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, part 2 examines the five recommendations submitted by Transparency International as a response to the FATF invitation, part three looka at the FATF response to the call for submissions, and part 4 recaps a number of recent high-profile examples of why beneficial ownership transparency is so important.
The Financial Action Task Force (FATF) is responsible for determining the standards and measures to be put into place to combat money laundering, terrorist financing and other global threats. Established in 1989, its initial focus was on money laundering but has since expanded to cover the financing of terrorist activities. Through its 40 regularly-updated recommendations, the FATF monitors their implementation in member countries, promotes the worldwide adoption of those recommendations, and reviews anti money laundering countermeasures established.
Failure of a jurisdiction to strengthen its money laundering measures according to the FATF recommendations will result in the addition to FATF’s list of high-risk jurisdictions under monitoring, or the list of high-risk jurisdictions who are urged to take swift action.
Beneficial ownership a barrier to good financial practice
Beneficial ownership (BO) opacity is just one of the high-risk situations that can enable, and is enabling, a range of criminal activities. The beneficial owner of a company is the true owner who ultimately benefits from the operations of that company – but they may not be the legal owner declared in company documents, as anonymity in the company’s ownership conceals their identity. Meanwhile, the anonymous company provides a cover for tax evasion, wildlife crime, money laundering, human and arms trafficking, the funnelling of large sums of money safely to the coffers of terrorist organisations, and personal gain from prohibited transactions.
South Africans are all too aware of the spate of recent scandals around the purchase of personal protective equipment [PPE] during the early days of the Covid-19 pandemic, where politically connected people and even high-ranking government officials benefited personally, and substantially, from shady PPE deals. Government officials are not permitted to do business with the state, but convoluted ownership structures and opacity have allowed many of them to do just that.
In these disgraceful cases, lives were literally at stake. Medical institutions were prevented from buying sufficient amounts of PPE for staff members, or had to work with substandard products, because of exorbitant prices, diversion of funds into certain pockets, and a severe shortage of PPE as brand-new companies with no track record snapped up the available goods for resale at inflated prices and scored lucrative contracts, among other atrocities.
Procurement corruption is well-entrenched in South Africa, but the implementation and enforcement of mandatory BO disclosure will be a step in the right direction. Despite committing several years ago to tackling the problem, South Africa has yet to see any meaningful measures put in place.
FATF beneficial ownership standards review under way
The FATF is currently undergoing a review of its BO standards, which are covered in recommendations 24 and 25 – with a focus on recommendation 24 (R.24).
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.
It has called for public comment and input on the potential revisions, and Transparency International (TI) is one of the organisations that heeded the call. As an accredited TI member, Corruption Watch is a signatory to TI’s 22-page submission, released in August 2021.
“After years of powerful resistance, the FATF members are now finally open to suggestions on the ways to revise of the global standard on beneficial ownership transparency,” said TI.
“For far too long, the corrupt and criminals have been able to hide behind secretive corporate structures without leaving much trace.”
The corruption-busting organisation’s research has highlighted “significant weaknesses in terms of ensuring transparency of beneficial ownership across the global network of FATF countries. As the global standard-setter on anti-money laundering, the FATF is the only international body with the mandate to bring all countries up to speed.”
The FATF has stated its objective as strengthening the international standard on BO of legal persons so as to ensure greater transparency about the ultimate ownership and control of legal persons, providing competent authorities timely access to adequate, accurate and up-to-date BO information, and taking more effective action to mitigate the risks of misuse.
To this end the financial watchdog put out a number of questions and proposals, under five main themes, for respondents to consider and comment on. The FATF will consider the views received and propose revisions to the text of R.24 for discussions at its meetings in October 2021.
- Risk-based approach for foreign legal persons – In light of the use of cross-border ownership structures to conceal BO, FATF is considering whether all countries should apply measures to understand the risk posed by all types of legal persons created in the country (as currently required) and also to certain foreign-created legal persons, and to take appropriate steps to manage and mitigate these risks.
1. Should countries be required to apply measures to assess the money laundering and terrorist financing risks to all types of legal persons created in the country and also to at least some foreign-created legal persons and take appropriate steps to manage and mitigate the risks?
2. What constitutes a sufficient link with the country? How should countries determine which foreign-created legal persons have a sufficient link with the country? Is there an alternative standard to “sufficient link” that could be used? What are the practical issues met/envisaged regarding the identification and risk assessment of foreign created legal persons?
- Multipronged approach to collection of beneficial ownership information – The FATF recommends that countries use a multi-pronged approach to ensure that beneficial ownership information is available to competent authorities. FATF is evaluating countries’ experience to date of the creation and operation of beneficial ownership registries, and is considering what core elements should be included in a multi-pronged approach, and what supplementary measures should be considered for inclusion.
3. (a)What do you see as the key benefits and disadvantages of a BO registry, and
(b) what are the alternative approaches to registries, such as BO information held by companies, financial institutions, and DNFBPs, and their key benefits and disadvantages?
4. What are the key attributes and role regulators play in ensuring that a BO registry has adequate, accurate and up-to-date BO information available for competent authorities? Does this make a difference if BO information is held by a BO registry and alternative approaches to registries (e.g. BO information held by companies, financial instituions, and DNFBPs))?
5. How should the accuracy of BO information disclosed to the BO Registry be confirmed?
6. What role should the private sector play, if any, in ensuring that the BO information is adequate, accurate and up-to-date? What lessons should be learned from private sector use of existing registries?
7. What effective mechanisms (aside from a BO registry) would achieve the objective of having adequate, accurate and up-to-date BO information for competent authorities? What conditions need to be in place for authorities to rely on financial institutions and DNFBPs to hold BO information? How could BO information held by obliged entities as part of their customer due diligence be utilised in this regard?
8. How can the compliance burden on low-risk companies be reduced, without creating loopholes that could be exploited by criminals?
- Adequate, accurate, and up-to-date information – FATF is considering how to clarify the key attributes of access to information by competent authorities, that access should be timely, and information should be adequate (to identify the beneficial owner’s identity and means of ownership), accurate (i.e., verified using documents or other methods, on a risk-sensitive basis) and up-to-date (i.e., updated within a certain period following any changes).
9. Who should play a role in the verification of BO information? How effective is the framework on discrepancy reporting? What are the possible verification approaches that can balance the need for accuracy and compliance cost?
10. Should BO registries (where they exist) follow a risk-based approach to verifying of BO information?
11. How frequently should disclosed BO information be updated or re-confirmed (e.g., annually, within a set period after a change is made)?
- Access to information – FATF is considering who should have access to beneficial ownership information, whether held by a registry or another mechanism., and how confidentiality or privacy should be protected.
12. Should access to a BO registry or another mechanism be extended beyond national anti-money laundering/combating the financing of terrorism (AML/CFT) competent authorities (e.g., to AML/CFT obliged entities such as financial institutions and/or DNFBPs)?
13. What measures should be taken to address concerns relating to privacy, security and potential misuse of BO information, arising from access to BO information?
- Bearer shares and nominee arrangements – FATF is considering possible measures to strengthen controls on bearer shares and nominees to prevent them from being used to conceal the beneficial owners of legal persons. This includes potential prohibition on the issuance of new physical bearer shares and a requirement for existing physical bearer shares to be immobilised or converted before any associated rights can be exercised.
14. Should issuance of new physical bearer shares without any traceability be prohibited?
15. Should existing physical bearer shares be immobilised or converted?
16. With regard to nominee arrangements, what are the benefits and disadvantages of requesting nominees, directors and stakeholders to declare their status? Are there alternative equivalent measures that would offer the same level of transparency?