Beneficial ownership has caused compliance teams headaches for as long as we can remember, especially if you are an obliged entity. Currently, beneficial ownership is considered the top vulnerability in the US financial system, alongside the misuse of digital assets. This reality, which was outlined in the 2020 National Illicit Finance Strategy released earlier this year, came as no surprise to us, or anyone familiar with global anti-money laundering (AML) initiatives. The new US strategy reflects a growing global emphasis on beneficial ownership regulation to stem the flow of illicit cash, following scandals like the Panama Papers and Paradise Papers.
We’ve already seen regulatory bodies in Europe make moves to strengthen financial systems through legislation, with the Fourth and Fifth Anti-Money Laundering Directives enforcing a requirement to check corporate ownership. The US looks likely to follow along a similar trajectory with legislation targeting shell companies in the form of the Corporate Transparency Act and the Illicit Cash Act.
So as we look around the globe, what challenges should businesses expect to face surrounding ultimate beneficial ownership (UBO) and how can you best prepare for new beneficial ownership rules on the horizon?
Challenges with Beneficial Ownership & AML Compliance
Criminals have long been accustomed to using complex and multi-layered corporate structures to hide their identities and commit financial crime. As a compliance professional, you know that it can be burdensome to identify the true identity of beneficial owners behind holding companies (onshore or offshore), even more so when it is multi-jurisdictional. Current ownership information is fragmented and is often incomplete or difficult to access in many countries.
In Europe, legislation has brought in a mandatory requirement to develop public ownership registers at a state level, responding to the increased requirement for transparency. But this is already progressing behind schedule in many European states with only five of its 27 countries meeting the deadline. Closer to home, other countries are also showing a willingness to develop public registers before similar legislation comes into place.
The Cayman Islands, one of the world’s most infamous offshore tax havens, has expressed a willingness to allow the public access to its registers, but this is unlikely to occur until after 2023, in line with commitments made by European Union countries. Panama has also declared its intent to create a free register, but again, the date is yet to be provided. If Europe is anything to go by, the registers may take longer than expected, despite the growing regulatory requirements on business to verify ownership information. How can you and your business prepare for the perfect storm that is heading our way?
Navigating the Information Gaps
While we wait on public registers, organizations will have to contend with the information gaps that exist globally and in the US. Criminals naturally gravitate toward areas where they find structural weaknesses in compliance programs, and these will likely be the first areas to see beneficial ownership regulation.
We believe it will be vital to have a strengthened AML compliance approach toward beneficial ownership in three key areas:
- Real Estate Transactions: The US real estate market has long been a draw for foreign investment, as it presents a significant opportunity for illicit cash to enter a legitimate market. As also seen in the British and Canadian markets, shell companies, trusts and offshore firms are regularly used as instruments for purchase, causing the sector to be under increased regulatory scrutiny. IntegrityRisk’s OwnerCheck provides you with information on beneficial ownership needed to show regulators you have made a good faith effort to learn more about the ultimate shareholders.
- Private Wealth Clients: Assembling accurate, holistic, and actionable insight into High Net Worth subjects can pose special challenges. Research into past and current business affiliations and partners is critical to ensure full compliance, paying particular attention to politically exposed persons (PEP) and sanctions/watchlists. IntegrityRisk’s WealthCheck covers the full spectrum of research to create an exhaustive view of a subject’s source of wealth background.
- Third-Party Risk: Understanding the ownership structures of your third parties is essential, especially overseas. Through beneficial ownership checks, businesses are better able to spot red flags, such as political involvement, working with sanctioned individuals, or involvement with competitors. Beneficial ownership research may also help to identify controlling interests that conflict with your own. IntegrityRisk’s third-party screening and diligence simplifies compliance and provides our clients with greater visibility, transparency, and assurance that their regulatory requirements are met for 100 percent of their business partners, all of the time.
With new beneficial ownership regulation on the horizon, managing compliance of these new rules will require access to deep information sources as well as robust processes that produce high-quality research. IntegrityRisk is uniquely positioned to help organizations achieve this goal. We maintain a global network of risk, investigative, and security professionals that enable us to help clients find hard-to-acquire information, oftentimes in difficult markets where little to no public records exist. That same network is the foundation that allows us to handle the evolving UBO situation on our own home turf.
Contact IntegrityRisk today and find out how our comprehensive research solutions can help you resolve beneficial ownership headaches.