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Hidden in plain sight – The concealment of beneficial ownership

International Compliance Association

Anti money laundering , Beneficial ownership , Compliance

The Financial Action Task Force (FATF) published a recent report that looked into the techniques employed by criminals to conceal the ownership and control of illicitly obtained assets by using a combination of layering and direct ownership chains. In many cases the beneficial owner will maintain some level of direct control over a scheme, usually involving a family member or business associate, but it is imperative that they are able to conceal their own identity.

The report explained that schemes designed to obscure beneficial ownership often employ a ‘hide-in-plain sight’ strategy by leveraging global trade and commerce infrastructures to appear legitimate. However, this visibility does not equate to transparency, and many of the tools that were designed to encourage business growth and development, such as limited liability corporations and nominee directorship services, can be used to facilitate money laundering, tax evasion, and corruption. The globalisation of trade and communications has only increased this threat, and countries now face the challenge of enforcing national laws in a borderless commercial environment.

Let’s take a closer look at how these legal arrangements and professional intermediaries help criminals conceal their wealth and illicit assets.

Shell companies

One of the key elements used to conceal beneficial ownership is through an incorporated company with no operations, business activities or employees, commonly known as a shell company, through which illicit money can be passed. Layers of ownership linked to the shell company will be put in place, with intermediaries and third parties, which can include spouses and children as well as other personal or business associates, who will exercise control of it on behalf of the beneficial owner.

Trust and company service providers

The use of professional intermediaries is also quite common in concealing beneficial ownership. For example, a trust company or a legal professional can assist a criminal by establishing legal arrangements and bank accounts through which criminal funds can be moved. Legal trust accounts offer a means to disguise beneficial ownership too, and the legal professional privilege can also offer a significant barrier to authorities trying to recover beneficial ownership information.

Trust and company service providers (TCSPs) represent a significant proportion of the professional intermediaries who are establishing legal persons and legal arrangements on behalf of their clients. They were also found to be more likely to provide services to clients internationally, which plays conveniently into the hands of anyone looking to conceal beneficial ownership overseas. TCSPs who were found to be complicit in their involvement, were identified as being more wilfully blind than fully complicit. This is because their services are vulnerable to exploitation by criminals (and potentially other professional intermediaries) involved in an illicit scheme. 

Designated non-financial businesses

Designated non-financial businesses and professions (DNFBPs), e.g. casinos, real estate agents and dealers in precious metals/stones, can also help to add a layer of concealment to the beneficial ownership details, which will assist the criminal in concealing their identity. More often than not, the DNFBPs will get involved knowing they are playing a role in the concealment of the proceeds of crime, however, occasionally they may be unwitting participants. This highlights the important need for more effective regulation of DNFBPs, as well as professional intermediaries, to encourage increased awareness in the sector, and to reduce the likelihood of some of these becoming unwittingly involved.

Some of the ways in which these vulnerabilities can be addressed have been identified by the FATF report and include:

  • consideration of the role of nominees, including measures that may limit their misuse
  • the need for regulation of professional intermediaries in line with the FATF Standards, and the importance of efforts to educate professionals on money laundering and terrorist financing vulnerabilities to enhance awareness and help mitigate the vulnerabilities associated with the concealment of beneficial ownership
  • further work to identify possible solutions or measures to prevent the misuse of legal professional privilege (LPP) to conceal beneficial ownership information, including through the provision of enhanced training and guidance material for legal professionals
  • ensuring financial intelligence units have access to the widest possible range of financial information
  • increased sharing of relevant information and transaction records to support global efforts to improve the transparency of beneficial ownership
  • further work to understand what can be done to improve the quality and timeliness of the cross-border sharing of information, including through mutual legal assistance
  • ensuring, for countries that make use of registers of beneficial ownership, and for all countries’ company registers, that there is sufficient resource and expertise associated with their maintenance – this is to ensure that the information recorded in the register is adequate, accurate, and up-to-date, and can be accessed in a timely manner
  • the need for countries to consider and articulate the vulnerabilities and threats relating to domestic and foreign legal persons and arrangements, the domestic and foreign intermediaries involved in their establishment, and the means by which criminals may exploit them to facilitate money laundering and other criminality.

A broad theme underlying all of these issues is information, including possible ways to improve the reliability, access and mechanisms to share that information more effectively at domestic and international levels.                                                                                                                     


Further reading: 

 

This article forms part of the #BigCompConvo - Join us as we explore and debate the latest challenges and issues facing you and regulatory and financial crime compliance professionals all over the world. If you’d like to contribute an article as part of the Big Compliance Conversation get in touch with us at contributions@int-comp.org

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