By Bachir El Nakib, Founder, Senior Consultant Compliance Alert (LLC)


Each day regulatory financial services conduct corporate investigations because something adverse has occurred and they want to know what went wrong and why, those investigations have always been difficult and take sometimes establishing the true beneficial owner of a company. 

Corporate investigations are wide and varied and may cover anything from financial crime, cybercrime, cyber security, shell companies disguised to launder money or finance terrorists’ activities, for example the Panama Papers have revealed that many may have been a cover for illegal activities, attracting the attention of regulators. Such activities have ranged from tax avoidance to money laundering to avoiding sanctions to far-reaching organised crime or hiding wealth for illicit purposes. 

Mossack Fonseca role in being the banks' first choice of "go to" shell company creator, distributor and administrator or for structuring the affairs of more than 15,600 shell companies for at least 500 banks pose big question in relation to regulatory weaknesses monitoring law firms . 

The United States, EU, UK and Australian government agencies are reviewing the substantial email evidence from the International Consortium of Investigative Journalists (ICIJ) which obtained leaked information dubbed the "Panama Papers".

These suggested beneficial ownership requirements were often ignored or watered down for a fee. 

Banks involved in setting up shell companies 

Panama papers have exposed what most regulators suspected but were unable to prove. Since the 1990s, shell companies have thrived because of poorly designed local and international tax policies. Many governments accommodated this and allowed shell companies to engage freely with banks, despite being aware that the regulatory standards did not meet international benchmarks. Panama was well known for its failure to cooperate with international agencies yet many banks transacted business there. 

Banks lined up to establish shell structures; the ICIJ leaked records show HSBC and its subsidiaries have more than 2,300 shell companies and UBS hold the accounts of more than 1,100 shell companies. Other international banks which have been doing business with Mossack Fonseca, include Société Générale, with 979 shell companies; Royal Bank of Canada, with 378 shell companies; Commerzbank, with 92 shell companies and Credit Suisse, with 1,105 shell companies. 

The leaked documents also reveal a dispute between UBS and Mossack Fonseca where UBS executive Patrick Kung said Mossack Fonseca was "in violation of the Swiss money laundering code and was seriously considering reporting the firm to the authorities".The ICIJ and Suddeneutsche Zeitung, the German paper which

published the leaked material, said: "The leaked records provide not only an peek into the UBS-Mossack spat, but an unprecedented picture of how large global banks work with other players in the industry that helps the super-rich, politicians and criminals keep their assets private."


Cracks in the shell 


U.S. regulatory agencies have targeted a handful of international banks for their roles in offshore tax evasion. Since 2010, UBS, Credit Suisse and Julius Baer have all settled with U.S. authorities, and UBS discontinued setting up companies with Mossack Fonseca as a result. The leaked documents have also revealed that more than 800 Australian individuals and companies have shell companies with Mossack Fonseca. AUSTRAC announced recently that 80 of them had been identified as persons of interest by the Australian Crime Commission and that more than half might not have disclosed their incomes in the shell companies to avoid tax.


Opening accounts for organised crime 

The leaked papers have also revealed that, prior to the U.S. authorities' investigation of UBS, Mossack Fonseca agreed to carry out "light touch" due diligence with regard to shell companies owned by Credit Suisse, HSBC, UBS and Société Générale.

The ICIJ leaked emails also reveals many of the Société Générale shell companies created only had "bearer shares" that do not recall the owner or the beneficiary's name. The owner of the account simply turns up with the bearer shares to claim the account. These types of accounts have long been considered to be vehicles for money laundering and organised crime, and have been gradually become obsolete following tightened international regulation. In this situation, little or no beneficial ownership or due diligence can have been undertaken.

It seems likely that a bank or shell administrator which consciously lowers its standards of due diligence is doing so to reduce transparency. It also raises red flags that some banks were prepared to accept a less exacting standards of due diligence and reporting obligations for some shell companies than set out in their own policies and procedures. In the UK, United States, Europe and Australia authorities are investigating the names of Mossack Fonseca clients and have identified numerous accounts where income was not declared. Panama has offered to comply with OECD principles and cooperate with other government agencies requesting information in the future — the inference being that it has not previously done so.


Conducting Beneficial Ownership:Ddue Diligence

The conduct of the various banks involved has once again raised questions about the culture within banks and the continuing existence of a mindset they circumvent international rules. The ICIJ emails indicate due diligence standards among some of the international banks were compromised. The question is whether the banks are learning lessons. HSBC and other banks are still recovering from revelations and multibillion dollar fines for harbouring accounts of money launderers and drug cartels in South America.


