Our new mini-series shines the spotlight on the current Financial Action Task Force (FATF) beneficial ownership review process. Part 1 presents the particular issues the organisation has recently sought input on, this article – part 2 – examines the five recommendations submitted by Transparency International as a response to the FATF invitation, part 3 looks at the FATF proposed amendments, and part 4 will recap a number of recent high-profile examples of why beneficial ownership transparency is so important.
The Financial Action Task Force (FATF), which sets the standards for combating money laundering, terrorist financing and other global threats, is currently undergoing a review of its beneficial ownership (BO) standards, which are covered in recommendations 24 and 25 of its 40-recommendation guide. The focus of the review is on beneficial ownership transparency (BOT) in terms of R.24:
Transparency and beneficial ownership of legal persons:
Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. 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. In particular, countries that have legal persons that are able to issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and designated non-financial businesses and professions (DNFBPs) undertaking the requirements set out in Recommendations 10 and 22.
In midyear the FATF called for public comment and input on the potential revisions, and Corruption Watch’s parent organisation Transparency International (TI) is one of those that heeded the call. As an accredited TI member, Corruption Watch is a signatory to TI’s 22-page submission, released in August 2021.
Consultations, submissions and discussions are now over and the FATF has released its draft amendments to R.24. We will cover the FATF response in part 3, and recap a number of recent high-profile examples of the importance of BOT in the final part 4 – but in this article, part 2, we will highlight the TI submission to FATS’s call for input. Part 1 looked at the background to the call for consultation.
Shell companies wreak havoc by enabling criminality
The evidence is clear, says TI: “anonymous shell companies enable kleptocracy, tax evasion, wildlife crime and arms trafficking.”
Because the real – or beneficial owner – of these entities is shrouded in anonymity, rendering them almost untouchable, and the registered corporate structure of shell companies is often far from the reality, such firms are often used as a channel for furtively disposing of ill-gotten gains in such a way that they cannot be traced.
What’s more, says TI, “the globalisation of world trade and finance has meant that the law enforcement agencies and other watchdogs investigating financial crime often don’t even know where to look for clues.”
The best way to combat these shenanigans is with beneficial ownership transparency (BOT). It is a widely accepted strategy, but to date has not been implemented as widely. As the global standard-setter on anti-money laundering, the FATF can change this by requiring all countries to put in place the measures that would make financial crime investigations both more efficient and effective. It can also sanction countries that fail to comply.
TI’s contribution is based on the premise that a multi-faceted approach to BOT, including compulsory beneficial ownership registers, would be most effective. This would eliminate the non-standardisation and variety of mechanisms for accessing beneficial ownership information that are found across the globe.
To this end it submitted a document containing 16 questions and accompanying detailed answers and recommendations relating to five key suggestions that, it says, will help ensure the heightened effectiveness of the revised measures intended by FATF. The submission was based on a TI analysis, first released in 2019, that exposed a number of significant weaknesses in ensuring BOT across the global FATF network.
The five key suggestions are as follows:
1. Make beneficial ownership registers a requirement
Information collected by financial institutions and relevant business and professionals such as real estate agents, as part of their compliance and due diligence regimes, is crucial for authorities investigating financial crime – but there are limitations to these being the only sources of such information.
Not only are banks seen to be themselves complicit in money laundering, but there are questions around the accuracy of the data in some cases, and dependency on the company in question having established a business relationship with a financial institution or professional.
But a centralised register will help ensure accurate information around company ownership and will provide easier access to that information. In addition, such a register will facilitate international co-operation.
2. Clearly define “beneficial ownership”
South African law does not currently provide a clear definition – or indeed, any definition – of beneficial ownership, though the Companies Act does mention a notion of “beneficial interest”.
“A vague legal definition of a beneficial owner creates loopholes that can be exploited by criminals,” states TI, adding that a “single beneficial ownership definition in a given jurisdiction that applies to company registration, customer due diligence and any other sectoral disclosure requirements” would be the ideal scenario.
In practice, says TI, beneficial ownership tends to be defined by the percentage of shareholding – but this does not always correlate with the reality of control and ownership of a legal entity. This is especially true of sectors or types of legal entities that pose high money-laundering risks, TI says. While the FATF recommendations provide a beneficial ownership disclosure threshold of 25% of shareholding, it would be more accurate to individually assess for each sector and entity type for money laundering risk, before committing to an ownership threshold.
3. Require independent verification of beneficial ownership data
R.24 requires “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”. This calls for much more than merely recording and updating information.
Registers should be mandated and empowered to independently verify the information, by checking and cross-checking against ID documents or tax and citizenship registers. Furthermore, when irregularities and suspicions arise, registers should be able to request documents and further information from companies. Finally, they should be able to sanction non-compliance.
Institutions such as banks or estate agents should be required to report discrepancies between the information available on the beneficial ownership register and that collected during their own due diligence or investigation processes, says TI.
4. Close loopholes that allow anonymity: bearer shares and nominees
Bearer shares are company shares that exist in a certificate form, TI explains, and whoever is in the physical possession of the bearer shares – a process that requires only the delivery of the certificate between people – is deemed to be the owner. In this way bearer shares easily allow for anonymous transfers of control.
They also pose a tremendous hindrance to financial crime investigations. Countries should prohibit such misuse, says TI, or, at the very least, “adopt measures that allow for the identification of the beneficiary of the shares, such as requiring bearer shares to be converted into registered shares or held with a regulated financial institution or professional intermediary”.
Some countries permit the appointment of nominee shareholders and/or directors. These services, says TI, should be provided only by licensed professionals, who should keep relevant records for a specified time. “Moreover, nominee shareholders and directors should be obliged to disclose the identity of the beneficial owner who nominated them to the company and to the company register,” suggests TI.
5. Increase ownership transparency of foreign companies
In cases where foreign companies invest in a country, it should be mandatory for such companies to disclose their beneficial ownership information, just as domestic companies do, before investing. This applies to activities such as buying real estate or opening bank accounts.