Beneficial ownership always refers to a natural person, never a legal person or a legal arrangement. Although complex and confusing structures create myriad opportunities for a beneficial owner to hide their control of legal persons or to conceal the transfer of assets, countries can count on key concepts to navigate the maze.
Beneficial Ownership and the International Standards
The Financial Action Task Force’s (FATF) international standards for anti– money laundering and combating the financing of terrorism (AML/CFT) define the concept of beneficial ownership. A beneficial owner is:
The natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person or arrangement. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal entity or arrangement.
The beneficial owner is always a real human being, commonly referred to as the “natural person.” It can never be the “legal person” or “legal arrangement,” which are legal constructs based on a law (for example, a company or a trust). The expressions “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership and/or control is exercised through a chain of ownership or through control other than direct control. This definition makes it clear that a beneficial owner can never be a legal person or a legal arrangement, even if legal entities may own or control other legal persons, especially when there is a chain of ownership. The terms “beneficial owner” and “ultimate beneficial owner” are often used synonymously, but “beneficial owner” is intended to refer to the natural person or persons who ultimately own or control a customer, and/ or the natural persons on whose behalf a transaction is being conducted. Accordingly, the two terms have the same meaning.
The FATF Standards
The FATF AML/CFT international standards set out requirements to enhance the transparency of legal persons, including regarding the availability of adequate, accurate, and up-to-date beneficial ownership information. These measures are important to help prevent the misuse of legal persons.
International standards are one of the drivers for countries to implement systems to ensure beneficial owner transparency. The best-known standards are the FATF’s 40 Recommendations, which the IMF’s Executive Board has endorsed. The FATF’s mandate is to set standards and promote effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, proliferation financing, and other related threats to the international financial system’s integrity (FATF 2012, Introduction).
The FATF requirements for measures to ensure transparency of beneficial ownership information have been in place since 2003 and were updated in 2012. In March 2022, the FATF adopted enhanced requirements relating to the transparency of legal persons, which are set out in FATF Recommendation 24 and its Interpretive Note. The FATF is concerned with the effective implementation of its recommendations (which is measured based on 11 immediate outcomes, of which Immediate Outcome 5 is concerned with the transparency of legal persons), but in general, countries have faced considerable challenges with effectively implementing the international standards for beneficial ownership transparency.1 The text of Recommendation 24 and Immediate Outcome 5 is set out in Box 2.1.
The aim of Immediate Outcome 5 and the enhanced requirements for Recommendation 24 is to prevent the misuse of legal persons and to ensure access to beneficial ownership information for competent authorities. At its core, Recommendation 24 is a requirement for authorities to obtain and hold this information when legal persons are created. To do this, the technical compliance standard places various requirements on countries, including to put a legal framework in place to ensure that basic and beneficial ownership is captured accurately, that basic information is publicly available, and that beneficial ownership information is available to competent authorities. The requirements apply at one or more of the creation, registration, and/or incorporation stages of the legal person and remain relevant during its lifetime and even at and after dissolution (see Box 2.1).
FATF Core Requirements regarding Transparency of Beneficial Ownership
Immediate Outcome 5
Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments. Characteristics of an effective system Measures are in place to:
Prevent legal persons and arrangements from being used for criminal purposes;
Make legal persons and arrangements sufficiently transparent; and
Ensure that accurate and up-to-date basic and beneficial ownership information is available on a timely basis.
Basic information is available publicly, and beneficial ownership information is available to competent authorities. Persons who breach these measures are subject to effective, proportionate, and dissuasive sanctions. This results in legal persons and arrangements being unattractive for criminals to misuse for money laundering and terrorist financing.
Recommendation 24: Transparency and Beneficial Ownership of Legal Persons
Countries should assess the risks of misuse of legal persons for money laundering or terrorist financing, and take measures to prevent their misuse. Countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities, through either a register of beneficial ownership or an alternative mechanism. Countries should not permit legal persons to issue new bearer shares or bearer share warrants, and take measures to prevent the misuse of existing bearer shares and bearer share warrants. Countries should take effective measures to ensure that nominee shareholders and directors are not misused for money laundering or terrorist financing. Countries should consider facilitating access to beneficial ownership and control information by financial institutions and DNFBPs undertaking the requirements set out in Recommendations 10 and 22.
