Beneficial ownership best practices – improving the variety and availability of information

With the complexity and variety of corporate structures, governments are having trouble creating effective beneficial ownership transparency rules. That is but one conclusion from the Financial Action Task Force (FATF) in their October 2019 document, Best Practices on Beneficial Ownership for Legal Persons.

The FATF is an independent inter-governmental body that focuses on Anti-Money Laundering (AML) and other serious global financial activities. While their guidance and recommendations have no legal weight, the 39 members of the FATF represent the world’s largest economies, and they set the international standard for AML regulations.

The first FATF beneficial ownership standards came out in 2003, and they were updated in 2012, with a guidance in 2014. However, even with over five years of time to implement measures, most countries are still not rated as largely compliant, as shown in assessments by the FATF. In one round of assessments, “only 4 out of 25 countries attained a substantial level of effectiveness in preventing the misuse of legal persons and arrangements.”

Jurisdictions, compliance teams and other stakeholders will need to do better to help combat the estimated $2 trillion of money laundering that occurs every year.

Problems of acquiring beneficial ownership information

There are six substantial issues with current beneficial ownership information:

Risk assessment

Defining risk in a consistent manner is difficult. Different ownership types result in varying reporting rules and gaps, the risks posed are not always well understood, and cross-border ownership is often not considered.

Adequacy, accuracy and timeliness of information on beneficial ownership

Accuracy of information is often questionable; how the information is verified, monitored, stored, updated and cross-referenced differs widely according to jurisdiction. Complex ownership structures and foreign ownership add to the complexity.

Access by competent authorities

Considerations such as data protection and privacy laws, information sharing among regulators, and ways for regulators to access information and sources complicate access to accurate, up-to-date beneficial ownership information.

Bearer shares and nominee shareholder arrangements

The true ownership of bearer shares, and similar, is often hidden by nominee shareholders, and the information is not easily accessible by regulators.

Fines and sanctions

The number and amounts of fines have not been sufficient to dissuade beneficial ownership reporting failures.

International co-operation

The complexity, number of agencies involved, lack of proper record keeping and language issues makes international coordination difficult.

3 approaches to identifying beneficial ownership

Each country is allowed to determine the specific mechanisms they deploy to ensure beneficial ownership transparency. There are three approaches:

1. Registry approach

Countries can operate company registries that hold information such as company name, proof of incorporation, legal form and status, address of the registered office, basic regulating powers, and list of directors. Authorities, financial institutions (FIs) and other regulated companies can then access that information for beneficial ownership checks.

If registry information is accurate, up to date and robust, this approach can provide one source of truth that delivers effective transparency. However, the FATF finds that in many cases these registries don’t have the requisite procedures and authority to meet objectives. Potential points of failure include:

• Lack of information verification and monitoring
• Lack of regulatory mandate and powers
• Lack of investigative capabilities
• Lack of funding to achieve broad goals

2. Company approach

Countries can require each company to obtain and hold accurate beneficial ownership information, which is shared with authorities or regulated companies running checks. If the information is indeed accurate, up to date and effectively shared, the company approach can also be effective.

While this approach might sound straightforward, the reality is that multiple layers of ownership can obstruct beneficial ownership, making it difficult for companies to acquire the necessary information. The same points of failure above may also apply; is there a legal framework in place that enables companies to capture and confirm the necessary information and provide remedies in case they can’t? What are “reasonable measures” in an environment where corporate structures can vary widely in terms of complexity, number of owners, ownership types and numerous other permutations?

Without clear guidance, companies can have difficulty in determining correct procedures and the level of associated risk, potentially making transparency uneven and difficult to enforce.

3. Existing information approach

Countries can determine beneficial ownership information by examining existing information available in databases held by organizations such as registries, FIs or other regulated companies, or with other regulators. If the information acquired is accurate, timely and sufficient, this approach provides the necessary level of transparency.

As with the other approaches, this approach also has its problems, including:

• Is the information even available?
• Was effective due diligence performed on the information?
• Is all the relevant information disclosed, as a source might not require those details?
• Is there a legal framework to share the information? Under what conditions and safeguards?

The previous points of failure also apply to this approach; as the FATF states, “it is important to define the roles and responsibilities of each stakeholder, empower them and equip them with the necessary resources and support to carry out their functions.”

A better way — a multipronged approach to transparency

While the approaches described above each have their merits, they also have weaknesses. However, combining approaches and interweaving strengths of the different models enables a more complete and functional way for regulators and regulated entities to identify beneficial owners.

This multipronged approach enables collection from different channels to provide more detailed and up-to-date information, as well as cross-checking information for accuracy. According to the FATF, “the variety and availability of sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources.”

A multipronged approach requires countries to enact legislation and/or regulation that details specific requirements. Fortunately, the FATF provides 34 suggestions on roles and responsibilities for various stakeholders, including:

For company and legal persons:

• Provide basic and beneficial ownership (BO) information, via obliged parties (for example, lawyers, notaries, accountant, FIs) as required, for the company registry upon registration.
• Provide basic and BO information, via obliged parties (for example, lawyers, notaries, accountant, FIs) as required, both annually and when changes occur without delay to ensure that the information is up to date.
• Provide copies of documentation for verification of identity as requested.
• Keep shareholder registers, such as shareholder lists and information on beneficial ownership (including the disclosure of the names of person(s) on whose behalf shares are held), and make it available to competent authorities or obliged entities upon request in a timely manner.
• Keep updated the list of their representatives, including their roles, functions and authority.
• Obtain updated information from their shareholders.
• Seek to apply restrictions against shareholders for failure to provide BO information through appropriate courts or authorities, such as in relation to shareholder voting rights, or the sale of shares.
• Understand and/or hold information on their ownership structure,
  including chain of ownership.

For FIs and regulated entities:

• Adequately carry out CDD measures at the incorporation stage and conduct ongoing CDD on the business relationship. Scrutinize transactions throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer and its business and risk profiles, including, where necessary, the customer’s source of funds.
• Record the CDD procedures performed and maintain these records for at least five years.
• Report suspicious transaction activities.

Automating beneficial ownership checks

The FATF understands the scope and complexity of acquiring, analyzing, monitoring, updating and reporting beneficial ownership information. Thus, it’s not surprising that their Best Practices document includes guidance on technologies and procedures that can speed the process and improve accuracy.

Using digital procedures to verify registry information against other accessible digital sources helps ensure that inputted information is correct. Automatic calculation of share information speeds the process and can provide information to validate the share owner. New information can be cross-referenced with existing data to potentially uncover suspicious activities. Digital identity information can also be pulled into registry systems to help verify and validate the beneficial ownership information.

GlobalGateway Business Verification

Using Trulioo GlobalGateway Business Verification, regulated companies can automatically retrieve company and beneficial ownership information from registries and other data sources. Using a multipronged approach, the ability to get accurate and up-to-date information using one system helps propel business ownership transparency forward. GlobalGateway Business Verification helps businesses automate compliance workflows, reduce manual front-to-back office operations, take advantage of digital processes and decrease the risk of fraud, and it allows businesses to focus on key compliance considerations.