Introduction

Large financial scandals that come to light are in most cases associated with individuals that own a complex web of anonymous companies, partnership and trusts spread across multiple jurisdictions. As is often the case, they use professional advisors and financial institutions to structure the entities to ultimately hide the beneficial owners and the source of their illicit funds.

Some of the examples of scandals worth mentioning that used these mechanisms to hide the ultimate beneficial owners include the indictment of Fédération Internationale de Football Association (FIFA) officials for receiving bribes; Brazil’s largest scandal involving the state-run oil company Petrobas that paid bribes to politicians and political parties and recently, as reported by Toronto Star, certain significant owners of the former Toronto Trump Tower were individuals that created shell companies in New Brunswick. The Panama Papers is another pertinent example.

The list can go on and on, but the point is the regulations in most of the G-20 countries for the identification and verification of beneficial owners of organizations are increasing in complexity with time. Global financial institutions are expected to be proactive and to ensure effective compliance.

This paper highlights the plethora of regulations that require beneficial ownership information, the challenges global financial institutions face in complying with the regulations and the possible solutions to comply reasonably with the extensive requirements.

Beneficial ownership regulations

As this is an essential component when onboarding corporate customers for a wide variety of industries and in particular, financial institutions operating in multiple jurisdictions, it is essential to understand that beneficial ownership rules emanate from a number of regulations and guidelines, to name just a few:

• • Proceeds of Crime and Anti Money Laundering Act and FINTRAC guidelines
  • Financial Crimes Enforcement Network (FinCEN) Notice of Proposed Rulemaking (NPR) and Geographic Targeting Orders (GTO)
  • Foreign Account Tax Compliance Act (FATCA)
  • Office of Foreign Assets Control (OFAC)
  • 4th EU AML Directive
  • Financial Action Task Force (FATF)

The challenges for beneficial ownership determination

1. Varied definitions of beneficial ownership

The challenge facing multinational financial institutions is these regulations have varied definitions of beneficial ownership, thresholds and extent of due diligence required.

The Law Library of Congress, Global Legal Research Center issued in July 2017 the results of a comparative study on beneficial ownership laws and disclosures in the EU and in twenty-nine countries, representing all continents and major geographic regions of the world. The study exemplifies the varied definitions of beneficial ownership and disclosure requirements.

The study further reveals that following the adoption of the beneficial ownership policy at the G-20 summit in Brisbane, Australia in 2014, most of the countries in the survey have since amended their legislation or are currently working on amending their laws.

However, Canada and Japan are the only two countries that have not made changes to their national laws even after being signatories to the policy. In fact, Canada reported that it does not “require that the beneficial ownership and company formation of all legal persons organized for profit be reported.” – 2014 G- 20 Anti-Corruption Working Group Accountability Report

2. Beneficial ownership thresholds

In terms of thresholds, most regulations require identification and verification of individuals that own 25% or more of total shareholding. However, other regulations such as FATCA apply a threshold of 10%. For higher risk customers such as PEPs (Politically Exposed Persons) or HIO (Head of International Organization) and related parties, the threshold is lowered to 1%. This is further complicated as certain regulations refer not just to thresholds but also to who effectively controls the entity.

3. Reliance on customer attestation

The information required to determine beneficial ownership can be obtained from several sources: certain government registries, third party search companies, tax authorities and the owners themselves. However, most of these sources are not available to the public or either have inaccurate or outdated information.

Therefore, financial institutions are forced to rely on self-attestation by an individual. This has inherent limitations as financial institutions are required to be fully compliant with the regulations that require independent verification. Furthermore, there are operational challenges as the information from the customer takes time to obtain. This is a key cause of delays when onboarding corporate entities as customers.

4. Lack of a beneficial ownership government registry

The United Kingdom is the only nation in the world that has a functioning public central registry for beneficial ownership. Companies are now required to file returns that include “Persons with Significant Control” to the Companies House. This information is now available in one easily accessible central registry for public access. In the EU, all member states are required to establish central registries by 2017.

In 2016, Transparency International rated the UK with a “very strong framework” for compliance with the G20 Beneficial Ownership Transparency Principles adopted by the G20 in November 2014. Whereas, Canada and the United States are rated as having a “weak framework” well behind the progress being made by India, Mexico, Russia, Saudi Arabia, Turkey and South Africa.

Therefore, the lack of an accessible and up to date central registry for beneficial ownership information remains a key challenge to implement the regulations and guidelines.