Source: FATF Standards and FATF Methodology. Note: A copy of the most recent changes proposed to FATF Recommendation 24 is included in Appendix 2 and shown in Figure 2.1. Reproduced from the Financial Action Task Force Recommendations. Copyright © FATF/OECD. All rights reserved.Transparency of beneficial ownership requirements are also relevant for Recommendation 25, which concerns the transparency of trusts and other types of legal arrangements. The requirements are also relevant for several other FATF recommendations, including regarding understanding risks, customer due diligence (CDD), politically exposed persons, wire transfers, fit and proper tests for ownership of financial institutions, and international cooperation. It is particularly important for CDD requirements because these feed into the requirements of Recommendation 24 (as an information source) but also rely on beneficial ownership information that is available pursuant to this recommendation. As a result, shortcomings in the implementation of Recommendation 24 can have a negative impact on other FATF recommendations.
Immediate Outcome 5 assesses the extent to which countries have put effective measures in place to prevent legal persons and arrangements from being used for criminal purposes, make legal persons and arrangements sufficiently transparent, and ensure that accurate and up-to-date basic and beneficial ownership information is available on a timely basis. As with technical compliance, lack of effectiveness in the implementation of beneficial ownership requirements can affect immediate outcomes beyond Immediate Outcome 5, and it is relevant (though less directly) to all the other 10 immediate outcomes (see Appendix 3).
Figure 2.1 illustrates how the different elements of Recommendation 24 interact with each other.
Requirements under FATF Recommendation 24
Sources: Financial Action Task Force; and IMF staff.Note: BO = beneficial ownership; DNFBP = designated nonfinancial businesses and professions; FI = financial institution; FIU = financial intelligence unit.Requirements under FATF Recommendation 24
Sources: Financial Action Task Force; and IMF staff.Note: BO = beneficial ownership; DNFBP = designated nonfinancial businesses and professions; FI = financial institution; FIU = financial intelligence unit.Requirements under FATF Recommendation 24
Sources: Financial Action Task Force; and IMF staff.Note: BO = beneficial ownership; DNFBP = designated nonfinancial businesses and professions; FI = financial institution; FIU = financial intelligence unit.Requirements under FATF Recommendation 24
Sources: Financial Action Task Force; and IMF staff.Note: BO = beneficial ownership; DNFBP = designated nonfinancial businesses and professions; FI = financial institution; FIU = financial intelligence unit.Requirements under FATF Recommendation 24
Sources: Financial Action Task Force; and IMF staff.Note: BO = beneficial ownership; DNFBP = designated nonfinancial businesses and professions; FI = financial institution; FIU = financial intelligence unit.Other Standard Setters and Initiatives on Beneficial Ownership
Other standard-setting bodies have also incorporated requirements related to beneficial ownership. This includes the Global Forum on Transparency and Exchange of Information for Ta x Purposes (Global Forum), which is the international arrangement for monitoring and conducting peer reviews on the implementation of the international standards on transparency and exchange of information for tax purposes (that is, the Exchange of Information on Request Standard and the Automatic Exchange of Financial Account Information Standard). The concept of beneficial ownership, as defined under the FATF recommendations, features prominently under these two tax standards because knowing the identity of the natural persons behind entities helps preserve the tax systems’ integrity and enables tax jurisdictions to achieve their tax goals. In addition, the United Nations Convention against Corruption reiterates the need for countries to implement beneficial ownership identification as part of the measures to prevent money laundering stemming from proceeds of corruption (Article 14) and to take reasonable steps to determine the identity of beneficial owners of funds deposited into high-value accounts, both to prevent and detect the transfers of proceeds of crime (Article 52) (UNODC 2003). The concept of beneficial owner is not elaborated, but an indication of who may be considered a beneficial owner is included in the technical guide to the United Nations Convention against Corruption (UNODC 2009).2
Beneficial ownership requirements also feature in industry and other private sector standards. The Extractive Industries Transparency Initiative Standards promote good governance of oil, gas, and mineral resources. One of the requirements of this standard (Requirement 2.5) is to recommend publicly available beneficial ownership registers for corporate entities that apply for or hold an interest in the relevant industries (EITI 2019, 18). The Wolfsberg Group, which is an association of 13 global banks, develops frameworks and guidance for the management of financial crime risks for banks. Its 2012 anti– money laundering principles for private banking include requirements related to beneficial ownership and its implementation (Wolfsberg Group 2012b).
