25 Mar 2020
The misuse of legal structures for illicit activities has been the subject of intense global scrutiny since the release of the Panama Papers in April 2016 and the Paradise Papers in November 2017. Since then, the requirements around the identification of the UBOs (ultimate beneficial owners) of legal entities have moved up on the regulatory agenda, increasing the need for financial institutions to identify, verify and screen beneficial owners.
Prior to the leaks, the FATF (Financial Action Task Force) Recommendations had already set out obligations for financial institutions to identify beneficial owners, take reasonable steps to verify their identities, and understand the control structures of customers that legal persons (e.g. companies) and legal arrangements (e.g. trusts).
To address the challenges many jurisdictions experience in trying to ensure ownership transparency, last October the FATF released a best practice paper offering guidance on measures countries should consider to facilitate access to beneficial ownership and control information by financial institutions and other entities.
However, there remains a large gap between the best practices put forward by the FATF and market realities, and progress to enhance beneficial ownership transparency has been uneven, given that jurisdictions often have different methods for defining and recording ownership.
Closing the transparency gap
In the US, no state currently requires disclosure of beneficial owners to set up a company. In fact, most states do not even require information about the officers and directors who will be managing the company.
FinCEN’s CDD Rule was issued to address this vulnerability, requiring financial institutions to identify and verify the identities of UBOs of legal entity customers at the time of account opening and defined points thereafter. While the CDD Rule became fully enforceable in May 2018, it is “not a comprehensive solution to the problem”, according to the US Treasury Department.
Last month, the US Treasury issued its 2020 national strategy for combatting terrorist and other illicit financing, calling for legislative action to require the disclosure of beneficial ownership information at the time of company formation. This “gap” was cited as one of the principal reasons for the US’ “failing grade” on beneficial ownership transparency in its 2016 FATF mutual evaluation report.
In Asia, Hong Kong and Singapore require all companies to maintain an up-to-date list of their UBOs in the form of significant controllers. In Malaysia, companies are required to maintain basic ownership information, which is available to the public. Japan requires companies to declare UBOs upon establishment, but changes in beneficial ownership are not covered.
To try and address transparency gaps, and eventually become fully compliant with the FATF Recommendations, a number of Asian jurisdictions have also indicated they are exploring the possible introduction of public registers of beneficial owners – including Australia, New Zealand, Japan, Malaysia and Indonesia.
The introduction of public UBO registers in each member state was the EU’s direct response to the Panama Papers, forming part of the 5th Anti-Money Laundering Directive (5AMLD) which took effect on 10 January 2020. The previous directive – 4AMLD – did include a requirement to collect beneficial ownership information on companies and trusts, but it did not require this information to be made public.
Despite having two years lead time for compliance, the majority of EU member states either still do not have a centralised register of beneficial owners, or they have imposed registration requirements or other restrictions that inhibit full public access. According to campaigning group Global Witness, only six EU states – including the UK – have complied with the requirement so far.
A persistent stumbling block
“Although progress is being made in many jurisdictions, a persistent stumbling block is a lack of independent and reliable UBO data,” says Phillip Malcolm, Regional Performance Director for Asia Pacific at Refinitiv. “Countries that have a beneficial ownership register in place are better able to support enforcement action because of the enhanced access to ownership information.”
“But in many jurisdictions, especially where such registers are not present, authorities largely rely on banks and financial institutions to supply beneficial ownership information. In many cases this information is incomplete and inaccurate, ultimately hindering efforts to crack down on financial crime.”
By Manesh Samtani, Regulation Asia, 25 March 2020
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