Challenges for Beneficial Ownership Rules Across Jurisdictions
If you’re in the compliance industry, you’ll be hearing the term beneficial owner more and more. While Anti-Money Laundering (AML) and Know Your Customer (KYC) laws and procedures are well established for individuals, Know Your Business (KYB) requirements are increasingly being mandated. As the Panama Papers revealed how unscrupulous individuals were using businesses, shell companies, trusts, nominees and other financial structures to hide money and control, these loopholes are now the target of beneficial ownership laws.
According to the FATF, “beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” That is to say, you need to know who you are doing business with, the real person (or group of people) who owns or controls that business.
Here’s a sampling of how beneficial owners are defined and the requirements from each regulatory agency or policy:
FATCA - a 10% ownership threshold or below for Foreign Investment Vehicles
CRS - a 10% ownership threshold
OFAC - 50% rule
High risk or Politically Exposed Persons (PEP) - a threshold as low as 1% or 0.01% is required
FinCEN Final Rule - 25% ownership threshold
4th EU AML Directive - 25% shares or voting rights in a corporate entity. If, after having exhausted all possible means and provided no UBO is identified, the natural person(s) holding the position of senior managing officials are, in principle, considered to be the UBO
Dodd-Frank [sections 13(d) and 13(g)] - beneficial owner of more than 5% of certain equity securities are to disclose information relating to such beneficial ownership
SEC - 506(e) disclosure requires issuers to perform due diligence on any person that is going to become a 20% beneficial owner upon completion of a sale of securities
Source: Understanding Beneficial Ownership Structures by Dun & Bradstreet
These rules do not, of course, represent all the rules around beneficial ownership but are demonstrative of some of the issues. For example, the thresholds range from 0.01% to 50%, so there’s little consistency or commonality. This can occur in the same jurisdiction, where different regulations apply at the same time – so which rule trumps the other?
Another issue is the different time-tables of implementation. The 4th AML Directive is already in effect, while the FinCEN Final Rule takes effect May 11, 2018. Just keeping track of all the regulations and the changing requirements takes concerted effort.
Ultimate Beneficial Owner (UBO)
Much more difficult though, is actually discovering the ultimate beneficial owner (UBO). Consider that, millions of companies are formed every year. If someone is looking to commit fraud, evade taxes, launder money or finance terrorism, they’ll look for lax jurisdictions or loopholes. They can get advice from accountants and/or lawyers that are knowledgeable in setting up complex financial structures that cross borders, layer ownership and obfuscate paper trails.
There are numerous vehicles that can be used by corrupt people to transfer and hide wealth. Offshore companies are so difficult to uncover that they are not even considered in UBO research. US States like Delaware and Nevada are well known for their ease of incorporation and their confidentiality.
Nominees might be a real person, but only a front for the true owner. Any purchase, financing or trade is possibly involved in illegal wealth transfer, from real estate deals to stocks and bonds, from gambling to cryptocurrencies.
Old School Compliance
Compliance, in general, is not set up to uncover the complex, cross-border, intertwined nature of beneficial ownership. True, public companies already need to report ownership, management and control information, so that information is relatively easy to gather and report. Unfortunately, those make up a small fraction of all companies.
Compliance is often set up to run in departmental or geographical silos. Each unit gathers their own data from various research and reports then analyzes and cross-references the information in multiple formats, spreadsheets, and databases. The data is generally static, difficult to update and oftentimes out-of-date.
This information is then used to determine ownership structure. Only at that point can actual ownership percentage be checked and the UBO determined. With the UBO information, compliance can then do their due diligence checks.
Trying to reconcile and track all the information is a nightmare. As the process in mostly manual, checks are slow, costly and rife for potential errors. Additional reporting burdens and approval delays are put on customers who don’t appreciate the added cost and frustration.
Simply put, these processes are not scalable and without improvements will stall growth, impede compliance and put companies at risk of compliance failure.
New Era Compliance
It doesn’t have to be this way; there are solutions. Modern APIs (Application Programming Interfaces) can easily gather and share information across networks. Data capture, sharing and workflows are automated, speeding up the process and standardizing the information. Specific issues are quickly noted and sent immediately to the correct person responsible.
In many cases, the entire UBO process is discoverable through automated workflows using the power of APIs:
Automated Workflow for Identifying and Verifying Beneficial Owners to Meet AML Laws
Compliance can then focus on more complex situations or files that present higher risk. The results are faster and easier onboarding for customers, significant cost savings due to better use of compliance resources, less errors and higher confidence in operational compliance.
In addition, as we are in the age of big data, there’s more data and it’s easier to analyze. Different departments can access the data for a variety of purposes and a more holistic view offers opportunities to optimize operations.
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