Other supranational and regional initiatives and high-level political commitments have helped promote transparency of beneficial ownership. For example, the European Union has been taking steps to implement the relevant FATF requirements through legislation, including by requiring its member countries to implement public registries of beneficial ownership information. At the Group of Twenty meeting in Sydney, Australia, in 2014, member countries agreed to high-level principles on beneficial ownership. Among others, these principles urge countries to ensure that beneficial ownership information is kept in the country, and is adequate, accurate, and current (Principle 3) (G20 2014, 2).
These initiatives reinforce the relevance of beneficial ownership issues to other policy agendas (see Chapter 4). However, in some instances, they may also fall short of the FATF approach to beneficial ownership, and in such cases, countries should focus on following the FATF’s definition of beneficial ownership.3 More broadly, countries should aim to put a holistic and comprehensive system in place for collecting and maintaining beneficial ownership information in a country that can support these different objectives instead of adopting a piecemeal approach to different initiatives, which may have varying requirements.
Types of Legal Persons
Even if the names of different categories of legal persons are the same between jurisdictions (for example, limited liability companies, limited liability partnerships, partnerships, and foundations), their characteristics and use in practice can vary significantly between jurisdictions.
Most (if not all) countries have developed legal frameworks that regulate the creation of legal persons. In general, these frameworks attribute a series of legal rights and obligations to legal persons, including the right to own movable and immovable property and to enter into contracts, thereby enabling them to play an essential role in commercial and entrepreneurial activity.
The types of legal persons that can be set up in a specific country are unique to the country’s legal and regulatory framework. Even if they are known by similar names or titles in individual countries, they are likely to have different characteristics and different legal requirements.
Mapping of Legal Persons
In line with FATF standards, countries are required to have mechanisms that identify and describe the different types, forms, and basic features of legal persons in the country. In practice, this means that competent anti– money laundering authorities need to list and keep a comprehensive overview of all existing types and forms of legal persons, including a description of their relevant features (see Box 2.2). In addition, those authorities should describe the processes for creating each of those types of legal persons and for obtaining and recording both basic and beneficial ownership information. This includes being aware of all the relevant laws and regulations establishing the legal persons (which is also relevant for technical compliance). The FATF standards require that this information on types of legal persons and processes is publicly available. It is important that these authorities know the legal persons that can be created and/or operate in their jurisdictions so that they have an idea of how natural persons might use these entities and from which entities they need to collect information. To understand a country’s systems from an AML/ CFT perspective, it is necessary to centralize and organize this information for the purposes of the AML/CFT risk assessment (see “Risk Assessments of Legal Persons”).
When mapping the information, countries should focus not only on the primary law that regulates most of the basic features of most legal persons in a country (for example, company law, civil code) but also consider other relevant laws (including supranational legislation) that may allow for the creation of specialized legal persons (for example, legal persons that carry out special functions, such as asset protection) and laws that change the features of legal persons (such as the ability to change jurisdiction of residence) or afford them special treatment (such as special tax status). In general, no one type of legal person, a priori, should be excluded from this mapping exercise just because at first sight, they might give the impression that they are not particularly relevant for AML/CFT purposes (for example, associations, state-owned enterprises, and statutory corporations whose governance arrangements are usually embedded in their governing laws).4
At the outset, it is important to remember that although legal persons might have the same name in different countries or even the same origin in a common legal framework, their specific features might nevertheless differ between countries because of evolving differences in the legal frameworks governing the establishment and functioning of legal persons. In addition, vulnerabilities of specific types of legal persons are also likely to be different between countries, considering the money laundering and terrorist financing risks and context that individual countries present. This has consequences for discussions with counterparts in other jurisdictions (for example, for mutual legal assistance requests or as part of an assessment), and it is important to keep in mind that the simple name of a legal person, especially when translated to another language, is of limited value on its own in determining its characteristics and risks.
