Against a backdrop of often complex legal entity structures and strict regulatory requirements to identify the beneficial owners of these entities, compliance teams need the right tools to cut through opacity and deliver a clear and holistic view of ownership, so that they can accurately assess potential compliance risk and conduct appropriate due diligence screening checks in line with the risk-based approach (RBA).
- Complex and sometimes deliberately opaque corporate structures add significantly to the challenges when complying with legislation on ultimate beneficial ownership (UBO).
- In order to apply the RBA to beneficial ownership and controllership compliance teams need the right tools.
- Accurate, quality data is critical to being able to unwrap the complexities of ownership structures.
Global anti-money laundering and financial crime legislation places the onus on organizations to understand exactly who they are doing business with at all times.
However, the widespread abuse of complex legal entity structures to hide the identities of UBOs has complicated the process of compliance in this regard.
Both the Panama Papers and the subsequent Paradise Papers’ leaks in 2017 have served to highlight the complex nature of certain corporate structures and the onerous task often faced by compliance professionals in identifying UBOs.
Added to this equation is the fact that financial crime remains widespread.
A 2019 survey commissioned by Refinitiv, which questioned over 3,000 managers with compliance-related responsibilities at large global organizations in 24 geographies, revealed that 72 percent were aware of financial crime in their global operations over the 12 months preceding the research.
Faced with such pervasive venality, it is not surprising that global regulators have implemented stringent regulations that require financial institutions and ‘obliged entities’, such as lawyers and accountants, to identify and verify their clients’ beneficial owners.
Failure to comply with relevant laws and regulations can lead to significant regulatory and law enforcement action, major fines and reputational harm.
Beneficial ownership legislation
It is therefore crucial that organizations take appropriate steps to identify the true owners of entities before establishing any business relationship.
But this is not always straightforward as business ownership information may be fragmented, stored in different forms and locations, or difficult to find.
Moreover, complex, often deliberately opaque corporate structures can add significantly to the challenges faced by compliance teams when complying with UBO legislation.
The Financial Action Task Force (FATF) has worked consistently to improve beneficial ownership transparency and has developed guidance around the requirements for complying with beneficial ownership regulations.
The FATF recommends “that countries ensure adequate, accurate and timely information is available on the beneficial ownership and control of legal persons”, adding that “failure to comply with its recommendations should attract effective, proportionate and dissuasive sanctions”.
Focusing due diligence efforts
Substantial challenges, however, persist as a result of significantly varying definitions of what constitutes a beneficial owner in global laws and regulations.
The challenges are further exacerbated by a lack of independent and reliable sources from which this information can be obtained.
All this leads to added pressure on already-stretched compliance teams, but the FATF’s 2014 guidance entitled Transparency and Beneficial Ownership offers guidance on implementing the RBA.
Although organizations must assess and analyze risk for all third-parties, the RBA advocates focusing due diligence efforts on areas of medium and higher risk.
Applying the RBA to risk management is widely regarded as best practice, and has many benefits.
Not only does it allow often scarce or over-burdened compliance resources to be focused on the areas of greatest perceived risk, it also leads to greater accuracy in pinpointing areas of concern.
Helping to fight financial crime
In order to identify higher risk situations, compliance teams need the right tools to build a holistic picture of ownership structures, understand the relationships within each structure, and identify and screen beneficial owners for any links to financial crime.
Being able to visualize a holistic picture of interwoven ownership structures delivers clarity and promotes improved workflow, allowing you to focus efforts on subjects where heightened risk may lie.
Where such risk is identified, enhanced due diligence can then by be carried out to deliver detailed integrity and advanced background checks on identified subjects.
By employing the RBA to UBO identification with these time saving tools streamlines the workflow and speeds up the decision-making process.
Given the pervasive nature of corruption and the ever-increasing sophistication of financial criminals who may deliberately hide behind multi-layered corporate structures, being able to quickly and accurately identify UBOs and controllerships and pinpoint any heightened risk in line with the RBA has become a key tool in global efforts to help combat financial crime.
