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#Anti Money Laundering

Beneficial ownership: A new era of openness? (Switzerland)

International Compliance Association

4MLD , 5MLD , AML , beneficial ownership , FATF , financial crime , G20 , G8 , Switzerland , TI , Transparency International

Beneficial ownership is a phrase likely to leave the average person baffled and probably not very bothered. But it’s a concept set to attract much more interest over the coming months and years, thanks to the Fourth Anti-Money Laundering Directive (4MLD), and the central registers of beneficial owners that it will introduce.

Whilst 4MLD will not impact Switzerland, the global spotlight has certainly been cast on the topic of beneficial ownership.

The word ‘beneficial’ usually has positive connotations. But put beneficial ownership in the context of corporate anonymity ­– hiding the identity of ultimate owners of companies and other legal entities within complex structures that are almost impossible to unravel ­­­– and it takes on a different complexion.

In itself, there’s absolutely nothing wrong with beneficial ownership. Someone has to be the ultimate owner, and most will have entirely valid reasons why a corporate structure has been set up in a certain way. But when identifying an ultimate beneficial owner (UBO) becomes a mammoth, multinational detective job, that secrecy is very attractive indeed to those involved in financial crime.

Central registers

The international focus on secrecy over corporate ownership and control, and the part it plays in financial crime, has been growing in intensity among politicians and anti-corruption campaigners for more than a decade.

As far back as 2001, the Organisation for Economic Co-operation and Development was calling for reform in its report Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes.

Almost every economic crime involves the misuse of corporate entities– money launderers exploit cash-based businesses and other legal vehicles todisguise the source of their illicit gains, bribe-givers and recipients conduct theirillicit transactions through bank accounts opened under the names of corporationsand foundations, and individuals hide or shield their wealth from tax authoritiesand other creditors through trusts and partnerships. To prevent and combat the misuse of corporate vehicles for illicit purposes, it is essential that the authorities in all jurisdictions have the means to obtain and share, on a timely basis, information on the beneficial ownership and control of corporate vehicles established in their jurisdictions.

The Financial Action Task Force (FATF) stepped up the pressure in 2003, including measures in its revised Recommendations to address the transparency and beneficial ownership of legal persons and arrangements and strengthening these in 2012.

By 2013, the G8 had published Action Plan Principles, in line with the FATF Recommendations, to prevent the misuse of companies and legal arrangements, with G8 members committing to publishing national Action Plans on the issue.

A year later, the G20’s High-Level Principles on Beneficial Ownership Transparency included the value of authorities having ‘timely access to adequate, accurate and current information regarding the beneficial ownership of legal persons…for example, through central registries’.

Changes in Switzerland

Switzerland has responded to calls to increase the transparency of companies with the Federal Act of the Implementation of the Revised Recommendations of the Financial Action Task Force of 2012 (The Act).

Whilst the Act has brought a number of changes and obligations, it also included some very important updates to the requirements around beneficial ownership.

Bearer Shares

A controversial topic which often sparks debate is the use of bearer shares. Open to misuse by those of criminal intent wishing to disguise their identity, FATF have called upon all its members to put in place mechanisms to prevent their misuse, including prohibiting them altogether.

One of the other controls FATF suggests, which Switzerland has chosen to adopt, is the requirements for shareholders with a controlling interest to notify the company, and the company to record their identity.

The Act places the duty on owners of bearer shares in non-listed Swiss companies to disclose their identity to the company within one month of owning the shares. There is also the option to disclose identity to a financial intermediary instead of the company, in either case the information must be made available to the Swiss authorities, which effectively means that owners of Swiss bearer shares can no longer be anonymous.

Beneficial Ownership

The Act did not stop with bearer shares but also placed additional obligations on Swiss legal entities, any individual who owns or controls over 25% of the entity’s shares capital or voting rights (whether held by bearer shares or registered shares) is required to be identified to the company or an appointed financial intermediary.

The Act covers instances where an individual may collude with others to remain under the 25% threshold, requiring the identification of the individual whether they act alone or in concert with others. A beneficial owner cannot be another corporation, the layer must be peeled away until the ultimate beneficial owner(s) can be identified.

Again, the information will be made available to the Swiss authorities, which goes someway to increase the transparency of Swiss companies.

Financial Intermediaries

The changes have also impacted the financial sector, with the requirement to identify beneficial owners of customers over the 25% threshold in all circumstances, with the exception of listed companies. This requirement is very similar to the requirements imposed under the current European money laundering directive.

What happens next?

Whilst the measures addressed FATF concerns, Transparency International’s statement in 2014 as part of their “Unmask the Corrupt” campaign called upon a public register of beneficial owners to be introduced, arguing that it would be helpful when banks are undertaking their own due diligence on their clients.

The cultural shift involved in bringing certain corporate ownership structures out of the shadows will involve a perhaps lengthy period of adjustment, but with Europe setting the pace, commitments at a wider international level to ending corporate anonymity and the ongoing attention of anti-corruption campaigners, the pressure for reform looks set to continue and grow.

This update has touched on the campaigning of Transparency International and our next bulletin will focus on TI’s latest Corruption Perceptions Index.

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