The FATF standards do not describe a specific process for the mapping exercise, nor do they impose any rules for putting the overview of legal persons together. Countries have flexibility in deciding on the format if they ensure that all types of legal persons that can be set up in the country are duly reflected. Countries can choose a general description of the various categories of legal persons accompanied by the specific features for each of these categories.
It is possible to describe some broad categories of legal persons that are present in countries. The following list is by no means meant to be an extensive overview of all types of legal entities and their features in different legal systems.
Companies. One of the most widely used legal structures is frequently referred to as a company or corporation. In some countries, companies or corporations are mentioned in the domestic legal framework as specific and distinct types of legal persons, but in other countries, the term “company” or “corporation” is just a nonlegal generic term used to designate any legal person that undertakes commercial activity for profit. Even the FATF mixes the terms “legal persons” and “company” in different parts of the standards. The term “companies” can also extend to legal persons whose main object is not strictly commercial, such as holding companies, which are often created to buy and hold the shares of other companies.5 Either way, the term “companies” often refers to the legal persons that are the primary tool for serving as the main vehicles for corporate commercial activities.
Companies are usually characterized by precise ownership interests that may carry different rights and liabilities and the separate legal personality of the company itself. In addition, there is a clear distinction between the ownership (shareholders) and the management/control of the company (board of directors). Companies also tend to be incorporated under a statutory regime versus some other types of legal person (for example, associations) that can be established by agreement. Typically, natural and legal persons invest in a company through ownership of shares in the company, and shares can be owned by natural persons, legal persons, and legal arrangements. There are different categories of shareholders, notably those that have voting rights and those that do not. Voting shareholders elect the board of directors to run the company and vote on key decisions relating to the company’s activities.
Companies (that is, company shares) can generally be (i) publicly traded on the stock exchange (public companies and corporations), (ii) owned by the state, (iii) private companies (with varying restrictions), or (iv) variations of those three.6 Many countries also recognize the concept of limited liability companies,7 which are a hybrid between companies and partnerships, whereby ownership and control rights are determined by contract and are dependent on the amount of capital contribution by the investors.
Partnerships. Such entities are usually established between two or more partners (being natural and/or legal persons) to conduct business activities. In some countries, partnerships do not have a separate legal existence independent of their members or partners. In its simplest form, all partners are jointly liable for any debts and obligations pertaining to the business (general partnerships). In other instances, some of the partners may relinquish management of the business activities in exchange for limited personal liability. These may also be called limited partnerships, limited liability partnerships (which are a hybrid between companies and partnerships), or such ones called société en commandite.
Foundations. These can be used to own property or other assets for a specific and explicitly stated purpose (such as charitable purposes or for tax reasons). Such entities are usually managed by a board of directors that is responsible for the foundation’s operations.8 Nonprofit organizations and charities are often incorporated as foundations. That said, in some jurisdictions, foundations may be allowed to engage in for-profit activities or be a tax planning vehicle (OECD 2001, 27).
Associations, cooperatives, and mutual societies. These are legal persons formed by a group of people (members) who enter into an agreement to achieve a common objective or purpose. These persons can be formed for commercial or noncommercial purposes— including of a religious, social, or educational nature— and may fully independently engage in activities and transactions to achieve their stipulated objectives in their own names, without having to identify the individual members that make up the association, cooperative, or mutual society.
Cooperatives are typically set up to achieve a shared common goal, including for commercial purposes. Their ownership can be shared among a group of people, such as workers (worker cooperatives) or users (consumer cooperatives), or by several other legal persons. Cooperative businesses can be profit making, with the profits being shared among members or reused for investment and future growth. They may also conduct financial business on behalf of their members, such as credit unions or building societies.
Anstalt. This type of legal person is typically incorporated in civil law jurisdictions. An anstalt does not consist of members or participants, and it does not have any shareholders, but it is set up by one or more founders who can either be a natural or legal person who maintains control over the anstalt. This type of legal person provides the founders with increased protection of anonymity with only limited disclosure. They can have a commercial or noncommercial purpose but are most often used to park assets for tax planning purposes.
