Money laundering, terrorist financing, evading taxes, bribery, corruption, abuse of human rights and even modern-day slavery differ in their nature, but they have some things in common: They destroy people’s lives, undermine the common values in our societies and they are facilitated by a lack of transparency.
Global money laundering transactions are estimated at 2 to 5 percent of global GDP.1 The cost of corruption equals more than 5 percent of global GDP, with over $1 trillion paid in bribes each year.2 More than $12 trillion has been siphoned out of Russia, China and other emerging economies into the secretive world of offshore finance.3 Criminals hide behind a veil of complex and anonymous corporate structures, funneling dirty money into the legitimate financial market, evading taxes and enjoying the proceeds of crime, yet remaining untraceable to law enforcement agencies.
Anyone with experience in the compliance field will be familiar with these facts. There is no shortage of data that illustrate the scale and cost of the problem. The Financial Action Task Force’s (FATF) 40 Recommendations published in 2004 addressed the connection between business secrecy and financial crime. The World Bank’s Stolen Asset Recovery report of 2011 (“The Puppet Masters”) showed that of 150 corruption cases worth over $50 billion in illicit assets, nearly all involved the use of the companies with concealed ownership. But to your friends and family, the 2016 media blast around Panama Papers may have come as a revelation. It may have been the first time most civil society realized what the compliance world had known for decades. Such discoveries of the scale and pervasiveness of financial crime are needed for society to demand the changes necessary to effectively fight financial crime. As members of society, we can demand change from our political representatives for better regulations and their enforcement.
As part of the compliance environment, it is our duty to the rest of society to help prevent all forms of financial crimes. Thus, the requirement to uncover the true persons behind legal entities is key. However, the prevailing secrecy in corporate vehicles makes it often an impossible task for financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) to comply with anti-money laundering (AML) and anti-bribery and corruption (ABC) regulations and effectively identify the beneficiaries of legal entities.
Who is the UBO?
There is no universal definition of “beneficial owner.” Various bodies, governments and institutions differ in their interpretations. FATF, which sets the global standards in money laundering efforts, 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.”4 With regards to the owning threshold, FATF does not provide a clear answer and only provides 25 percent as an example.
How Civil Society Can Drive the Change
With numerous large-scale corruption and tax avoidance scandals reaching the mainstream media every month, civil society is now more than ever aware of how the lack of transparency in corporate structures can have a negative effect on the economy and how, through anonymous entities, stolen assets can be transformed into luxurious villas, private jets and fast cars. Increased engagement against business secrecy from charities and non-profit organizations, but also journalists’ groups working against corruption, has helped to build momentum. For example, a special report by Reuters in 2012 highlighted how one high street coffee shop chain avoided paying taxes on profits in the U.K. through a complex corporate structure. This led to a wide-spread media debate and in turn to customers boycotting the chain. Not only did the action have an enormous negative impact on the company’s reputation, but it also forced it to make changes to its tax maximization practice in the U.K.5
Abuse of the Housing Market
Various organizations, including Transparency International, Global Witness, Tax Justice Network and ClampK, have been leading successful campaigns to reveal the misuse of corporate vehicles and the funneling of “dirty money” into the U.K. housing market. Abuse of the market directly impacts property prices in the country’s capital, making housing unaffordable to the working class. The U.K.’s National Crime Agency reported that as much as 100 billion pounds in tainted cash passes through the U.K. each year, with significant sums invested in London’s thriving high-end housing market.6 The civil society’s pressure has had a definite influence on the delivery of the government’s commitment to introduce the updates into the Criminal Finances Bill. The new regulation allows the government to freeze the U.K. assets, including property, of international human rights violators, even if the offense was committed overseas.
The U.S. property market is similarly flawed. Earlier this year, as part of its program to identify and track secret homebuyers hidden behind shell companies and opaque structures for money laundering, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) found that “about 30 [percent] of the transactions covered by the Geographic Targeting Orders (GTOs) involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report. This corroborates FinCEN’s concerns about the use of shell companies to buy luxury real estate in ‘allcash’ transactions.”7
Social pressure has finally pushed politicians to tackle the problem of secrecy. Unable to mask or ignore the impact that the lack of transparency in legal arrangements have on society, participants at the 2013 G8 Summit endorsed the core principles on beneficial ownership and published action plans setting out steps they will take to enhance transparency. In November 2014, G20 leaders adopted a policy document containing 10 principles intended to improve the transparency of beneficial ownership of companies and trusts—“G20 High-Level Principles on Beneficial Ownership Transparency.” In the document, the group stated: “We need better cooperation between government agencies, as well as greater transparency, particularly on the beneficial ownership of corporations, trusts, foundations and other legal arrangements. We need to ensure that beneficial owners are identified and that access to information on beneficial owners and international exchange of this information can be further improved.”8 In June 2017, in Hamburg, the group again expressed the will for effective implementation of the international standards of transparency and UBO, welcoming the work done by FATF and the Global Forum on Transparency and Exchange of Information for Tax Purposes in this regard. The Group praised the “major progress” in the fight against tax evasion and tax avoidance, as reported by the Organisation for Economic Cooperation and Development in the July 2017 Report.9 The development in the Base Erosion and Profit Shifting (BEPS) package implementation and first automatic exchanges of financial account information (AEOI), scheduled to take place in September 2017, were presented as the Group’s recent achievements. However, in terms of the accessibility of the beneficial ownership information itself, not much has been presented in the G20 Hamburg Action Plan or the Leaders’ Declaration, but further reports on the progress were requested.
