Complex networks of companies created to disguise the ultimate beneficiaries of bribery and corruption were central to two of the most high-profile corruption scandals in recent years: bribery relating to officials of football’s world governing body, FIFA, and alleged kickbacks involving the Brazilian politicians and the country’s energy giant Petrobras. Not only that, but of the 11.5 million files that spilled out of the law firm Mossack Fonseca's so-called the Panama Papers, most had some element of disguised beneficiaries. As a result, there has been a push towards greater transparency. According to a new white paper from LexisNexis—the Hidden World of Beneficial Ownership—over 100 jurisdictions have committed to implementing automatic information exchange, including well-known offshore locales like the British Virgin Islands, Cayman Islands and Panama. In addition, France, Germany, Italy, Spain and the U.K. have committed to participating in a unified beneficial ownership register and are calling on the rest of the G20 nations to follow suit.
The Financial Action Task Force (FATF), an intergovernmental body established in 1989 by the G7 group of major economies, has defined ‘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.”
“In most countries,” says the paper, “shareholders of a company need to report their details to government or regulatory authorities. This information typically includes the shareholder’s full name, an identification number, and their date of birth, nationality and country of residence.” But problems arise when this information actually records a proxy for the person truly “wielding power or influence, or gaining financial benefit from the company or asset.”
Beneficial ownership frameworks
VERY STRONG FRAMEWORK: United Kingdom
STRONG FRAMEWORK: Argentina, France, Italy
AVERAGE FRAMEWORK: Germany, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, Turkey
WEAK FRAMEWORK: Australia, Brazil, Canada, China, South Korea, United States
Financial institutions are required to make myriad checks on customers using the institution to avoid being involved in money-laundering or bribery and corruption. Without the ability to identify who the true beneficial owner of assets is leaves them “exposed to facilitating corruption or bribery, or unwittingly funding illegal or terrorist activities.”
In addition to the developments sketched out in the timeline reproduced from the report, there have been a number of recent developments to help uncover beneficial ownership and avoid money laundering and bribery. In 2016, the EU’s 4th Anti-Money Laundering Directive (4AMLD) went into effect and EU member states had to implement the directive by a set of 2017 deadlines. In the same year, the U.S. the Financial Crimes Enforcement Network (FinCEN) releases its final AML rule. 2017 saw the establishment of the International Anti-Corruption Coordination Centre (IACCC), hosted by the U.K.’s National Crime Agency (NCA). The Centre has support from law enforcement agencies from Australia, Canada, New Zealand, United Kingdom, Singapore, and the U.S. In 2018, a number of jurisdictions, including FinCEN, are either adopting FATF recommendations or implementing their own solutions to address beneficial ownership, under which covered organisations “will be required to identify and verify the identity of beneficial owners of all legal entity customers.”
Hong Kong, which, the paper says, “was exposed in the Panama Papers as the most active market for creation of shell companies,” will implement a central register in 2018, coordinated by the Financial Services and Treasury Bureau (FSTB), requiring private companies to reveal who their true owners are. The European Commission’s 5th Anti-Money Laundering Directive (5AMLD) could be enacted by early 2018.
As can be seen from the table analysing the levels of framework for identifying beneficial ownership, taken from a Transparency International report—Just for Show? Reviewing G20 Promises on Beneficial Ownership—only one country, the U.K. has a very strong framework, although the report still identified major concerns over U.K. overseas territories and Crown dependencies, such as the British Virgin Islands and the Cayman Islands. The U.S. was identified as having a weak framework.
Key points for anti-bribery and corruption 3rd party due diligence
Foreign public officials (FPOs) are deemed ‘high risk’ under anti bribery and corruption (ABC) rules due to the many historical cases of senior government officials (particularly in emerging and developing markets) receiving bribes for helping companies win lucrative contracts.
Identifying and verifying the identity of beneficial owners, directors and shareholders of prospective third-party business partners is best practice for ABC due diligence to help establish whether there are close ties to governments and a high risk of bribery and corruption.
The U.K.’s preeminent position has come about because of the introduction of a register of People with Significant Control (PSC) of a company that is being implemented under the Small Business, Enterprise and Employment Act 2015. The Act, which came into effect on 6 April 2016, requires all U.K. companies, other than publicly traded companies, which already maintain such records, to maintain a register of people with significant control over them. “The legislation’s objective is to move beyond a simple register of shareholders and instead create a public record of anyone who exercises control over a company,” says the paper. A company’s PSC register must be available for public inspection and be searchable via Companies House. But the U.K. Government recently announced and implemented new regulations, expanding the reach of its PSC regime. As of June 2017, all companies and LLPs that fall within the PSC regime have only 28 days, instead of the previous six months, to disclose a PSC and submit the information to a central registry. It has also added AIM (Alternative Investment Market) and NEX (another SME independent exchange listing) companies, as well as unregistered companies.