In addition to knowing the companies incorporated under a country’s domestic legal framework, the revised FATF standards now require that countries are also aware of the risks of foreign legal persons who present money laundering or terrorist financing risks and have a sufficient link to the country. This will require country authorities to perform some sort of preliminary mapping exercise to understand what types of foreign companies are operating in their country or have another type of link to the country. The FATF has included some examples of what could be a sufficient link on a risk basis. Examples of sufficiency tests may include— but are not limited to— when a company has permanent establishment/branch/agency, has significant business activity, or has significant and ongoing relations with financial institutions or designated nonfinancial businesses and professions (DNFBPs); is subject to AML/CFT regulation; has significant real estate/other local investment; employs staff; or is a tax resident in the country. In conducting mapping exercises, authorities should look beyond their own domestic legal frameworks and have an understanding of the type of legal structures that can be created elsewhere, noting that the names of these legal structures can vary between countries.
Guiding Questions: Mapping of Legal Persons Mapping Exercise
Has the country carried out a mapping exercise that covers all legal persons that can be set up in the country or have sufficient links with it?
Does this exercise capture any relevant recent changes in legislation, processes for the creation of legal persons, processes to ensure that basic and beneficial ownership information is obtained and maintained?
Does the mapping exercise also cover legal persons having sufficient links in the country but established or created outside the country (for example, domestic registration of foreign legal persons)?
Have all types of existing governing legislation, enforceable means, and guidance (for example, at federal, state, and supranational levels) been identified and taken into consideration?
Does the country keep a comprehensive overview of all relevant laws and enforceable means providing the legal framework for legal persons that can be created? Is this overview publicly available? Where?
Does it give a clear indication (for example, through links) of where to find the various laws and enforceable means, relevant articles of these laws and enforceable means, and so on?
Did competent authorities issue any guidance targeting effective implementation by individuals and professionals creating and managing legal persons to ensure that individual persons and professionals have an adequate understanding of what information should be delivered (by the person initiating the creation of the legal person) or obtained (by the professional involved in the creation and management of the legal person)?
Features of Legal Persons
Do the various laws and enforceable means clearly set out
All types of legal person(s) that can be set up under each of these laws and enforceable means?
The basic features of all types of legal persons?
Is this information publicly available, and can all relevant aspects (for example, type, form, and basic features) be easily identified? Where?
Are there any other means that the country relies on to assist with the identification of all types, forms, and basic features of legal persons (for example, a summary document by the authorities)?
Processes for Creation
What is the process to follow for the creation of each type of legal person? (List each type and how it can be set up.)
Can this information on process be easily accessed?
Is this information publicly available?
Are requirements on basic and beneficial ownership information clearly set out?
Is there any relevant guidance for the public (for example, on identification data and documents to be provided)?
Where can it be found?
Public Availability of Information
How is the information setting out the previously mentioned mechanisms, processes, and requirements made available to the public?
Is there guidance to the public on how to get access to this information?
Is access direct through one or more central/decentralized government websites or other online platforms?
Is access free of charge? If not, what are the costs associated with this access?
Vulnerabilities and Threats of Legal Persons
Legal persons can be misused to facilitate criminal acts. As a first step to mitigating these risks, countries should understand the vulnerabilities and threats associated with different types of legal persons that are created/operate in or have a sufficient link to their countries.
Legal persons are key for the functioning of any economy, but the potential for their misuse is also well documented. This chapter gives a high-level description of some of the vulnerabilities and threats that lead to the misuse of legal persons. For a comprehensive overview of threats and vulnerabilities of legal persons, countries should refer to existing detailed guidance and best practices papers, typologies reports, and other studies issued by several international bodies (see World Bank [2011]; FATF [2006, 2014, 2018, 2019]; and Global Forum and IDB [2019]).
Although the vulnerabilities and methods differ, most (if not all) types of abuse of legal persons aim to hide the natural person that is the ultimate owner or controller of the company. This is because there are requirements on natural persons to identify themselves (for example, if they own bank accounts). The primary way for natural persons to operate anonymously is by owning or controlling legal persons.
Vulnerability Descriptions
Several possible factors may contribute to making a legal person more vulnerable to misuse, depending on the circumstances. Note that some of these factors may arise because of legitimate reasons.
Complex Ownership and Control Structures
In some instances, complex and multitiered ownership and control structures may be used to obscure ownership (for example, control structures that involve many different layers and tiers of ownership or involve several shareholders). Shares in one company can be owned by another legal person or a legal arrangement, which in turn are owned by yet another different legal person, and so on. This makes it more difficult to identify the beneficial owners or controllers at the end of the ownership chain.
