The misuse of legal persons, such as shell companies, for money laundering and terrorism financing has long posed a significant challenge for law enforcement authorities worldwide. In response, governments have enacted laws to enhance transparency and collect beneficial ownership information.
Since 2003, the Financial Action Task Force (FATF) has been at the forefront of efforts to strengthen standards for beneficial ownership transparency. In March 2023, the FATF issued guidance on the Beneficial Ownership of Legal Persons, emphasising the importance of a multi-pronged approach to collecting and maintaining accurate, up-to-date information to ensure competent authorities have adequate access.
A key element of FATF's guidance is that countries must assess the risks associated with legal persons operating within their borders. Timely and accurate information on beneficial ownership is critical in strengthening controls on bearer shares and nominee arrangements. This helps prevent financial crimes, corruption, and tax evasion facilitated by corporate vehicles.
When conducting a risk assessment, countries can take the following steps to better understand the risks related to legal persons operating within their borders:
• Collecting and analysing registration statistics for legal persons created under national laws.
• Reviewing suspicious transaction reports: Analysing law enforcement and prosecutorial cases to identify patterns or trends related to the misuse of corporate vehicles for illegal purposes.
• Identifying common typologies of abuse of domestic or foreign legal structures: Recognising the most frequent patterns of abuse in legal structures connected to their jurisdictions enables countries to understand their specific risks better.
• Investigating advertising practices: Examining how Trust and Company Service Providers (TCSPs) promote a jurisdiction as an international centre for incorporation or entity formation helps countries understand the motives behind legal persons created within their jurisdiction.
• Conducting expert consultations: Seeking input from external experts in the private sector, civil society, and academia helps identify emerging trends and potential risks associated with legal persons.
Beneficial ownership has gained increasing importance as countries aim to prevent the misuse of legal persons for illicit purposes. It's crucial to differentiate between legal ownership and beneficial ownership, as they are distinct concepts. While the legal and beneficial owners are often the same, there are instances where the beneficial owners differ from the legal (or registered) owners.
The FATF guidance emphasises the significance of identifying individuals who exercise ultimate control over a legal entity, regardless of their share ownership.
When identifying beneficial owners, countries must consider different types of ownership interests and ways to exercise control over a legal person. This can include:
• Voting rights: The right to vote on important corporate decisions, such as electing directors or approving mergers and acquisitions.
• Economic rights: The right to receive dividends or other profit distributions.
• Convertible stock: Stock that can be converted into voting equity later.
• Outstanding debt: Debt that can be converted into voting equity, providing a means of controlling a legal entity.
When implementing a multi-pronged approach, countries may use effective verification mechanisms for beneficial ownership information from:
• The company itself.
• An alternative mechanism.
• Other supplementary information.
For example, verification can be done by reviewing supplementary information, such as share certificates, shareholder registers, board meeting resolutions, and power of attorney documents. This data can then be cross-checked against the appropriate government and publicly available databases, such as demographic or national identity registrations, taxpayer identification registers, vehicles, and land registries.
Employing enhanced verification mechanisms plays a vital role in identifying inaccuracies in reported beneficial ownership information or deliberate concealment, including undisclosed nominee relationships. These mechanisms also enable law enforcement agencies to conduct more in-depth investigations.
By adopting these verification measures, authorities can detect any discrepancies in the information provided by companies and other entities. This helps identify instances of concealed beneficial ownership and undisclosed nominee relationships.
As per FATF guidance, bearer shares are negotiable instruments that grant ownership in a legal entity to the person holding the physical bearer share certificate without any traceability. Similarly, bearer share warrants are negotiable documents that allow the individual holding the actual bearer share warrant certificate the right to ownership in a legal business with no traceability. It is important to note that both bearer shares and bearer share warrants do not refer to dematerialised forms or other instruments that allow identification of the beneficial owners.
Bearer shares and bearer share warrants are characterised by physical ownership of the certificates and the lack of traceability of the owners. These features make it easier for individuals to misuse corporate vehicles for activities such as money laundering and terrorism financing.
To address this issue, countries are required to prohibit legal entities from issuing new bearer shares or bearer share warrants and take steps to prevent the misuse of existing ones. Existing bearer shares or bearer share warrants should be converted into a registered form or immobilised to ensure the identification of the beneficial owners.
The current FATF guidance on Beneficial Ownership emphasises the significance of increasing transparency in legal persons in order to prevent their abuse for unlawful purposes. Consequently, we expect countries to adopt a multi-faceted approach when implementing new regulations or refining existing ones to ensure effective collection and verification of beneficial ownership information. This could involve collaboration among various entities, including companies, authorities, and regulators, to ensure accurate and up-to-date ownership information. Additionally, we anticipate the introduction of new measures to address risks associated with shell companies, bearer shares, and nominee shareholders.
All these measures aim to prevent the misuse of legal persons and arrangements for illicit purposes. Their implementation requires cooperation and coordination among stakeholders to mitigate the associated risks effectively.