The Hidden World of Beneficial Ownership— Due Diligence Strategies for Managing Risk
In 2014, estimates of undeclared offshore wealth accounted for at least 8% of the world’s personal financial wealth, being more than US$ 7 trillion. The reason for this? Problems caused by Beneficial Ownership. Anonymous companies can be used to conceal illegal activity including tax evasion and Ponzi schemes. Although this might not be common knowledge for everyday life, as stated by Manhattan district Attorney, Cyrus R. Vance, Jr, “your average terrorist, drug trafficker, tax evader or money launderer is well versed in the art of legal anonymity.”
This webinar from September of last year, is presented by Karen Gray (pictured below), Senior Entity due diligence and monitoring specialist at LexisNexis, who focuses on efforts to increase profitability, cash flow, risk mitigation and operational efficiencies. In order to tackle the hidden world of beneficial ownership, Karen covers various topics, beginning with what beneficial ownership really is, and going on to explore how corporate hierarchy data helps unravel complex ownership structures, why country data enables you to better understand a country’s commitment to beneficial ownership transparency and what data on the origin and listing of a company reveals about beneficial ownership risk potential.
Firstly, it is important to understand what beneficial ownership really is; it refers to the natural person who ultimately owns or controls customer and or the natural person on whose behalf the transaction is being conducted. In most cases, shareholders must report details to the government and regulatory authorities, but the challenges arise when there are differences between this information and the real information. Beneficial ownership has become an international issue, not made easier by the fact that there are so many different laws and no single global registration. Thus, organizations such as the United Nations (UN), Group of Twenty (G20) and Financial Action Task Force (FATF) must call for greater transparency.
There is a strong link between beneficial ownership and financial crime; anonymous companies (phantom firms/ shell companies) can be used to hide illegal businesses or to facilitate illegal acts such as tax evasion and hiding bribes. The companies are used to disguise the identity of their true owners, or ‘beneficial owners’. It also arises from complex ownership trails that cross geographical boundaries, as was seen with FIFA and Petrobras.
The International Anti-Money Laundering (AML) and Anti-Bribery & Corruption (ABC) regulations require companies to identify and verify the identity of beneficial owners with 25% or more controlling interest. Identifying and verifying the identity of beneficial owners, directors and shareholders of prospective third-party business partners is best practice for AML & ABC due diligence. Financial institutions need to ensure that they carry out advanced due diligence when taking on new customers. They must closely watch people who have a higher risk of corruption, often Politically exposed persons (PEPs).
Looking at corporate hierarchy data to help unravel complex ownership structures that are indicative of beneficial ownership involves looking at corporate affiliation. Corporate affiliation is also a source of hierarchical information that includes corporate identity. This can all be checked against self-reported data against perspective third parties involved. It can come in many different forms, including descriptive data, current financials and outside service firms. Country data is incredibly important to understand a country’s commitment to beneficial ownership transparency because even in the most developed countries, there is still a long way to go in addressing the transparency. Christine Lagarde, Head of the IMF, pronounces that “corruption is pollution, and its pollution for developing and developed economies alike.”
Karen informs us that whether a company is public or private, it is important to understand where a company originates. This is because some markets are deemed as being higher risk which is where beneficial ownership is likely to occur. Understanding the company type can help to point towards the transparency of a company, thus customers should be conducting AML and ABC due diligence investigations to mitigate risk. Unfortunately, no company is free from the risk of financial misadventure.
Her five tips for delivering a more effective due diligence programme are made up of the following:
1. Know your customer/ supplier/ partner better
2. Understand the regulatory environment because it varies globally
3. Follow the trail i.e look beyond immediate partners
4. Consider external support
5. Due Diligence is not a one-time activity
Even in the most developed countries, there is still a long way to go in addressing the transparency, therefore every company has a responsibility to do all it can to mitigate this risk. Customers should be conducting AML and ABC due diligence investigations to aid this; many complex ownership structures that we see today must be broken down to ensure that they adhere to the regulations of their environment.