In general, one can expect that official representatives of legal persons should understand their ownership and control structure and know the identities of the beneficial owners. The revised FATF standards now expect companies to obtain and hold adequate, accurate, and up-to-date information on the company’s own beneficial ownership. They should be able to explain that structure to competent authorities, obliged entities, and those persons with a valid interest in knowing this information. Competent authorities and other third parties could see representatives’ lack of ability to understand and/or refusal to explain the ownership or control structure as a red flag and prompt obliged entities to apply enhanced scrutiny measures on relationships and transactions with these legal persons.
Confusing Ownership and Control Structures
Ownership and control over a legal person are two separate concepts, and it should not be assumed that a certain percentage of ownership in a legal person will also mean the same level of control. For instance, complex ownership structures could allow minority shareholders to exercise control over legal persons (including where there are undisclosed agreements between those minority shareholders). The same goal to obscure the control structure can be achieved through issuing shares with voting rights and others without voting rights. As a result, the number of shares needed to control a legal person can easily go below any of the thresholds that countries may use to define beneficial ownership (for example, 25 percent, 20 percent, or 10 percent). This shows that ownership is not the sole determinant of control over a legal person.
Other scenarios can also determine control, such as debt instrument arrangements, in which a lender or creditor can control a legal person via the provisions of the lending agreement or by a third party who can otherwise influence a shareholder by means of a financial or other relationship. This is why the FATF’s definition of beneficial ownership separates the concepts of ownership and of control and goes to the extent of referring to those persons who exercise ultimate effective control over a legal person or arrangement.
Complex Multijurisdictional Structures
Complex structures are often multijurisdictional, with a legal person in one country owned or controlled by legal persons in one or more other countries. The chain of ownership may therefore be spread across several jurisdictions, which is likely to create significant impediments when law enforcement authorities are investigating a legal person, including those caused by a lack of timely access to information on beneficial owners. These impediments can also extend to other competent authorities (for example, financial intelligence units, supervisors, tax authorities) and obliged entities when they are interacting with the legal person. This vulnerability can be exacerbated when the country where the legal person was created and registered has low or no transparency requirements or even allows information on beneficial owners to be held in a country other than the country of creation/registration of the legal person (third-party introducers). In addition, distinguishing between ownership and control can be particularly difficult when assessing foreign-created legal persons— their structures may be well understood in the country of origin but not in another jurisdiction.
Ease of Concealing and/or Transferring Ownership
Multiple tools allow for the easy transfer of ownership along with a high degree of anonymity. For example, bearer shares— in their basic, unregulated form— are company shares in certificate form, and whoever is in physical possession of them is considered their owner (just like cash). This allows for complete anonymity in transferring ownership and control. Another tool that continues to exist and can be easily misused to ensure anonymity is the concept of nominee shareholders and directors. Although nominees can be used for legitimate purposes, the fact that a nominee holds shares for the benefit of or acts on behalf of another natural or legal person (whose identity is not disclosed) complicates the identification of the beneficial owners. The revised FATF standards impose additional measures on bearer shares and nominees (see discussion in Chapter 3 of “Bearer Shares and Share Warrants”).
In some countries, foreign legal persons can operate or conduct business relationships without having to be reincorporated under the laws of the second jurisdiction, which can further complicate investigations involving such companies. Although the legal person likely remains fully domiciled in the original country of incorporation/formation, the legal person is offering products and/or services to customers or owns assets or conducts operations in a second jurisdiction, and beneficial ownership information might not automatically be available in the second jurisdiction. Competent authorities in the second jurisdiction should have timely access to basic and beneficial ownership information of those foreign legal persons. The revised FATF standards now require that countries take measures to mitigate against the risks of foreign legal persons that present money laundering or terrorist financing risks and have a sufficient link to the country, which can include requirements to hold beneficial ownership information (see the discussion in Chapter 3).
Use of Intermediaries in Forming Legal Persons
Professional intermediaries— including lawyers, notaries, accountants, financial or wealth management advisors, tax advisors, and trust and company service providers— are so-called gatekeepers that are retained for the creation and/or management of legal persons, depending on the jurisdiction. They provide specialist advice for financial, business, tax, and personal matters and can help set up particularly complex ownership and control structures, often to shield assets from various types of liability to which their true owners may become subject or to minimize tax liabilities.
