution or company must conduct more thorough KYC and CDD, and possibly elevate to EDD, to fully understand the ownership structure of the company. EDD should include verification of ownership, source and use of funds, and all owner relationships.
  • Is the customer acting on behalf of someone else? If so, the institution or company must know on whose behalf the customer is acting, and in what role he, she or it is acting.

The institution or company must make a reasonable effort to obtain and verify KYC, CDD and EDD information, especially concerning beneficial ownership. Applicants, customers, and beneficial owners can mislead and misrepresent information during the account opening or company formation time and subsequently. The institution or corporation must have policies, procedures and processes to research and verify ownership information that is provided and conduct a thorough KYC, CDD and EDD review, document the process, and assure that the information on which they accepted the customer is true and accurate.

Three accounts and relationships raise special risks

There are several types of financial accounts in which the identification of the beneficial owner is more difficult and inherently risky. Three types of accounts are particularly so, and need more detailed research and analysis to determine the true beneficial owner. They are: 1. correspondent accounts for foreign financial institutions, 2. private banking accounts, and 3. accounts for senior foreign political persons.

The KYC, CDD, and EDD processes for these accounts must determine the source of funds and anticipated use of the account, location of the customer, employment status of the customer, the entity’s ownership structure, and the nominal and beneficial owners. Also, with private banking accounts, an institution must review the customer data base of these accounts to see if any of them are held by senior foreign political persons (PEP) as nominal or beneficial owners. PEP accounts must receive EDD reviews, because they may include transactions involving corruption proceeds. (PEP means “Politically Exposed Person”)

Correspondent accounts for foreign financial institutions contain special risks because they often involve “payable-through” accounts that foreign customers use to access the banking system of another country. These accounts require more thorough EDD measures because the local financial institution often does not fully understand the level of AML/CFT compliance of the foreign jurisdiction or the regulatory regime of the foreign institution. Since the local institution does not know if it can rely on the process of the foreign institution, it must conduct thorough and detailed EDD of owners and beneficial owners of accounts held by foreign financial institutions.

World moving to universal duty to uncover beneficial owners

The world is moving rapidly toward tighter regulation of the identification of beneficial owners.

The US Financial Crimes Enforcement Network, a bureau of the Treasury Department, has announced its interest in possibly issuing a final regulation that would require many financial institutions to gather beneficial ownership information concerning their accounts and other business relationships.

In early 2012, FinCEN issued an Advance Notice of Proposed Rulemaking announcing its intentions. Since then, it has taken no further formal steps to advance the finalization of the proposed regulation.

FinCEN Director Jennifer Shasky Calvery, told ACFCS in an interview in June 2013 that the proposed rule is in “the interagency clearing process” and that FinCEN officials are “still very strong proponents of the rulemaking and the need to get on top of this [beneficial ownership] issue.”

In addition to its inclusion in the FATF’s relatively new 40 Recommendations, the issue of beneficial owners is also mentioned in the preface to the US Foreign Account Tax Compliance Act of 2010.

In its opening words, this landmark law, known as FATCA, mentions “beneficial ownership” in introducing its substantive provisions which seek to uncover tax evaders and other financial criminals with hidden accounts in other countries.

Wise financial institutions and corporations, which are victimized by a multitude of financial crimes, including fraud and foreign corruption, will diligently construct sound beneficial ownership measures for implementation as part of their financial crime control programs in their dealings with customers and third parties.

Soon they will be required. The handwriting is on the wall.
Thomas E. Nollner is a former senior bank examiner for the US Office of the Controller of the Currency, with global experience in advising financial institutions and other business organizations in  financial crime and anti-money laundering matters. He is a member of the Advisory Board of the Association of Certified Financial Crime Specialists.