Action Item: Require that the beneficial ownership, control and accounts of companies, trusts and foundations be readily available on public record to facilitate effective due diligence; and explicitly require, and enforce, that financial institutions identify the ultimate beneficial owners or controllers of any company, trust or foundation seeking to open an account.
Background: The flow of illicit money including tax evasion, the proceeds of corruption, terrorist financing and a host of other global ills can be traced to the lack of information about the beneficial owners of corporations, trusts and foundations. Often located in some 70 secrecy jurisdictions around the world, these entities can absorb, hide and transfer wealth outside the reach of any law enforcement agency, and can often be reincorporated in another secrecy jurisdiction at a moment’s notice.
As the collapse of Enron showed, multinational corporations can have thousands of subsidiaries hidden throughout the world. Corporate entities can use these structures to transfer profits abroad in order to reduce tax liability or to circumvent local regulation in developing countries. Multinationals can use additional tools of transfer mispricing (manipulating prices of inter-subsidiary transactions to shift profits) to divert profit to no- or low tax jurisdictions and which are very hard to detect.
Convoluted structures of this kind are also commonly used as a way of siphoning off and handling illicit funds including corruptly and criminally acquired assets, as they enable the true ownership of assets to be disguised, particularly when opening bank accounts and transferring money. The impact of corruption on developing countries is devastating, and these structures help to facilitate it.
Financial institutions, including banks, are required to identify their customers as part of their account opening due diligence, but the true customer is often hidden behind layers of companies and trusts. Then, if money needs to be traced by investigators, these structures also make uncovering the true nature of transactions and tracing beneficial ownership and the origin of funds very difficult. The modus operandi of illicit financial flows are not aberrations but a part of a broad structural problem.
In order to address these ills jurisdictions must ensure that
- they maintain a current and publicly available list of the beneficial owners and controllers of corporations, limited liability companies, other legal persons and legal structures such as trusts organized under their laws; and that the Financial Action Task Force (FATF) has this requirement as the standard for compliance with its recommendations 33 and 34; and
- the FATF requirements for establishing beneficial ownership as part of the customer due diligence process (recommendation 5) are rigorously implemented globally. Anti money laundering laws in each jurisdiction must be explicit that financial institutions must identify the beneficial owners who are natural (i.e., real) persons or listed corporations, not a nominee corporation or disguised trust. Jurisdictions must ensure that these laws are properly enforced.
G-20 Jurisdiction: Working Group 1 (Enhancing sound regulation and strengthening transparency) and Working Group 2 (Reinforcing international cooperation and promoting integrity in financial markets).
Executing Authority: Financial Action Task Force; Individual Countries
Benefit: Due diligence is the first line of defense against laundering of illicitly acquired funds, so strengthening these procedures increases the integrity of the entire system. Financial institutions will be able more easily to fulfill their regulatory requirement to identify their customers and their sources of funds, and will also be in a better position to determine the credit worthiness of potential customers. Providing beneficial ownership information will help prevent and track illegal activity, as investigators will be able to track down the movement of illicit funds more quickly and effectively. It will enable national authorities to better estimate tax revenue (and plan for its utilization), and to identify where tax is being evaded. Current and potential investors will have an enhanced understanding of the workings of the corporation in which they invest. Thus, a fully transparent corporate structure will foster a better functioning global financial system