5. Complexity of ownership structures

As mentioned earlier, ownership structures can be extremely complex especially where the beneficial owner has engaged professional advisors that specialise in obscuring ownership. It becomes almost an impossible task for financial institutions to cut through the complexity. Corporate customers can have multiple owners spread in different jurisdictions using multiple entity vehicles in countries that have bank secrecy laws.

Financial institutions simply do not have the resources in terms of skilled staff, budgets and time to trace the ultimate owners.

So, what is the solution?

These challenges will not suddenly disappear. However, financial institutions and other qualifying businesses are obligated to comply with the regulations, regardless. Reliance on central beneficial ownership registries where available, or on customer attestations is simply not good enough to withstand regulatory scrutiny.

Transparency International in their 2016 global assessment of the state of beneficial ownership revealed that financial institutions are not taking appropriate steps to verify information and usually take the information provided by customers at face value.

Demostrable measures for beneficial ownership attestation

Therefore, financial institutions must take demonstrable measures to investigate and verify the true owners. These high-level demonstrable measures will go a long way in satisfying the regulators of your financial institution’s commitment to beneficial ownership attestation:

1. Update polices and procedures

• • Identification of all the regulations relevant to beneficial ownership and the requirements for verification e.g. different threshold requirements
  • Ownership and control of impact to procedures from changes in country beneficial ownership legislation
  • Risk assessments based on the customer profile e.g. if the beneficial owner is a PEP or HIO or their related parties; see further below
  • Trigger events and frequency of on-going monitoring
  • Escalation procedures for missing beneficial ownership information
  • Accurate and up to date documentation, and reporting of suspicious transactions
  • Record retention
  • Training programs for persons responsible for beneficial ownership attestations
  • Evaluation of outsourced third parties to provide beneficial ownership information in terms of quality and detail of ownership structure, frequency of updates, geographical coverage, sources of data, customer privacy, cyber security controls business continuity, reputation, pricing and service level standards
  • Independent audit of the effectiveness of beneficial ownership program

2. Risk-based approach to beneficial ownership verification

It is important that the financial institution has an effective risk assessment process for beneficial ownership. This will facilitate the triggers for escalation, enhanced due diligence, suspicious transaction reporting and customer exit decisions.

Therefore, risk assessment procedures should be updated to consider the following specific beneficial ownership considerations:

• • Type of legal entity and ownership: whether the customer is a public corporation, partnership, private corporation or trust and whether ownership is either through bearer certificates, use of nominees or by name of shareholder
  • Self-attestation: Assessment of completeness and accuracy of customer self-assessments. For example, whether the customer has provided adequate details of layers of parent entities up to the ultimate beneficial owners
  • Geography: the extent to which a country is complying with the G20 Beneficial Ownership Transparency Principles adopted by the G20 in November 2014.The 10 principles cover the following elements:
    • 1. The definition of a beneficial owner in enacted legislation for beneficial ownership disclosures
      2. Risk assessments relating to legal entities and arrangements
      3. Beneficial ownership information of legal entities
      4. Access to beneficial ownership information of legal entities
      5. Beneficial ownership information of trusts
      6. Access to beneficial ownership information of trusts
      7. Roles and responsibilities of financial institutions and businesses and professions
      8. Domestic and international cooperation
      9. Beneficial ownership information and tax evasion
      10. Bearer shares and nominees
  • Changes in beneficial ownership: Financial institutions should have the necessary intelligence to proactively identify changes in beneficial ownership. Any change should be reconciled with, for example, self attestations provided from the customer. In situations where there are gaps identified, the customer’s risk profile should be amended for enhanced due diligence.
  • Risk ratings: The risk rating model adopted for beneficial ownership assessment should be consistent with the rating models adopted for customer and sanctions risk ratings.

3. Combination of verification methods
In view of the inherent challenges of verifying beneficial ownership information, the risk of inadequate due diligence can be significantly reduced when financial institutions use a variety of sources e.g. data from reputed third parties, media information, government registries, customer self attestations etc.

Conclusion

How effective is your beneficial ownership verification program and does it meet the requirements of a multitude of constantly changing regulations? Does your program meet the expectations of the regulator in every jurisdiction your financial institution operates?

If the answers to these questions is a “may be” or a “no”, its about time to review the effectiveness of your global compliance program for beneficial ownership verification to mitigate the risks of regulatory sanctions and adverse reputation.