Turning the Screws on Beneficial Ownership

Turning 18 is a landmark birthday – it is supposed to be the age when we emerge into the adult world, all grown up and ready to play our part. In practice, of course, most of us still have a bit of growing up to do and we often need a bit of help. So, it is proving with the Financial Action Task Force’s (FATF) Recommendation 24, which began development 2003, but has still to fulfil its potential.

Recommendation 24, for the uninitiated, is the FATF’s attempt to address issues around “the transparency and beneficial ownership of legal persons”. Its premise is beguilingly simple: if we know who really owns corporate assets, it will be much harder for wrongdoers to use those assets to launder illicit funds, engage in corruption or evade tax. The trouble is that the word “if” is doing a lot of heavy lifting in that sentence.

Hence the FATF’s latest efforts to turn Recommendation 24 principle into practice that actually delivers. The organization held its fourth annual plenary in late June, and subsequently published a series of white papers that reflected discussions held at the summit. Most notable of those was a paper on how amendments to Recommendation 24 might improve transparency.

Trying hard but could do better

We should not be too churlish about progress to date on beneficial ownership given the international backdrop.

In the European Union, the 5^th Anti-Money Laundering Directive now requires every member state to set up and maintain publicly accessible registers of ultimate beneficial owners of companies in the country. The regulation, which became effective in January 2020, was a genuinely impressive step forward.

In the US, meanwhile, the Corporate Transparency Act (CTA), passed into law in January 2021, requires businesses to identify and report all significant shareholders to a registry maintained by the Treasury Department.

Countries across Asia have also responded to the FATF’s long-running work – China is the latest nation to pursue reforms, having published draft rules on beneficial ownership in April.

Still, this is far from a perfect world. Across the EU, significant numbers of states have yet to comply with last year’s directive; and those that have set up registers do not make it easy to use them. In the US, meanwhile, the CTA does not mandate public disclosures of the beneficial ownership information disclosed to the Treasury Department, which will hamper the work of anti-corruption groups outside of the American regulatory system.

Given such drawbacks, the FATF remains some way off its objective to shine as bright a light as possible on beneficial owners. Its latest white paper therefore suggests further action may be necessary in four areas:

• Keeping information accurate and up-to-date – registers of ownership are less useful if they are not kept current and verified for accuracy, so the FATF is looking into setting standards on who should do that verification work and how often records should have to be updated.
• Making information accessible – while concerns about privacy and security are valid, regulators also worry that an overly restrictive approach to access to registers of beneficial ownership may undermine the whole point of the initiative.
• Assessing foreign-owned companies – until now, the FATF has focused on countries taking responsibility for the companies registered with them domestically, but cross-border organizations are capable of muddying the water; it may therefore be necessary for states to assess ownership of foreign businesses active in their country.
• More controls on bearer shares and nominee arrangements – the FATF fears these instruments may be being used to obscure visibility of beneficial ownership; it is therefore considering whether new rules are needed here.

Nothing is yet set in stone, with the FATF requesting feedback on its thinking by late August, so that it is able to publish draft amendments to Recommendation 24 by October, when it is next due to hold meetings. Still, it seems clear that this work will lead to further tightening of the rules on beneficial ownership, even if individual countries and regions take some time to implement the changes.

More work for compliance

In which case, financial institutions, including banks, will have further compliance work to do. Whatever form these changes take, you can expect the regulatory burden to increase – or at least to alter, which creates an implementation workload. In some jurisdictions, moreover, the authorities are only just getting round to implementing existing regulation, so the road ahead looks complex.

In such a world, manual, paper-based systems will increasingly look over-stretched, exposing institutions to additional expense as well as the elevated risk of a compliance failure, with all the dangers that brings around reputational damage and regulatory sanction.

New technologies potentially provide some comfort here. Artificial intelligence and machine learning solutions can be used to trawl data, both public and inside the organization. Data visualization tools provide a means with which to see the wood from the trees. Automation can reduce human workloads, freeing up resources for more value-additive work.

The bottom line, however, is that organizations not focused on the changes to come risk being caught out. From where we are today, work on beneficial ownership transparency will be iterative rather than big-bang in nature, but banks and other institutions will still need to engage with each and every new reform.