The global Financial Action Task Force- FATF have published their latest guidance on the best practices for establishing beneficial ownership of entities and individuals, for example legal persons, companies, foundations and even associations.
Back in 2012, the intergovernmental organisation published formal recommendations regarding the dangers behind a lack of entity beneficial ownership legislation. In November 2019, many jurisdictions are still not effectively preventing perpetrators from hiding behind false identities and conducting illicit profit generating schemes behind the disguise of outwardly authentic financial activities.
The 2019 report identifies the most prevalent issues that jurisdictions are facing today in certifying the true beneficial owners of entities and legal bodies are identified, as well as putting forward some new ideas for an effective global system. It also suggests options for countries to engage in cross-border data sharing for all overseas companies.
Three different approaches are characteristically used by jurisdictions to determine entity beneficial ownership:
The existing info approach. This approach relies on existing information that is already available to the authorities, such as data from banks and financial institutions. Entities can also include non-financial professionals, regulators, tax authorities or even online stock exchanges.
The company approach. This approach requires companies to obtain and hold the information themselves.
The registry approach. This approach requires company registries in order to attain and record entity beneficial ownership information.
Challenges to the 3 approaches to identifying beneficial ownership
According to FATF, each method has its own implementation challenges. The registry approach while being the most widely used, suffers from a lack of powers at the registry institutions themselves, while the company approach has the problem that
The company approach means that many companies pay to research out of their own pockets with little financial support. The existing information approach relies on financial institutions and non-financial professionals to conduct effective customer due-diligence checks, which is not always achievable. Companies additionally cannot mandate nominee shareholders to disclose the real owners easily, especially if the company directors are non-resident of that country.
The group have recently completed their 4th round of evaluations, which portrayed countries using one or more of the approaches are a lot more effective than approaches that rely on a single method.
“The variety & availability of using multiple sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources. Implementing different approaches can therefore complement each other.”
Using a multi-faceted approach, authorities can attain access to beneficial ownership data using different sources. They can also ensure the accuracy of data by cross-checking it.
It is also easier for key individuals, including regulated entities such as shareholders, companies, directors and to identify incorrect beneficial ownership information in their database by looking up different registers or requesting information from different sources.