Assessing beneficial ownership isn’t like looking for a needle in a haystack, it’s like looking for a needle in a pile of other needles. Tracing beneficial ownership to owners—especially outside the UK—is often difficult in practice, not least due to the different national disclosure regimes within the European Union (EU) itself.
So what is beneficial ownership? Why does it matter? And why do financial institutions (FIs) and companies need to sit up and take notice?
Let’s start at the beginning. A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company or its management. Where such an interest is held through a trust, the trustee(s) or anyone who controls the trust will be registered as the beneficial owner(s).
Not everyone wants to be identified as the beneficial owner. Many criminals will deliberately use the opacity of corporate vehicles to hide their identity, the true purpose of the account and the source or use of funds or property associated with the corporate vehicle.
That might be for good old-fashioned tax avoidance purposes. It might be to prevent authorities tracking the proceeds of individual or corporate crime, such as money-laundering or bribery and corruption. Or it might even pull a cloak over state-sponsored terrorism activities. Whatever the reason, many individuals, corporates and other business entities are capitalizing on the traditionally lax rules governing beneficial ownership for ill-gain.
Beneficial ownership—the authorities are on the case
The authorities are fighting back. For example, the Financial Action Task Force (FATF), an international body that sets standards for anti-money laundering and counter-terrorist financing, has issued guidance for countries on beneficial ownership and for FIs on implementing a risk-based approach toward handling customers.
The FATF recommendations provide measures that address the transparency and beneficial ownership of legal persons, and it adds a series of recommendations that countries should adopt to prevent the misuse of legal persons from being misused for criminal purposes. These recommendations include:
- Assessing the risks associated with legal persons and legal arrangements
- Making legal persons and legal arrangements sufficiently transparent, and
- Ensuring that accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion.
Alongside this, the Fourth EU Money Laundering Directive was also published last year to crack down on money laundering, tax evasion and terrorist financing—making beneficial ownership a key provision of concern to corporates. The Directive must be implemented by member states by June 2017.
All of this represents a new step towards transparency and the introduction of public registers on the ultimate beneficial ownership of companies and other entities. None of it is easy to implement though. In fact, establishing beneficial ownership at the same time as global organizational structures becoming more complex is perhaps among the biggest challenges facing FIs today.
A lot of those challenges relate to data. There are huge issues surrounding data lineage, for example, data quality and the timeliness of the data. Moreover, different countries have different rules. Certain countries and off-shore tax havens, for example, have barriers in place to prevent the gathering of data on beneficial ownership—something that criminals are very quick to exploit.
Delivering ethical business growth
Organizations and trusts can adopt two different routes to collecting beneficial ownership data. Look at each record manually, or automate the process. The manual approach is prohibitive: too slow, too expensive and too prone to error. However, a semi-automated beneficial ownership data collection process streamlines the data collection process, delivers the necessary transparency and ethical business growth.
So what action can you take? Ideally, you want to deploy a solution that enables your organization to reach its core data assets relating to global share ownership quickly and efficiently. A solution that enables you to get to the ‘holy grail’ of beneficial ownership structures first time, more often and more quickly.
This is why it makes sense to use analysis and research tools to establish those links before you ‘deep dive’ into information on those businesses and people during the onboarding phase. This saves you time and money and potentially reduces the number of entities you then have to screen. For example, it enables you to:
- Visualise corporate ownership structures up to and including corporate ownership over 5% or more
- Add individual shareholders to ownership trees and reference your source of information for complete transparency and audit
- Source and maintain full ownership details, type of share ownership and percentage
Establishing beneficial ownership when global organizational structures are so complicated can be expensive and time-consuming. But increasing amounts of international legislation demand that you get it right, and report comprehensive information.
With the right systems and processes in place, you can identify that needle among the other needles, meet the compliance regulations surrounding transparency and onboard/manage client relationships more successfully.