Corporate vehicles play a critical role in the global economy. Companies, trusts, foundations, and partnerships conduct various commercial activities. However, criminals often exploit these vehicles to launder illegally derived funds. Criminals use corporate vehicles to disguise their identities, the real purpose of an account held, and the source of funds or property that belongs to a corporate vehicle. To address this issue, the Financial Action Task Force (FATF) has developed and updated standards allowing authorities to “follow the money” during investigations.
What are the new FATF requirements?
The FATF is an international standard setter for combating money laundering (ML), terrorist financing (TF), and the proliferation of weapons of mass destruction (PF). To respond to the misuse of legal persons, it has developed and updated standards that would allow authorities to “follow the money” during investigations.
The updated Recommendation 24 requires countries to ensure adequate, accurate, and up-to-date beneficial ownership information, prohibit the issuance of new bearer shares or bearer share warrants, and take measures to prevent the misuse of existing bearer shares and bearer share warrants.
The FATF requirements, according to the new FATF Guidance on Beneficial Ownership issued in March 2023, can be broken down into the following:
- Beneficial ownership information: Countries must ensure adequate, accurate, and up-to-date beneficial ownership information. Beneficial ownership refers to the individuals who ultimately control an entity through ownership interest or other means. The FATF emphasizes identifying not only the legal owners of an entity but also the individuals that ultimately control an entity.
- Bearer shares and warrants: Bearer shares are unregistered shares owned by whoever holds the physical share certificate. Bearer share warrants represent the right to acquire ownership of a legal entity at a later date. They can be easily transferred without being recorded in any official registry. This anonymity makes them a popular vehicle for money laundering and terrorism financing. Countries must prohibit the issuance of new bearer shares or bearer share warrants and take measures to prevent the misuse of existing bearer shares and bearer share warrants. The existing bearer shares and bearer share warrants must be either converted to registered shares or dematerialized and held with a custodian who is effectively supervised.
- Nominee shareholders and directors: Countries must take effective measures to ensure that nominee shareholders and directors are not misused for ML/TF. Nominee shareholders and directors are individuals who are appointed to act as a legal owner or director of a company, trust, or other legal entity, but who do not have any real control over the entity. Criminals often use these individuals to conceal their identities and control over the entity. Countries are required to impose transparency requirements to nominee arrangements including disclosing the nominator, licensing requirements to those acting as nominees or prohibition of nominee arrangements.
- Risk assessment: Countries must conduct a comprehensive risk assessment of all types of legal persons, including the threat and vulnerabilities that they pose on the specific country. The risk assessment can be performed by collecting and analyzing registration statistics for legal persons created under national laws, reviewing and analyzing suspicious transaction reports, identifying typologies of abuse of legal persons, and investigating advertising practices by Trust and Company Service Providers (TCSPs) promoting a jurisdiction as an international center for incorporation/entity formation to non-residents.
- Preventive measures: Countries are recommended to take some preventive measures including applying disclosure requirements to legal persons operating in the country, investigating violations of beneficial ownership reporting rules with specialized expertise, increasing investigative and enforcement capacities of relevant public bodies, requiring legal persons to have at least one resident director for traceability and potential sanctions, setting an appropriate beneficial ownership threshold, and implementing sector-specific arrangements to prevent risks.
- Multi-pronged approach: Countries must follow a multi-pronged approach to ensure beneficial ownership can be determined in a timely manner by a Competent Authority. This includes using a combination of mechanisms to verify information in the beneficial ownership registry or alternative mechanism. These mechanisms can include a company approach, registry or alternative mechanism, and any other supplementary sources. Supplementary sources can include information held by financial institutions or DNFBPs, stock exchanges, and other regulators.
- Virtual Asset Service Providers (VASPs): require countries to prevent criminals from holding controlling interest or management functions in VASPs and ensure beneficial ownership information is accessible. VASPs on their side must manage risks associated with anonymity-enhancing technologies, obtain customer identification and beneficial ownership information, and conduct due diligence to customers but also to potential correspondent relationships. Countries must also identify and sanction unregistered VASPs and consider how existing regulations apply to digital assets to mitigate risks associated with bearer shares.
- Trust and Company Service Providers (TCSPs): TCSPs play a critical role in conducting CDD on clients for corporate vehicles. However, deficiencies in implementing CDD obligations still exist even when TCSPs are subject to AML/CFT requirements. Countries should mandate CDD for all legal professionals and TCSPs. Legal professional privilege can cause practical issues with AML/CFT obligations, and competent authorities and professional bodies should work together to ensure a clear understanding of the scope of professional privilege and secrecy.
- International cooperation: To prevent financial crimes, countries should mandate CDD for all legal professionals and TCSPs, provide access to basic information held by company registries to foreign competent authorities, exchange information on shareholders, and use competent authorities’ powers to obtain beneficial ownership information on behalf of foreign counterparts, not only for their own investigations. International cooperation is vital to combat financial crimes effectively.
The misuse of legal entities is a significant issue in the global fight against money laundering, terrorist financing, and proliferation of weapons of mass destruction. The prioritization of the implementation of the FATF standards on beneficial ownership information can prevent criminals from exploiting corporate vehicles to launder illegally derived funds and to enhance transparency in the global economy.