FATF emphasis on improved beneficial ownership obligations


The Financial Action Task Force (FATF) has set out a raft of proposals to improve the effectiveness of the international standards on tax transparency and the sharing of beneficial ownership information. The proposals are part of a crackdown on corruption, tax evasion, terrorist financing and money laundering following the Panama Papers. The Paris-based standard setter was responding to a request from the G20 Finance Ministers and Central Bank Governors for suggestions on ways to prevent the misuse of companies, trusts, and other corporate vehicles.

The FATF said there were already appropriate international standards in place to improve transparency but often the implementation fell short. The task force said it would place more emphasis on beneficial ownership during the follow-up work on mutual evaluations. It will also work on developing clearer recommendations to assess countries on how they comply with the beneficial ownership requirements. The FATF will also work on developing closer ties with the Global Forum on Transparency and Exchange of Information for Tax Purposes to coordinate the work on improving transparency in relation to beneficial ownership. 

The release of the Panama Papers in April uncovered the "large-scale misuse of legal persons and arrangements" and focused attention on the need to strengthen controls against the misuse of corporate structures, the FATF said in its report to the G20. The report said the international standards were adequate but there were "significant implementation challenges on beneficial ownership based on recent peer reviews."

Some of the biggest challenges include the fact there is not enough accurate and accessible information relating to company registration. In many jurisdictions gatekeepers are not meeting their customer due diligence (CDD) obligations. Shortcomings have been identified among company formation agents, lawyers, and trust-and-company-service providers. There is also poor enforcement for companies that fail to update information about their shareholders or members on company databases. 

"Improving the transparency of the beneficial ownership of legal persons and legal arrangements is vital to protect the integrity of the international financial system, and to prevent misuse of these entities and arrangements for corruption, tax evasion, terrorist financing and money laundering," the G20 said. Following the release of the Panama Papers the G20 is focusing on ensuring countries can provide timely and accurate beneficial ownership when complying with the international information exchange obligations between "competent authorities".

The FATF and the Global Forum agreed to prepare their responses before the G20's October meeting on ways to improve the implementation of the international standards on transparency. The Financial Action Task Force (FATF) has long stressed the need for banks to strengthen their compliance regarding beneficial ownership. The 2014 G20 Summit in Brisbane reinforced international governments' commitment to working together to target tax avoidance schemes, and cooperation between agencies has increased considerably since then. A recent EU directive has also strengthened the due diligence banks must undertake to establish beneficial ownership.

Treasury Department rules

The U.S. Treasury Department (through its Financial Crimes Enforcement Network, or FinCEN) introduced a rule in May that would obligate banks to collect beneficial ownership information from companies, starting in 2018.

The new measures aim to enhance customer due diligence (CDD) for banks, broker-dealers, mutual funds, futures commission merchants and commodities brokers. FinCEN's final rules target the identification and verification the beneficial owners of legal entities, along with the adoption of risk-based procedures for CDD. The proposed rule identifies two types of beneficial owners -- those who satisfy an ownership threshold, where they directly or indirectly own 25 percent or more of the legal entity’s equity interests -- and those who satisfy a control threshold, where the beneficial owner is an individual who has significant authority to control, manage, or direct the legal entity customer.

The rule is designed to end the use of anonymous corporations in the United States and require disclosure of beneficial owners when foreigners deposit money or buy assets in the USA. The rule does not impose any disclosure requirements on the companies themselves or on those non financial gatekeepers, and the rule’s fate remains uncertain in a new Republican-controlled Congress and White House.

The International Monetary Fund (IMF) criticized the FinCEN proposal as not strong enough to meet international standards. Like the FATF, the IMF recommends stronger requirements for identifying beneficial  owners, and extending anti-money laundering requirements to such gatekeeper sectors. Such inconsistencies between countries in their commitment to determine beneficial ownership details only creates more work for Compliance Officers.


Other Countries'Standards


Former UK Prime Minister David Cameron in May announced steps to end the secret ownership of property in the UK by foreigners.

"For the first time," Cameron said in a statement, "foreign companies that already hold or want to buy property in the UK will be forced to reveal who really owns them."

Any foreign company that wants to buy UK property or bid for central government contracts has to join a new public register of beneficial ownership information. The disclosure rules apply to companies that already own property in the UK and to new buyers.

"The new register for foreign companies will mean corrupt individuals and countries will no longer be able to move, launder, and hide illicit funds through London’s property market, and will not benefit from our public funds," the PM's statement said.

