“There is not a crime, there is not a dodge, there is not a trick, there is not a swindle, there is not a vice which does not live by secrecy.”
― Joseph Pulitzer
To help put an end to corruption and financial crime, one of the most important steps governments can take is to ensure that effective beneficial ownership transparency rules and procedures are in place. In reference to the G20 Anti-Corruption Action Plan 2017-18, global anti-corruption organization Transparency International quoted, “transparency over beneficial ownership is critical to preventing and exposing corruption and illicit finance.”
The report notes there is progress amongst the G20 in improving beneficial ownership legal frameworks, but progress is slow. Unfortunately, nine countries in the G20 are considered to still have average beneficial ownership rules, while two — Canada and South Korea — are considered weak. While the G20 might represent the most advanced economies of the world, it appears other countries have more advanced legal frameworks when it comes to beneficial ownership transparency.
Beneficial Ownership Considerations
The first step to having an effective framework is to define what factors determine a country has solid regulations in place for beneficial ownership transparency. Transparency International assesses countries on 10 principles that includes examining how beneficial ownership laws are setup, who they cover, what type of reporting requirements they have and who can access the information.
It’s notable to point out that the three countries that achieved a very strong framework rating are all in the EU: France, Italy and UK. This is directly correlated to the full-implementation date of 4AMLD in 2017, which is the EU’s update to their Anti-Money Laundering laws and includes significant additions to beneficial ownership reporting. As the European Commission states in the Directive, “understanding the beneficial ownership of companies is at the heart of the risk mitigation of financial crime and of prevention strategies for regulated firms.”
To that end, a requirement of 4AMLD is that corporations and other legal entities need to gather, and maintain, accurate ultimate beneficial ownership (UBO) data and share that with their appropriate government agencies.
Unfortunately, the requirement for entities to know their ownership is not enshrined in law in many other jurisdictions. As Transparency International states “the great majority of countries assessed still do not require legal entities to maintain beneficial ownership information themselves … All countries do have some sort of shareholder register, but the information rarely includes beneficial ownership information.”
Beneficial Ownership Registration
The lack of information leads directly to the next major problem; lack of access to beneficial ownership information. The ideal standard is to have all beneficial ownership data available in an online central register, openly available, such as prescribed in 4AMLD. A central register assists in ensuring the information is accurate and up-to-date, enables law enforcement to quickly gather necessary information and supports cross-border investigations.
Yet, even in the EU, central registers are not fully implemented. And while France, Germany, Italy, and the United Kingdom had central beneficial ownership registers, only the UK have theirs publicly available. Even more problematic, many countries have no central registry or plans for one.
Business Information Verification
Proper beneficial ownership transparency is not just about having the information, it’s about ensuring the information is usable. If beneficial ownership information is fraudulent, fake or otherwise inaccurate it can’t prevent money laundering, fraud or other corrupt activity.
For example, in the US the FinCEN Final Rule collecting, maintaining and reporting of beneficial ownership information is now a requirement for financial institutions. However, they can use information supplied by the customer, as long as they have “no knowledge of facts that would reasonably call into question the reliability of the information.”
While an improvement, as previously no beneficial ownership information was required at all, it still falls short of Transparency International recommendations:
Governments should resource and establish mechanisms to ensure that at least some verification of beneficial ownership information takes place, such as cross-checking the data against other government and tax databases or conducting random inspections.
Practical Steps to Transparency
With all the corruption that has come to light in the last years, such as the Panama Papers, Paradise Papers and the Russian Laundromat, the battle to put the squeeze on beneficial ownership opacity is becoming ever more public and serious. The G20 considers it a high priority issue and has adopted High-Level Principles on Beneficial Ownership Transparency. With organizations like Transparency International putting such a spotlight on the issue, countries will continue to expand their regulations in the area.
For example, Canada just released proposed amendments to their money laundering laws. Previously the regulations require reporting entities to obtain its beneficial ownership information and to take reasonable measures to confirm the accuracy of this information. The amendments would require taking explicit steps to confirm the accuracy of new information as it comes in or as it is updated over time.
But how does a reporting entity keep on top of these beneficial ownership requirements? There’s a morass of information to collect, check and verify. There’s multiple sources to connect to. There’s different formats, systems and requirements that must be analyzed, integrated and monitored. Previous KYC (Know Your Customer) is tough enough but the complexity of KYB (Know Your Business) is a potential nightmare for compliance.
Traditionally, the onboarding of business entities and merchants is conducted through manual checks. The process needs to confirm that the merchant account belongs to the claimant and can be reasonably expected not to be used for fraud, money laundering or financing terrorist activities. These processes are manual, tedious and time-consuming.
Organizations need to examine how they can automate the KYB process to help reduce manual costs and save time. To mitigate the risk of AML noncompliance they should consider artificial intelligence and new solutions can verify the authenticity of business entities in real time. They should employ procedures to unravel multiple, complex layers of business ownership structure.
A May 2018 Medici report takes a deep dive into KYC for Businesses. The objective of the study is to understand the traditional and automated approaches to the KYC process, including the complexities involved in international business verification. Regardless of specific beneficial ownership requirements, having processes that improve transparency into who you are doing business is a smart risk-mitigation strategy.