The global COVID-19 pandemic and the opportunities it created for criminals to enrich themselves placed a renewed focus on increasing transparency of beneficial ownership information within the global financial system. The establishment of complex corporate structures has increased global awareness of the way in which legal persons and legal arrangements can be used to conceal assets acquired illicitly.
According to international bodies such as the G20 and the Financial Action Task Force (FATF), transparency over beneficial ownership information plays a key role in combating financial crimes such as money laundering (ML), terrorism financing (TF), bribery and corruption, insider dealings and tax fraud. Other international organisations such as the United Nations Office on Drugs and Crime (UNODC), the Organisation for Economic Co-operation and Development (OECD) and the World Bank also play a critical role towards increasing beneficial ownership transparency.
Legal persons and legal arrangements are corporate vehicles through which a wide variety of commercial activities are conducted, and assets are held. The types of legal persons and legal arrangements that are most vulnerable to misuse for illicit purposes are corporations, trusts, foundations, and partnerships, including shell companies, nominees and professional intermediaries in order to conceal the true intent of activities, particularly when the arrangement involves several international countries.
Despite the important and legitimate roles that legal persons and legal arrangements play in the global economic system, these corporate vehicles may, under certain conditions, be misused for illicit purposes due to the great degree of anonymity which they provide to criminals.
Criminals frequently use various legal persons and legal arrangements established in different countries in order to frustrate investigative efforts by regulatory authorities and law enforcement agencies to determine the identity of the ultimate beneficial owner.
How is beneficial ownership concealed?
Determining the extent and means of the misuse of legal persons and legal arrangements for illicit purposes has been challenging for authorities. However, studies and surveys conducted indicate that economic crimes or financial crimes mostly involve the use of legal persons and legal arrangements.
In 2018, for instance, the FATF in association with the Egmont Group of Financial Intelligence Units published a report on how legal and corporate structures can help criminals conceal wealth and illicit assets. Using a range of techniques and mechanisms to circumvent control denies the regulatory authorities and law enforcement agencies timely access to adequate, accurate information for identifying the natural persons who truly have ownership and control of a company or its assets.
For instance, individuals seeking to conceal the ownership of assets are most likely to exercise control over those assets via a combination of direct and indirect control. Control can also be exerted via third parties, including professional intermediaries, family members, associates, nominees, and other natural persons who have been recruited or coerced to act on behalf of the ultimate beneficial owner.
Legitimate questions remain with regard to the merits of certain legal persons and legal arrangements in the context of the significant ML/TF vulnerabilities associated with their use i.e. nominees. These vulnerabilities allow criminals to hide their identity behind structured ‘corporate veils’, thus obscuring the true purpose of the account, the source, use and flow of funds; or property associated with the legal persons and legal arrangements.
The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard. Under Recommendation 24, countries are required to take measures to prevent the misuse of legal persons for ML and TF. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities and law enforcement agencies.
FATF Guidance on Beneficial Ownership
The FATF has published best practice for beneficial ownership for legal persons including Guidance on transparency and beneficial ownership. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard. Under Recommendation 24, countries are required to take measures to prevent the misuse of legal persons for ML and TF. The transparency and beneficial ownership requirements of the FATF Recommendations are not only aimed at fighting ML/TF, they also support efforts to prevent other serious crimes such as tax crimes and corruption.
However, results of FATF Mutual Evaluations indicated that countries struggle to achieve a satisfactory level of transparency regarding the beneficial ownership of legal persons. In order to successfully combat ML/TF and prevent the misuse of legal persons and legal arrangements for illicit purposes, it is essential that countries establish effective mechanisms that enable their authorities and law enforcement agencies to obtain, on a timely basis, information on the beneficial ownership and control of legal persons for the purpose of investigating illicit activities, fulfilling regulatory and supervisory functions, and sharing information with other authorities domestically and internationally.
ML/TF Considerations for Accountable Institutions
The attraction of legal persons and legal arrangements is their ability to hide beneficial ownership or involvement of criminals in transactions and to create a front behind which criminals may hide their activities or obscure the involvement of other natural persons connected to the illicit activity. Legal persons can give the appearance of legitimate business transactions and can be used at all three stages of the ML process – placement, layering and integration. The ML/TF red flags for accountable institutions include: (a) problems identifying beneficial owners and; (b) complex ownership and organisational structures.
Accountable Institutions must therefore give particular consideration to the ML/TF risk in relation to legal persons and legal arrangements associated with Politically Exposed Persons (PEPs) and Prominent Influential Persons, as well as businesses associated with organized crime groups and high-risk industries. In order to understand and obtain information for purposes of establishing a business relationship, determining beneficial ownership and control of clients also requires attention by accountable institutions, as do persons acting on behalf of clients.
Anonymity and complexity can be considered as part of the broader concealment of beneficial ownership. Obfuscation is highly desirable to criminals for ML/TF purposes and any products, services, business relationships or distribution channels that facilitate anonymity or the disguising of identity or beneficial ownership represent a high ML/TF risk.
Determining and verifying the identity of the individuals behind activities and transactions is one of the most important AML/CFT measures that accountable institutions must undertake. Shortcomings in this area present high ML/TF risks and will receive significant supervisory attention.
The following are recommended for accountable institutions:
• understand the different types, forms and basic features of the legal person;
• identify the processes for: (a) creating the legal person; and (a) obtaining and recording basic and beneficial ownership information on the legal person;
• assess the ML/TF risks associated with the different types of legal persons and legal arrangements;
• ensure compliance with the additional due diligence measures relating to legal persons, trusts and partnerships as contemplated in section 21B of the Financial Intelligence Centre Act, 2001;
• ensure that legal persons and legal arrangements are sufficiently transparent; and
• ensure that accurate and up-to-date basic and beneficial ownership information is available on a timely basis.
These measures will result in legal persons and legal arrangements being unattractive for criminals to misuse for ML and TF purposes.