France, the Netherlands, Nigeria, and Afghanistan have agreed to launch their own public registers of true company ownership, and Australia, New Zealand, Jordan, Indonesia, Ireland, and Georgia have agreed to take the initial steps toward making similar arrangements.

A recent EU directive has also strengthened the due diligence banks must undertake to establish beneficial ownership.

As with the FinCEN proposal, covered financial institutions will need to collect beneficial ownership information in a standardized format by identifying and verifying any individual who owns 25 percent of more of a legal entity, and the individual who controls the legal entity. 

Several items to consider in terms of crafting a risk profile include:


  • How complex the entity’s ownership structure is;
  • The customer’s home jurisdiction and whether it is known for having high levels of corruption or other financial crime;
  • The extent to which a customer’s business is cash-based;
  • Whether the customer has taken any initiative to give the identities of its shareholders and other relevant parties or, on the contrary, has tried to mask them;
  • Whether the customer's identity has been determined and vouched for by a third party that your organization has not adequately vetted.

Documentation is imperative -- detailed descriptions of all documents and tools relied upon for identity verification should be described in detail. Any resolution of discrepancies should be carefully noted. As risk profiles change, all customer information must be updated and new procedures applied as appropriate.

As financial institutions prepare to comply with the Customer Due Diligence rule issued by the U.S. Treasury Department earlier this year, compliance officers and bank training units would be wise to revisit the legal concept of willful blindness, lawyers said during a webinar earlier this week.

Willful blindness is a concept well-known in anti-money laundering circles. People have been successfully prosecuted for involvement in money laundering activity in cases where the courts found that looking the other way despite signs money came from an illicit source is equivalent to knowing the money is dirty.

In the context of Treasury's new Customer Due Diligence (CDD) rule, which was issued in May and comes into force in May 2018, this legal principle would apply to the requirement that banks, broker-dealers and certain other financial institutions collect information about the true, or "beneficial" owners, as well as the controllers, of legal entity accounts. 

The issue of willful blindness has emerged with the Foreign Account Tax Compliance Act (FATCA), a law Congress enacted in 2010 that obliges foreign financial institutions to help the U.S. Treasury Department spot taxable accounts held overseas by U.S. taxpayers. FATCA requires considerable digging and bank personnel cannot risk turning a blind eye. FATCA requires know your customer steps that in some ways are more stringent than the new CDD rule, for instance, FATCA obliges financial institutions to record the identities of any beneficial owners who hold a 10 percent or greater interest in a legal entity, whereas the threshold for the CDD rule is 25 percent ownership.

"With the 10 percent ownership interest, you would have to look through the complex structures to figure out who actually is a beneficial owner," she said. "Willful blindness sort of indicates that institutions need to go through and really determine who has the control and ownership of a particular account.


"Always ask detailed questions. If you're not sure if that answer is enough ask for documentation to support (a customer's) response about the entity, about the transaction, about where the money is going, where the money is coming from. Anytime that you find anything that is suspicious, raise it up through the chain of command immediately, and file an STR


The concept of “beneficial owner” has given rise to different interpretations by courts. Given the risks of double taxation and non-taxation arising from these different interpretations. 

Perhaps the most difficult task a financial institution must undertake when onboarding a new customer or counterparty is collecting Economic or Beneficial Ownership information. The regulations vary by jurisdiction, are in some cases unclear, and the client or the counterparty is often unwilling to provide the requisite information with alacrity or willingness. The client or counterparty may not be completely transparent and it’s often difficult to verify the information provided. Further, while beneficial ownership information can change, the client or counterparty is not obligated to provide its financial institution with updates.


FATCA’s Beneficial Owner Threshold Poses Challenges


With a 10% threshold, the FATCA net captures more beneficial owners than transparency regulations using a 25% test. For FATCA purposes, with respect to a corporation, a “substantial U.S. owner” is any U.S. person that owns, directly or indirectly, more than 10% of the stock of the corporation by vote or value.

The Final Regulations for FATCA, effective January 17, 2013, require withholding agents to identify the FATCA status of customers. When a withholding agent lacks information sufficient to assign an appropriate FATCA status, documentation on pre-existing accounts collected for AML/KYC purposes may be relied upon under certain circumstances. Further, FATCA offers a limited self-certification mechanism for accounts held by entities. 

From a practical standpoint, it will be challenging for some institutions to acquire sufficient documentation from every 10% owner. On the other hand, building a more complete database on these customers may prove beneficial in the long run if future EU directives and FinCEN rules move from the 25% test toward the 10% threshold.


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