Criminals may also rely on these intermediaries to set up legal persons and act as front persons, nominee shareholders, and directors to facilitate money laundering activities and other crimes.9 Obtaining information from gatekeepers has proved challenging, especially those that benefit from professional secrecy or claim legal professional privilege, or that operate in jurisdictions where they are not required to hold this information. These challenges are exacerbated when professionals from multiple jurisdictions are involved in the creation of corporate structures. However, it would be incorrect to say that gatekeepers are an impediment to access to information and transparency in all cases. On the contrary, well-regulated gatekeepers with a high level of professional integrity support effective identification and verification of beneficial ownership information.
Legal Arrangements as Part of Control/Ownership Structures
The use of legal arrangements in the control and ownership structure of a legal person can further complicate all the previous examples.10 Legal arrangements (such as trusts) are very heterogeneous and highly flexible, and they can be set up with or without gatekeepers, based on the legal system of a jurisdiction of choice. Trusts are essentially an agreement among parties, each with a defined role and responsibility (for example, settlor, trustee, beneficiary, and [in some cases] protector) aimed at separating legal ownership and control (that the trustee holds) from the benefit (economic or social that is attributed to the beneficiary or beneficiaries). Often, trusts may not require any registration, do not possess legal personality, and are unknown to the authorities in the country that provided the legal framework for their creation. Trustees usually have only fiduciary obligations to their beneficiaries but may also be unregulated (such as in the case of non-professional trustees) and may not be subject to even rudimentary obligations such as proper record keeping.11
The use of legal arrangements to obscure beneficial ownership is most often associated with building additional layers of complexity to hide ownership (FATF and Egmont Group 2018). For example, a legal person might have a legal arrangement as one of its shareholders and vice versa. Given that a legal arrangement might have a different natural person as the legal owner/trustee, the beneficiary, and the controller, then tracing the beneficial owner who exerts control becomes more complicated, especially because many legal arrangements are not registered. In addition, the precise relationship of ownership/control within the legal arrangement itself is likely to be determined by law in the jurisdiction in which the legal arrangement is set up and by the terms of the legal arrangement itself (for example, the trust deed). Even though some countries may not enable trusts and other types of legal arrangements to be formed within their jurisdiction, it still does not necessarily prevent foreign legal arrangements from being customers of financial and other institutions in that country.
Threat Descriptions
Criminal actors may take advantage of the vulnerabilities associated with legal persons to facilitate criminal activities. Although much has already been written about the misuse of legal persons, the following are additional resources that set out common examples of misuse:
Money laundering and terrorist financing. The extent to which legal persons have been misused for money laundering and terrorist financing purposes is well known and widely reported, including through FATF typologies, such as FATF (2019).
Tax crimes. Legal persons can also be used to facilitate tax offenses. For more detailed information on the global response to this issue, see Global Forum and IDB (2019).
Corruption. Companies have been used to hide the proceeds of corruption in most large-scale corruption cases. This was highlighted by work undertaken by the World Bank and the United Nations Office on Drugs and Crime’s Stolen Asset Recovery Initiative, whose report analyzed 150 cases of grand corruption and determined that companies had been misused in 128 of such cases (Van der Does de Willebois and others 2011).
Fraud. Legal persons can be used to defraud customers— for example, people may invest in or purchase goods and services from companies with no legitimate business activities, only for those companies to disappear without a trace or be found to be shell or straw companies without any assets to compensate victims. The lack of ownership or control information makes it difficult for customers to recover their money from these criminals. For example, see OECD (2021).
Trade-based crimes. Legal persons assume particular relevance in international trade transactions, in which large-scale exporters, importers, shipping companies, and facilitators are inevitably legal persons. In some instances, legal persons may be used to facilitate trade-based money laundering, for example, through instances of collusion between legal persons or the use of shell companies to conduct fraudulent or illicit transactions. Examples of this are elaborated in FATF and Egmont Group (2020).
