FATF releases best practice guidance on establishing beneficial ownership

Many countries are still not effectively preventing criminals and terrorists from hiding their identity and illegal activities behind the facade of seemingly legitimate activity, says FATF, which published formal recommendations on beneficial ownership legislation in 2012.

The report identifies the most common challenges that countries face in ensuring that the beneficial owners of legal persons are identified, and suggests key features of an effective system. It also suggests options for jurisdictions to obtain beneficial ownership information of overseas entities.

Three different approaches are typically used by jurisdictions to discover entity beneficial ownership:

• the registry approach, which requires company registries to obtain and hold beneficial ownership information;
• the company approach, which requires companies themselves to obtain and hold the information; and
• the existing information approach, which relies on existing information that is already available to the authorities, such as information held by financial institutions or non-financial professionals, regulators, tax authorities or stock exchange disclosures.

Each approach has its own implementation challenges, says FATF. The registry approach suffers from lack of resources and powers at the registry institutions themselves, while the company approach has the problem that companies cannot easily force nominee shareholders to disclose the real owners, especially if the company directors are non-residents. The existing information approach relies on financial institutions and non-financial professionals to conduct effective customer due-diligence checks, which is not always achievable.

According to FATF, its recently completed fourth round of mutual evaluations reveals that systems combining one or more of these approaches are often more effective than systems that rely on a single approach.

'The variety and availability of [multiple] sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources', it says. 'Implementing different approaches...can therefore complement each other.'

For example, it notes that an openly and publicly accessible central registry does not necessarily mean that the information is accurate and up-to-date. 'Under a multi-pronged approach, competent authorities can gain access to information on beneficial ownership through different sources. They can also ensure the accuracy of information by cross-checking.'

It is also easier for key stakeholders, including companies, directors, shareholders and regulated parties, to identify incorrect beneficial ownership information in their database by looking up different registers or requesting information from different sources, says FATF. 'This will then trigger the obliged party to seek clarifications from the companies, and if necessary, report suspicious activities to competent authorities. Such an approach encourages key stakeholders to fulfil their obligations through peer interaction and supervision.'

Sources

• FATF (report, PDF)