Legal Solutions | USA
The fight against money laundering and corruption has made financial transparency a global priority, meaning it is critical that we know with whom we are doing business.
Entering into a contract or business relationship with a company without full knowledge of beneficial ownership, past or present, introduces significant risk to an organization. Even an unwitting contravention of anti-money laundering, anti-corruption, and bribery legislation can have extreme consequences through regulatory censure, financial penalties, and reputational damage.
The G20’s commitment to increase corporate transparency and its crackdown on anonymous and secretive shell companies has been one such step in the fight against money laundering. And proposed changes to EU and U.S. anti-money laundering (AML) and customer due diligence legislation will soon affect the way in which organizations assess business risk.
These changes include tightening up the complex issue of ultimate beneficial ownership (UBO).
There is no universal and finite definition of “beneficial owner.” Various bodies, governments, and institutions differ in their interpretation, and it also depends on the legal person’s form.
The Financial Action Task Force (FATF), which sets global AML requirements, defines a beneficial owner as “the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.”
With regards to the owning threshold, FATF does not provide a clear numerical answer and only states 25 percent as an example. The Office of Foreign Assets Control (OFAC) stated that it would treat an entity as being subject to U.S. sanctions if it is owned 50 percent or more in aggregate by designated persons.
The Foreign Account Tax Compliance Act (FATCA), on the other hand, requires the institution to follow a 10-percent ownership rule.
The requirement for financial institutions to know their clients is not new. But amid growing demand for increased transparency, the need for UBO identification has gained momentum in the last few years.
The issue was among the key topics at the G8 Summit in 2013 and the G20 Summit in 2014, following which the International Monetary Fund and Organization for Economic Cooperation and Development (OECD) signed an agreement to ensure countries honor their commitments.
With governments now demanding increased business transparency, the UK introduced the Small Business, Enterprise and Employment Act 2015, which, among other changes, led to the creation of the PSC or “persons with significant control” register.
Regulators worldwide are following suit with a number of codifications and clarifications:
Organizations need to have a robust, risk-based, and auditable process which can identify who exercises ultimate effective control over legal persons. If the information is collected from the customer, organizations need to take reasonable steps to verify the information with public and reputable sources.
It is not sufficient to just find out who the beneficiaries are, but to understand what compliance risk, if any, they present to the organization. This can be achieved through an appropriate level of due diligence checks on all beneficiaries. Following the identification and analysis of risk, each organization must have a strong, documented policy of a risk-based approval process and regular monitoring of the ownership relationships.
Sylwia Wolos is head of Managed Services Product Development for Thomson Reuters. She has eight years of hands-on experience in public domain research and investigation, gained through managing regional operations teams. She has contributed to the development and now manages the delivery operations for ultimate beneficial ownership identification service. She is a certified anti-money laundering specialist and her interest is focused on business transparency and sustainable economy.
Find more articles on beneficial ownership and other key financial and risk areas from Thomson Reuters on the Inside Financial & Risk blog.