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.
Background: The flow of illicit money, tax evasion, 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. The activities of these entities are largely unknown (and can be moved to other jurisdictions at a moment’s notice), they often do not benefit the local population, and they frequently have no legitimate business purpose. Furthermore, beneficiaries of these activities often remain secret. In effect these entities operate in a world very much separate from the legitimate global economy.
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 used commonly as a way of siphoning off and handling illicit funds. These structures make uncovering the true nature of transactions and tracing beneficial ownership and the origin of funds difficult for investigators. 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 list of the beneficial owners of corporations, limited liability companies, and other legal persons organized under their laws. The FATF requirements for establishing beneficial ownership as part of the customer due diligence process must be implemented globally. A beneficial owner must be defined as a natural person or listed corporation, not a nominee corporation or disguised trust.
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
Benefit: Providing beneficial ownership information will enable national authorities to better estimate tax revenue (and plan for its utilization) and track and address illegal activity. Current and potential investors will have an enhanced understanding of the workings of the corporation in which they invest. Banks will be in a better position to determine the credit worthiness of potential customers. Thus, a fully transparent corporate structure will foster a better functioning global financial system.