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#Anti Money Laundering

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

International Compliance Association

Beneficial ownership: A new era of openness?

Beneficial ownership is a phrase likely to leave the average person baffled and probably not very bothered. But it’s a concept that seems guaranteed to attract a great deal of international interest over the coming months and years, not least because of the European Union’s Fourth Anti-Money Laundering Directive (4th AMLD) and the central registers of beneficial owners that it will introduce.

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, as the recent revelations by the International Consortium of Investigative Journalists in the Panama Papers have demonstrated.

In itself, there’s nothing wrong with beneficial ownership. Someone has to be the ultimate owner, and most will have 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 becomes very attractive indeed to those involved in financial crime.

Central registers

The Panama Papers have formed another landmark in a series of events intensifying the international focus on secrecy over corporate ownership and control, and the part it plays in financial crime, going back almost two decades.

As long ago 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 to disguise the source of their illicit gains, bribe-givers and recipients conduct their illicit transactions through bank accounts opened under the names of corporations and foundations, and individuals hide or shield their wealth from tax authorities and 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’.

The Fourth Anti-Money Laundering Directive

During negotiations on the 4th AMLD, members of the European Parliament strengthened its measures to include a requirement that member states keep central registers of information on the ultimate beneficial owners of corporate and other legal entities, such as trusts.

Entities must hold ‘adequate, accurate and current information on their beneficial ownership’. The information must be held on a central register in each member state, with features including:

  • unrestricted and timely access to national authorities and financial intelligence units (FIUs)
  • access to obliged entities – those responsible for applying anti money laundering/countering the financing of terrorism rules – for example, banks carrying out customer due diligence
  • access to any person/organisation able to show they have a legitimate interest, such as journalists – as a minimum they will be able to access the name, month and year of birth, nationality, country of residence and the nature and extent of the beneficial interest.

What is happening in Gibraltar?

Gibraltar’s geographical location gives rise to significant money laundering risks.  For example, it is adjacent to known drug smuggling and human trafficking routes and is exposed to money launderers located in nearby Morocco, a drug producing centre. Distribution networks in Spain, in particular, southern Spain, where there has been an increase in organised criminal activities from Eastern Europe, adds to the risk that Gibraltar has the potential to be used as a base for money laundering. The Gibraltar Financial Services Commission (GFSC) recognises the significance of these risks, and has highlighted them as such in their 2016 Risk Outlook.

Despite these risks, Gibraltar has enjoyed relatively strong reviews of its anti-money laundering (AML) and counter-terrorist financing (CTF) controls. In their 2002 Mutual Evaluation Report, FATF concluded that ‘Gibraltar has a comprehensive legal framework and administrative arrangements in place to fight money laundering’. The last Mutual Evaluation Report relating to the implementation of AML and CTF standards in Gibraltar was undertaken by the FATF in 2007. According to that evaluation Gibraltar was deemed compliant for 12 and largely compliant for 20 of the FATF 40+9 recommendations. It was partially compliant or non-compliant for 3 of the 6 core recommendations. Gibraltar is not on the FATF List of Countries identified as having strategic AML deficiencies.

As an overseas territory of the UK, Gibraltar is a member country of the European Union (EU) and has enacted the relevant laws and rules designed to implement the anti-money laundering policies. In line with Article 30 of the 4MLD, Gibraltar will be creating a registry of beneficial ownership and will make it available to anyone who can demonstrate a “legitimate interest”. It will not be accessible to the public.

In practice, these changes will mean that financial institutions that operate in Gibraltar should refuse to open an account/enter into a relationship, or will have to close an existing account/terminate a relationship, if they cannot form a reasonable belief that it knows the true identity of the UBO; and/or the nature of business or that the formal requirements concerning the identification of the UBO are not met.  

 

What happens next?

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.

As regulatory regimes evolve, the International Compliance Association’s qualifications, including in anti money laundering, financial crime prevention, managing fraud, and governance, risk and compliance, equip professionals around the world with the skills and knowledge they need to keep pace with ongoing change.

 

For more information about ICA qualifications, please visit our page dedicated to courses available in Gibraltar.

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