Stacey-Ann L. Williams
Governments worldwide are rallying for greater transparency about exactly who owns what in business and finance, to root out financial crime and terrorist networks from the global banking system. But will the strength of recent progress be undermined by practical differences in regulation and enforcement from nation to nation—and even, in the US, from state to state? As things stand, apparent gaps and mismatches in “beneficial ownership” rules being advanced by various jurisdictions could set the stage for something short of transparency.
US Erects "Fifth Pillar" of Compliance
In the United States, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently issued final rules clarifying and strengthening customer due diligence (CDD) requirements for banks and other financial institutions. To date, banks have not been required to track the beneficial ownership of bank customers—that is, to know the identity of individuals who have significant equity ownership or management control of the legal entities
they do business with.
Many US banks collect this information of their own accord, but inconsistently. FinCEN says its new rules will advance national security interests by establishing more consistent practices. Banks have until May 2018 to comply with the new standards.
FinCEN underscored the importance of its new CDD requirements by anointing them as a “fifth pillar” of anti-money laundering (AML) compliance, in addition to those four it currently enforces (internal controls, independent testing, designated compliance officer, and personnel training).
G20 Raises the Bar
Many other countries are collectively and individually advancing beneficial ownership rules as a tool to keep bad actors from anonymously accessing the banking system. International AML efforts against financial crimes and terrorism are often proceeding in parallel with broader campaigns against tax evasion—adding impetus to proposals including public registries of beneficial owners.
The Group of 20 (G20), European Union (EU), and Organisation for Economic Co-operation and Development (OECD) are all active. At the national level, such countries as Canada and the UK are considered among the most forward-leaning.
At the G20 Summit in September, presidents and prime ministers took the financial transparency agenda to the next level, including a 2017-18 anti-corruption action plan. In July, the G20 Finance Ministers and Central Bank Governors Meeting proclaimed, “We will tackle all sources, techniques, and channels of terrorist financing.” The finance ministers called for improvements in the implementation of international standards on transparency, singling out beneficial ownership, for which norms have been evolving over the years within the 37-nation Financial Action Task Force.
Also in July, the European Commission (EC) fast-tracked a proposal requiring the EU’s 28 member states to implement and interconnect national beneficial ownership registries, while expanding the information that would be collected. In doing so, the commission cited the recent “Panama Papers” containing leaked information on questionable international bank accounts.
Notably, among national initiatives, the UK government is putting particular focus on real estate transactions. “Property can provide a convenient vehicle for hiding the proceeds of crime,” explained a recent report from the UK’s Department for Business Innovation & Skills.
Mismatched Rules Raise Questions
While aligned at a policy level, the US and its global partners can differ on specific details of beneficial ownership regulations. Such differences could undermine effectiveness, collaboration, and trust among the financial investigation units and other AML agencies in various countries, as they also impose conflicting or overlapping compliance requirements on banks.
Key mismatches are found in such details as ownership levels, control attributes, data sharing requirements, and grandfathering.
As one example of a mismatch, the EC’s latest proposal calls for information gathering on beneficial owners with a 10% stake in companies that present a higher level of risk, with the threshold remaining at 25% for other companies. FinCEN’s final CDD rule sets an across-the-board 25% requirement for banks in the US. In any case, some observers question the usefulness of a 25% trigger, since companies might relatively easily restructure a holding down to 20%, for instance, to avoid exposing a beneficial owner.
Differences elsewhere range from slight to significant. Regardless of equity ownership, for example, FinCEN’s guidance says individuals could also fall under beneficial ownership rules because of their ability to control a company or its activities—as “a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager.” In the UK, a person could be considered to have significant control if “directly or indirectly holding over 25% of the voting rights in the company; directly or indirectly holding the right to appoint the majority of the board of directors; having the right to or actually exercising significant influence or control over the company; and exercising significant influence or control over a trust or firm that itself meets the control conditions, where that trust or firm is not a legal person.”
Data sharing requirements
. While proposed US legislation would establish a central federal registry of beneficial ownership, at this point, US banks hold the information themselves, and any congressional action on the proposed bill could be stalled in Washington. Elsewhere, six countries (Afghanistan, France, Kenya, the Netherlands, Nigeria, and the UK) have agreed to open such registries to the public, and six more (Australia, Georgia, Indonesia, Ireland, New Zealand, and Norway) agreed to consider doing so, according to reports from last spring’s Anti-Corruption Summit in London. Almost 30 countries now hold and share such information among
themselves (as well as with competent authorities, those doing due diligence, and others with a legitimate interest, although not publicly).
The US requirement applies only to new accounts. The EC has proposed that existing accounts should be subject as well.
Even as progress is made, there could be disconnects between federal and state requirements in the United States, for instance. At the same time, the OECD has called out a number of havens and other outliers around the world where, it says, “a lack of information on beneficial ownership of corporate and other entities is facilitating illicit flows.”
As President Obama himself has said, “if we can't cooperate with other countries it makes it harder for us to crack down.” Nonstandard information collection poses barriers to the transfer of information for investigations. Mismatched approaches could engender mistrust, when information requested by one country’s investigators is not delivered by another’s—even if for the simple reason that the data was never collected or updated.
Banks themselves stand to benefit from any reduction of the risk associated with illicit activity on their systems. But compliance that is complicated across international borders by diverging rules could add costs and regulatory risk. It could add hurdles in the very act of setting up an important bank account and getting the money on the books in a reasonable amount of time.
Time will tell whether and how these various approaches will ultimately align—how much or little they will disrupt bank business, how effectively governments can collaborate to stem financial crime and terrorist financing, and whether the global bank network of the future will be a more transparent one.
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