Cracking The Code on Ultimate Beneficial Ownership
In , the Monetary Authority of Singapore (MAS) released a notice on the prevention of money laundering and countering terrorism financing. The notice underscored the need for a risk-based approach to creating a robust system of controls when identifying the sources of funds that flow through financial institutions.
In , the UK government’s Companies House published a central public “Persons of Significant Control” (PSC) register of individuals who hold more than 25% of shares or voting rights in a company, and who wield significant influence or control in management decisions.
In , Normative Instruction No. 1634/2016 issued by the Brazilian tax authorities made it mandatory to disclose details of ultimate beneficial owners who wield “significant influence” over an entity when filing information to the Brazilian Corporate Taxpayers Registry.
The implementation of these regulations did not happen in isolation. They’re a reaction – some may say belatedly – to the ease with which individuals and companies are able to create labyrinthine shareholding structures that hide the true ownership of assets. The massive, unprecedented leak by the International Consortium of Investigative Journalists (ICIJ) of more than 11 million records and dealings from specialist offshore law firm Mossack Fonseca, followed by the 1MDB scandal and the recent , were watershed moments. The existence of the opaque world of offshore finance is nothing new, but by exposing its sheer scale and complexity to the public, these events have helped nudge authorities into a more urgent response.
As a result, “ultimate beneficial ownership” is a buzz phrase we’ll be hearing a lot in the compliance space.
Ultimate beneficial owners are defined by the intergovernmental Financial Action Task Force (FATF) as the “natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted”, or “those persons who exercise ultimate effective control over a legal person or arrangement.”
It has been described as the issue in the anti-money laundering and terrorist financing (AML/CFT) battle, and it has placed transparency of ownership arrangements at the forefront of the risk-and-compliance discourse.
All companies have some form of beneficial ownership – all profits must ultimately end up somewhere and with someone. Opaque ownership structures and complex layers of corporate anonymity do not necessarily indicate illegal activity, but they do enable corporations to be used as vehicles for money laundering, organised crime, fraud or corruption.
With increased regulatory scrutiny on shell companies and private investment vehicles, as well as the global crackdown on financial crime, being able to identify who ultimately calls the shots in a company you are doing business with is a crucial part of risk management. More than ever, failure to investigate this in sufficient depth poses a significant reputational risk, and can result in stiff financial and regulatory penalties.
Some of the common questions and challenges associated with identifying ultimate beneficial ownership are:
- Are your partners associated with politically exposed persons (PEPs), blacklisted or sanctioned individuals, or those involved in organised crime?
- When dealing with corporate vehicles in offshore jurisdictions where different disclosure laws or transfer of ownership laws apply, have you done enough to mitigate possible risks?
- Are you able to identify suspicious patterns of activity within a corporate entity when the ownership structure is obscured?
Does the ultimate beneficial owner have relationships with multiple accounts or customers that might pose a risk to your business, and are you able to detect possible conflicts of interest?
The burden is growing on compliance teams to apply a risk-based approach in ensuring business activities are in line with AML regulations. Yet to de-risk from “high-risk” countries altogether might not be the best move for client onboarding or the purposes of financial inclusion. Even having governments maintain a public register requires navigating the murky territory between the need for corporate transparency and the right-to-privacy of business owners.
Given these challenges, technology is increasingly becoming an effective way to tackle the internal and operational risks that ultimate beneficial owners may pose, and helping to draw links within complicated corporate structures.