Financial Crime
Financial crime comes in all shapes and forms, from drug cartels laundering profits through legitimate businesses, to the rich and powerful offshoring their wealth, to students used as money mules buying million-dollar properties for unknown individuals. One common element that makes these crimes go undetected is the frequent use of shell companies. With their often-bogus officers and opaque corporate ownership structures, these companies disguise the true identities of those behind it.
Corporate transparency has been a subject of interest for several decades and it continues to be at the heart of discussions about financial crime, breaches of sanctions, tax evasion and secrecy concerns. Having access to a central beneficial ownership registry with accurate, up-to-date information where corporate entities declare which individuals control them would be instrumental in the fight against financial crime and could close a major loophole that has routinely been taken advantage of by various corporate and individual actors.
According to our survey, there is little question among financial institutions (FIs) and corporate entities about the utility of a beneficial ownership registry; 87% of respondents globally stated that a beneficial ownership registry would be “somewhat” or “extremely helpful.” Although routinely thought of as an onboarding information source, complete and accurate beneficial ownership information can be leveraged across multiple business lines throughout the customer relationship and can be used in numerous ways to address risk. There does, however, appear to be some uncertainty about which jurisdictions around the globe are participating, according to our survey. Other questions remain around central registries, including who will be able to access the information, who will have to register to see the information and how much information will be included in each entry. As stated in the “How Technology is Transforming AML” article, technology can be vastly helpful in this space. In the case of beneficial ownership registries, having direct access and integration with systems, along with coordination between public agencies and the private sector, can be extremely useful to compliance departments. However, a beneficial ownership registry is not a panacea. No matter the level of accessibility or the quality of the data, institutions will still be required to perform their own research and diligence on parties; a beneficial ownership registry remains merely a tool in the arsenal used by compliance professionals in the fight against financial crime.
The idea of public beneficial ownership registry dates back to the 1990s, but it wasn’t until the early 2000s that the concept gained traction among policymakers. In 2003, the Financial Action Task Force (FATF), an intergovernmental organization that sets global standards for combating money laundering and terrorist financing, published a recommendation that countries should require all legal entities to maintain beneficial ownership information and make them available to law enforcement and competent authorities. In 2009, the G20 endorsed the FATF’s recommendation and called on all countries to adopt measures to prevent misuse of legal entities for illicit purposes. In 2012, the FATF strengthened its standards on beneficial ownership and issued additional guidance on transparency and beneficial ownership in 2014, further clarifying what ownership and ultimate effective control mean.
The first country to establish a public beneficial ownership registry was the UK, launched in June 2016. This was followed by similar initiatives in other countries, including Ukraine, Colombia, Kenya and Nigeria, who now maintain public beneficial ownership registries.
In 2018, the EU adopted the 5th Anti Money Laundering Directive (5AMLD) requiring all EU member states to establish central registries containing information on the beneficial owners of legal entities, including trusts established within their jurisdiction by March 10, 2020. However, in November 2022, the European Court of Justice ruled that the general public’s access to beneficial ownership information meant “serious interference with the fundamental rights” of both private life and personal data. As a result of this ruling, some EU members, including Luxembourg and the Netherlands, suspended access to their registers to the public and have since introduced additional rules on who can access registry information.
In the U.S., the Corporate Transparency Act (CTA), as part of the Anti-Money Laundering Act (AMLA) of 2020, contains a beneficial ownership information reporting requirement, effective January 2024, for certain corporations, limited liability companies and other entities. Entities will be required to file a report with the Financial Crimes Enforcement Network (FinCEN), which identifies an entity’s beneficial owner and provides information about the persons who formed the entity. However, many details about this registry remain uncertain, including to what extent outside groups, such as FIs, will have access to this information.
Canada announced in March 2023 that it will implement a free and publicly accessible beneficial ownership registry of all corporations, a big step in a jurisdiction that has frequently come under criticism for its money laundering issues.
Some countries have put legislative provisions in place requiring mandatory submission of beneficial ownership information and commitment to establishing a registry. However, not all of them are, or will be, publicly accessible. India is an example where companies are required to disclose the details of beneficial owners, directors and key personnel to the government, but access to the register is not public.
More countries are establishing, or committing to establishing, a dedicated beneficial ownership registry, and although the access to the information may be made available to the public in some instances, beneficial ownership information is not readily available in most jurisdictions due to inadequate regulation or poor enforcement of laws.
The information may also vary across jurisdictions due to the myriad of definitions of ultimate control, along with varying reporting thresholds and reporting requirements. Furthermore, data privacy concerns and compliance and professional risks, to name a few obstacles, make effective implementation of reporting standards even more challenging.
