How FATF’s ultimate beneficial ownership changes affect your risk-based approach

Earlier this year, the Financial Action Task Force adopted amendments to Recommendation 24 – one of its 40 recommendations that govern global AML policy – making changes to Ultimate Beneficial Ownership. How will this impact your company?

In a recent post by Sentinels, the company looked deeper into UBOs – the ‘people who ultimately gain from money moving into or out of companies’ – and why the rule change is so important.

Sentinels began, “The changes are important as R.24 has faced criticism in the past for being a blanket-approach that did not consider the variances of a risk-based approach or the unique needs of NPOs. R.24 has been under scrutiny for the past two years. Following input from the Global NPO Coalition, the private sector, and FATF itself, the recommendation has been rewritten to strengthen requirements for transparency on beneficial ownership globally and legal persons.”

According to the firm, FATF defines legal persons as ‘any entities other than natural persons that can establish a permanent customer relationship with a financial institution or otherwise own property’. This can include companies, bodies corporate, foundations, anstalt, partnerships or associations and other relevantly similar entities that have legal personality such as NPOs.

Sentinels remarked, “It’s a comprehensive definition, but really it just means any entity that can hold rights and liabilities in law which is not a human being. From a money launderer’s perspective this is a feature of the global financial system that is ripe to be exploited, by forming companies and assigning incorrect UBOs they can hide the real beneficiaries of the proceeds of crime more easily.”

The company remarked that understanding legal persons is key as under the old version of R.24, FIs were responsible for finding the UBO of a business, whereas now the legal persons are obliged to have that information on record and make it available to the country they’re operating in. This information must be publicly available through a beneficial ownership registry.

Prior to the revision to R.24, there was a requirement to have a register for UBOs, but this was often separate from specific business information. In the UK, for example, there is the persons with significant control register – something Sentinels claims is ‘widely regarded as a failure and filled with incomplete, incorrect or inadequate information’.

This was not just a challenge in the UK, but globally – and had rendered R.24 quite ineffective at tackling money laundering and terrorism financing. Some companies were able to be formed and trade without any clarity as to the UBO – meaning money was circulating through companies without any real knowledge as to who the real beneficiary was.

Sentinels said, “Operating in this way means that transaction monitoring struggles to provide a full picture of customer behaviour at pace. Instead, compliance officers normally have to wait for patterns to emerge and determine suspicious activity from there. This process has been sped up thanks to the advent of real-time transaction monitoring but it could be even faster if UBOs were properly identified.

What are some of the challenges to identifying UBOs? The first key one surrounds risk assessments, “Not all risk-based approaches are the same, with good reason as every business has unique requirements depending on where they operate and their industry. But certain standards must be met regardless of these factors.” Sentinels added that standardising the issue of covering legal persons in domestic law, FIs, DNFBPs and regulations will be immediately aware of what legal persons to consider.

There should also be more accurate UBO information. According to Sentinels, having accurate information is vital to any AML activity, but especially when conducting transaction monitoring and investigating how suspicious a transaction may be. Without accurate, monitored and verified UBO information it can be much more difficult to understand whether a flow of money is illicit.

The firm added, “By creating a register of UBO information that is accurate and verified, countries will make it far easier for FIs and DNFBPs to investigate transactions and understand whose hands money is flowing through.”

It is also key to communicate UBO information. Making this information easily and quickly accessible to authorities is vital – however, weak registers and FIs and DNFBPs failing to provide the necessary information can lead to many falling at this hurdle. This can be dealt with through technology, Sentinels claims, and can assist by implementing API-based solutions that can quickly convey all the necessary information to the local regulator.

Shareholder arrangements are also key. Sentinels underlined how FATFs revision to R.24 would see immobilized bearer shares held with financial institutions rather than licensed providers which would also come with a requirement for timely access to the UBO information for those shares. FIs may also see stricter accessibility regulations come into effect to facilitate this revision and may not be able to provide as much privacy to customers as a result.

Another challenge surrounding UBOs is penalties. When it comes to UBOs, there is little that regulators can do around penalties – with little provisions in law to punish a company for poor, incorrect or wrong UBO information.

This will almost certainly change following FATFs review of R.24, as it claims it wants an overhaul of the approach nations and businesses take towards UBO information.

International alignment is another key challenge. Sentinels remarked, “Regulatory harmonisation has been a popular talking point at AML conferences for years. And due to a lack of standards some nations have not considered UBO information in any degree, making sharing information across borders far more difficult.

“Language barriers do not help but creating registers and potentially centralising information as the European Banking Authority’s EuReCa is set to do may see greater efficiency in the future in some parts of the world.”

Find the full post here.

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