Who are you really doing business with?

Until recently you could start up a company or open a bank account in most countries around the world without providing any information on beneficial ownership and factual control. This frustrated forensic investigations substantially. This is changing rapidly as “beneficial ownership” becomes the regulatory benchmark for transparency in compliance. Financial institutions will now be obligated to ask their clients to lift their corporate mask and reveal their true identity and controlling mind. Three weeks ago, the United States Financial Crimes Enforcement Network (FINCEN) implemented final rules that introduced beneficial ownership disclosure obligations. This substantially raises the bar for customer due diligence standards in the US financial sector. Financial institutions have until 11 May 2018 to comply.

27 Jul 2016 4 min read Dispute Resolution Alert Article

Three months ago, the UK implemented legislative measures requiring incorporated companies to keep their own register of “people with significant control” (PSC). The registers will contain information on the company’s beneficial ownership and control, and will be available for public inspection. The second stage of this new requirement involves the PSC information being held on a publicly searchable database. With the Panama papers still fresh in the mind, the US and the UK are aligning their compliance frameworks with the standards set by the Financial Action Task Force (FATF) - the independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing.

In 2011 the World Bank published its Puppet Masters Report highlighting the abuse of corporate vehicles to conceal beneficial ownership and, in the following year, the FATF published its revised Recommendations which now also provide for transparency and beneficial ownership. The G20, at the Brisbane Summit in November 2014, recognised the importance of collecting beneficial ownership information and a month later the European Union consented to create an anti-money laundering directive and, at national level, registers of beneficial ownership information throughout the European Union.

The FATF definition of a beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted and includes those persons who exercise ultimate effective control over a legal person or arrangement. The FATF Recommendation 24 is that countries should ensure that there is adequate, accurate and timely information available on the beneficial ownership of all legal persons, and that their authorities can access this information in a timely manner.

Although the UK became the first government in the world to commit to creating a fully public beneficial ownership register of companies, several other countries have indicated their support for the concept and several have already started raising the bar on customer due diligence in their own jurisdictions. Australia updated its preventative measure requirements in 2014 to align its regulatory framework with the FATF Recommendations and, since 2014, Canada, has also made it mandatory for reporting entities to ascertain the beneficial ownership of their clients.

South Africa has not yet introduced beneficial ownership but the South African Financial Intelligence Centre Amendment Bill of 2015, which provides for beneficial ownership, was approved by cabinet and could become law as soon as it has been assented to by the President. Two weeks ago , at the High Level Conference on Illicit Financial Flows, the Minister of Finance, Mr Pravin Gordhan, stressed that it is in the interest of Africa to quickly develop the capacity to implement the concept of beneficial ownership and that the establishment of beneficial ownership is fundamental to detecting and preventing illicit financial flows. He reiterated that Africa must move swiftly to ensure that it has the right legislation in place emphasising that the lack of legislation to meet the expected standards of FATF recommendations, or poor enforcement, will expose domestic banks and other institutions to significant punitive action including massive fines.

This Bill is intended to align the South African regulatory framework with the standards set by the FATF. The Bill promotes the following:

  • Enhanced Customer Due Diligence requirements by providing for the adoption of a risk based approach in the identification and assessment of anti-money laundering.
  • Combatting the financing of terrorism risks by providing for the adoption of a risk based approach to customer due diligence and, in particular, introducing the concept of beneficial ownership.
  • “Domestic Prominent Influential Persons” as potential clients presenting a potential higher risk and justifying “reasonable measures” to determine the source of the customer’s wealth and the origin of funds in respect of a particular transaction.
  • Enhanced “monitoring of the customer’s account” in order to identify the background and purpose of all complex and unusual transactions and all unusual patters of transactions, which have no apparent or business or lawful purpose.

If this Bill becomes law, it will undoubtedly be a formidable tool in the hands of investigators and law enforcement agencies to combat money laundering, bribery and corruption, tax evasion and financing of terrorism. The Bill will also serve to place the financial institutions in South Africa centre stage for this process. South Africa’s financial sector is regarded as one of its strongest sectors, internationally compliant with best international standards.

It is clear that the transparency in the global regulatory landscape is here to stay and that companies will have to adapt if they wish to continue conducting business within the global financial system. Obviously, the concept of beneficial ownership is also very important for fiscal reasons.

For criminals, the world is about to become a smaller place: hiding behind anonymously owned corporate structures is going to become difficult. The financial sector’s obligations will increase but forensic investigators will welcome this new initiative as following money to the criminal source will become easier.

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