Nearly two-thirds of those who took our survey stated that they have access to, or anticipate having access to, their jurisdiction’s beneficial ownership registry. Another 28% state that they do not currently have access to, or do not anticipate having access, to a registry. A small 8% of survey respondents were unsure. The two-thirds majority brings into question how informed practitioners stand on this issue around the globe. It is likely that many of those individuals who answered “yes” would fall into the category of anticipating registry access. As indicated above, many jurisdictions have not yet established a registry, and the question remains: once these registries are rolled out, who will have access and to what degree? For example, in the U.S., debate swirls around the level of access bank employees will have, as opposed to those in law enforcement or in the government. The way the current proposed rule stands, outside entities such as banks will have very limited access.
Does the survey suggest that the 28% who said “no” are correct? Is this a question of misinformation or a lack of understanding by those out in the field? This suggests that there is a need for better education explaining and clarifying to those in the industry who will have access, and what information will be contained within each registry.
Overall, the current situation is evolving globally and is in constant flux. It will require vigilance on the part of everyone to keep on top of these changing requirements and adjust their programs accordingly.
The consensus among survey takers who have access to their beneficial ownership registry is that it will be either somewhat or extremely helpful to their compliance programs. Very few believe access would be unhelpful, clearly indicating that, regardless of whether full or even partial access ever becomes fully realized, there is an overall agreement that access would play a key part in one’s compliance program.
With individuals and corporate entities filing their own information with central registries, the reliability of the data is in question. This can bring a host of issues. For example, the ability to mistakenly check the wrong boxes or have the option to be less than transparent by checking “unknown,” as has been proposed in the U.S. Also, there is a debate in the final rule about the AMLA’s provision concerning the “consent” requirement that parties who have filed beneficial ownership information need to provide to other parties, such as banks, access to the information.
What if the information that is within the corporate registry itself conflicts with other documentation that the entity has submitted? Similarly, what if a bank employee finds inconsistencies in what is in the registry documentation and forms and what they have been provided directly by the customer, or what they even found researching in the public domain? Is it now on the institution to file a discrepancy report with the regulator? If this is the case, there may be additional obligations at play. For example, does the reporter to the regulator have to perform additional research and provide an ample, detailed explanation of the discrepancy and “fill in the gaps”? Once these steps are taken, this will now put additional obligations on the institution to determine how to address updating the information in their own systems and performing additional investigations, where necessary, and to even consider whether to exit the client relationship.
In the UK, Companies House has maintained a central beneficial ownership for seven years. As of April 2023, there is now an additional obligation on the part of FIs to report discovered “material discrepancies” on an ongoing basis. These reporting requirements don’t appear to be especially onerous, as discrepancy reports only need to be filed if there are money laundering or terrorism financing concerns, or if the discrepancy appears to “conceal the details of the customer’s business.” Although this now means firms will have to implement more controls and processes around discrepancy reporting, it is certainly a positive step in tackling financial crime.
The recent decision by the European Court of Justice on specific access also raises some questions as to the future of access, and whether the information contained in these registries will prove as much use to the institutions seeking to use them.
Despite the doubts addressed above, along with the additional potential burdens on those who wish to use the data, there is little question that a beneficial ownership registry will prove to be useful, especially a central registry available to FIs. If done right, there is little debate as to a beneficial ownership registries’ usefulness in the financial crime space. It is a source of information that can assist in onboarding, investigations and due diligence processes, but it cannot be the only source. Staff should not be lulled into a false sense of security by merely relying on information at face value and taking it as “truth”; onboarding teams or compliance will still have to undertake a form of vetting process, checking the public registry against their own data sources and research. They won’t be able to merely present to the regulator that information was taken from the registry and that analysis was stopped there, with no other steps taken. A beneficial ownership registry is a tool that can help corroborate research and data but is not a “magic” solution to the challenges of financial crime compliance.
When asked specifically about how access to a beneficial ownership registry would support their financial crime compliance program, responses ranged considerably. However, a significant portion indicated that it would improve security and could deter financial crime. Notably, some stated that they were either currently evaluating, didn’t know, or were unsure how a registry would support their program. When compared to another survey question, which shows an overwhelming belief that access to a registry would be helpful, these responses show that there is some uncertainty as to how this data can be implemented into a program.
Overall, the survey suggests that there would likely be useful information contained in a beneficial ownership registry, regardless of the jurisdiction, despite remaining questions about reliability and how data access will play out. However, no matter how good the registry, cooperation across organizations, governments, regulators, vendors and fintech companies will fundamentally make it more effective and useful going forward. If all users and consumers of the information can contribute in a community-based format, sharing data and findings across their networks would lead to a far more accurate and effective information source.
A central beneficial ownership registry is a fundamental tool in obtaining corporate transparency and in the fight against financial crime. However, questions surrounding accessibility and data quality of beneficial ownership registries continue to raise concerns as to whether the jurisdictions who have committed to such a registry will be able to have one fully implemented. Even if they do, a central registry’s overall ability to serve as an asset and not a burden to financial crime compliance programs remains largely unsettled.
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