, beneficial ownership
, 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, 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.
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.
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 to disguise the source of their illicit gains, bribe-givers and recipients conduct theirillicit 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, itis 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 Fourth Anti-Money Laundering Directive, 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 France?
Under the French Monetary and Financial Code, reporting entities (essentially financial institutions) must identify beneficial owners of clients before and during a business relationship, and keep information for five years after an account is closed or the relationship ends. There are also obligations relating to occasional clients. If the UBO is unknown, this should trigger an immediate suspicious transaction report to the French FIU, Tracfin.
Tracfin’s latest Money Laundering and Terrorist Financing Risk Trends and Analysis report, published last year, highlighted the issue and featured case studies relating to beneficial ownership. It warned:
Two of the most common ways in which organised crime groups operate is by infiltrating the legal economy by means of companies specifically created for criminal purposes, or taking control of legitimate companies experiencing financial difficulties…takeover methods…are designed to conceal the identity of the true beneficial owner through the interposing of foreign legal structures.
Other steps towards greater openness around beneficial ownership have included publishing a national Action Plan , in response to the G8 Action Plan Principles, stating France’s commitment to ensuring ‘transparency of the beneficial ownership of companies, other vehicles and trusts, which involves identifying who effectively controls and takes profit [from] a company or a legal arrangement’. The seven-point plan included a pledge to:
Assess France’s central public registry for companies, the Registre du Commerce et des Sociétés…in terms of efficiency to provide adequate, accurate, and current information,and propose and implement means to improve the situation if needed, including any othermeans to ensure access to beneficial ownership for the administrative authorities.
In November 2015, Transparency International (TI) assessed G20 members for compliance with the High-Level Principles on Beneficial Ownership Transparency and found that France was fully compliant with two principles and scored highly on some others.
However, it was only 50% compliant with the principle on acquiring accurate beneficial ownership information, with TI reporting: ‘Current laws and regulations do not require legal entities, other than those with anti-money laundering obligations to maintain information on beneficial ownership.’
Even where legal entities were required to collect information on the legal owners of shares – and, in some cases to publish details through the company registry – the owners might not be natural persons and the information might not be enough to identify the actual beneficial owners, or be inaccurate. However, TI concluded: ‘Access to beneficial ownership information is likely to improve when France implements the Fourth EU Directive on Anti-Money Laundering.’
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.
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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