As important as high-level political commitments are, progress in implementing changes at the national level has been unimpressive. Regulatory and legislative pressure to identify the UBO as part of AML and ABC regimes is growing. For example, regulators have taken more industries into their purview. However, governments have not made much real effort to make the information available.
Available Information in the EU and the U.S.
In the EU, the Fourth AML Directive requires member states to introduce registrars of the beneficial owners of companies. Yet in June 2017 (the implementation deadline) only a handful of member states had functioning registrars. Most registrars were hidden by a paywall or simply unavailable to the public, with data protection and privacy laws cited to justify restricted access. For example, the U.K. beneficial ownership registrar (“People with Significant Control Registrar”) opened in 2016, but excluded trusts from the requirement to file ownership information. Only a year later, Scottish Limited Partnerships (SLPs), which form two-thirds of all the opaque corporate entities in the U.K., have been covered by stricter disclosure rules. The registrar of trusts’ beneficiaries is still to be created.
Where registrars did become available in Europe, the quality of data (often collected but not verified) was widely criticized by industry experts. This further illustrates that European countries still have a long way to go to make a real change. The beneficial ownership data that is collected must be of better quality, accessible without restrictions and encompassing of more legal forms, including trusts. Only then will European legal entities become unattractive to financial criminals.
The U.S. is only now attending to the problem. The International Monetary Fund strongly criticized the U.S. for failing to address the lack of transparency of American corporations and trusts, and published clear and strong recommendation for U.S. authorities to “ensure that accurate beneficial ownership information of U.S. corporations and trusts…is collected and maintained by either registries of corporations and trusts…and requiring all FIs and DNFBPs, in particular trust and company service providers (TCSPs) including lawyers and accountants providing such services, to identify the beneficial owners of corporations and trusts and take reasonable measures to verify those identities.”10 A similar conclusion was made by FATF’s U.S. AML/CTF framework assessment in 2016. Even though the overall evaluation was positive, there were two significant gaps found in the regime: exclusion or limited obligations for non-FIs and service providers, and a lack of timely access to current and accurate beneficial ownership information for regulators and law enforcement.
This criticism seems to be having an effect. In June 2016, FinCEN finalized its long-outstanding beneficial ownership rule, which extends customer due diligence requirements under Bank Secrecy Act (BSA) rules to the natural persons behind a legal entity. In addition, a new bill, the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017,” has been recently proposed. This would introduce a new offense regarding the concealment of the source of funds in a transaction, including when such a source is a foreign politically exposed person, family member, or a close associate. The proposal stipulates penalties of up to 10 years’ imprisonment, up to a $1 million fine, or both.
In June 2017, a bipartisan group of U.S. lawmakers introduced the Corporate Transparency Act, which would require FinCEN to collect information on the beneficial owner(s) of companies incorporated in the U.S. if the information has not been collected at the state level. Another group of lawmakers has also introduced the True Incorporation Transparency for Law Enforcement Act, a similar piece of legislation, which would instead have states collect the information.
While governments are debating the form and scope of collecting beneficial ownership information, FIs and DNFBPs, covered by know your customer rules under AML and ABC regimes, are already obligated to collect and verify that information. However, while information disclosed by the customer is insufficient, other sources of information are rare in most locations. Among jurisdictions that allow online or in-person retrieval of corporate registry information, only 36 percent provide direct shareholding information. Even after the Panama Paper revelation, little has changed. Only a handful of countries have improved accessibility to information. Regulators expect FIs to stand against financial crime, but they do not facilitate the fight by making the corporate date, including the ownership information, accessible to all. If governments do not follow-through with their commitments to eradicate anonymous corporate vehicles and if obscure international structures are not honored, criminals will continue to hide behind them. Our role as members of civil society remains critical in demanding that follow-through.
- The International Monetary Fund, http://www.imf.org/external/index.htm
- World Economic Forum, https://www.weforum.org/
- Tax Justice Network, https://www.taxjustice.net/
- “Transparency and Beneficial Ownership,” FATF Guidance, October 2014, http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf
- Sylwia Wolos, “Business Transparency in the Fight Against Financial Crime,” Thomson Reuters, December 2, 2015, https://blogs.thomsonreuters.com/answerson/business-transparency-financial-crime/
- Juliette Garside, “Hundreds of Properties Could Be Seized in UK Corruption Crackdown,” The Guardian, October 13, 2016, https://www.theguardian.com/business/2016/oct/13/properties-seized-assets-corrupt-cash-crackdown-criminal-finances-bill-tax-haven
- “FinCEN Renews Real Estate ‘Geographic Targeting Orders’ to Identify High-End Cash Buyers in Six Major Metropolitan Areas,” FinCEN, February 23, 2017, https://www.fincen.gov/news/news-releases/fincen-renews-real-estate-geographic-targeting-orders-identify-high-end-cash
- “G20 High-Level Principles on Beneficial Ownership Transparency,” G20, 2014, http://www.g20.utoronto.ca/2014/g20_high-level_principles_beneficial_ownership_transparency.pdf
- “OECD Secretary-General Report to G20 Leaders,” G20, July 2017, http://www.oecd.org/tax/oecd-secretary-general-tax-report-g20-leaders-july-2017.pdf
- “Financial Sector Assessment Program,” International Monetary Fund, June 2015, http://www.imf.org/external/pubs/ft/ scr/2015/cr15170.pdf