National security risks. Designated natural and legal persons on sanctions lists can find ways to evade United Nations and other bilateral sanctions by owning assets (for example, real estate) or financing activities through other legal persons (DOJ 2017). Likewise, legal persons have also been used to circumvent prohibitions-related trade bans, and legal persons have been set up and used as de facto banks to facilitate financial transactions to avoid bans (UN 2015, sections VIII and IX). The absence of transparency of beneficial ownership information enables such activities, and countries that fail to prohibit such activities are making themselves vulnerable for (secondary) targeted financial sanctions.
Political interferences. The lack of transparency of legal persons can also give rise to the potential for political interference through indirect means. For example, other countries, parties, or persons who wish to influence the political discourse or decision-making processes to further their self-interests and avoid anti-bribery/corruption legislation can fund political campaigns through front companies or shell companies without having to disclose their identity as beneficial owners of these entities— for example, see Doublet (2011).
Disguising ownership and control of financial institutions. Legal persons can be misused to disguise the true ownership and control of financial institutions, with the aim to distort fit and proper requirements. This can be particularly concerning where criminals gain control of financial institutions and use them to launder proceeds of crime without being detected. The Basel Committee on Banking Supervision (2012) notes that licensing authorities should have the authority to set the criteria for fit and proper assessments, and this is also included in European Central Bank (2021).
Risk Assessments of Legal Persons
Countries should have a comprehensive understanding of how legal persons could be misused in their country— regardless of whether they are domestic or foreign-created legal persons— if they operate in or have a sufficient link to the country.
Domestic Legal Persons
Given the potential for misuse of legal persons, the FATF standards require countries to assess the money laundering and terrorist financing risks associated with each type of legal person created (that is, incorporated and/or registered) in the country and to take appropriate steps to manage and mitigate these risks. Based on the mapping of legal persons (see Chapter 2, “Mapping of Legal Persons”), this should involve an exercise that considers, among other things, the money laundering and terrorist financing threats and vulnerabilities in the framework relating to legal persons, how legal persons are used for commercial and noncommercial activities within the jurisdiction, and the potential criminal activity that may be perpetrated by using legal persons. This exercise should ultimately inform the country’s policies, including whether the appropriate legal structure exists to meet the relevant criteria of the international standards, and the allocation of resources to mitigate the threat of money laundering and terrorist financing.
Although there is no set format for the risk assessment of legal persons, countries may consider undertaking the legal person risk assessment as part of their national money laundering and terrorist financing risk assessment or as a stand-alone risk assessment exercise. The FATF has issued guidance on how to undertake a national risk assessment, and countries can rely on different technical assistance providers (for example, the IMF’s national risk assessment tool and the World Bank’s national risk assessment tool that includes a module covering shell companies and beneficial ownership– related risks) or the private sector in this regard (FATF 2013). In conducting a risk assessment of legal persons, countries should consult widely, including to get inputs from obliged persons (that have legal persons as their customers) and independent experts from academia and civil society looking at issues related to the transparency of legal persons (see Chapter 4, “Other Applications for Beneficial Ownership Information”).
At a minimum, the risk assessment of legal persons can consider the following information:
The number of each (sub)type of legal person created or operating in the country (see “Mapping of Legal Persons”)
The intended use of each (sub)type of legal person (for example, tax vehicle, nonprofit organization, company)
The information that is generally available on each (sub)type of legal person
Law enforcement typologies and case information (both qualitative and quantitative)
Information relating to suspicious transaction reports involving the different types of legal persons
The number of tax enforcement cases
Foreign mutual legal assistance requests involving legal persons (incoming and outgoing)
The use of legal persons in high- or low-risk sectors or industries
The strength of mitigating measures such as supervision of CDD requirements
The legal framework, including the robustness of the requirements to obtain and hold beneficial ownership information
Other factors will need to be considered depending on the risk and context of the country, such as the use of gatekeepers, and the legality and prevalence of foreign and/or politically exposed person ownership of legal persons. Risk indicators should be identified (for example, cross-border activities, the underlying crimes [predicate offenses]) and considered generally and in relation to each type of legal person.
Nonprofit organizations are often legal persons. Although FATF has a separate set of requirements for nonprofit organizations in relation to terrorist financing (Recommendation 8), at the mapping and risk assessment stage, countries should not exclude any type of nonprofit organization that is a legal person (including charities, foundations, or religious entities). It is likely that the risk assessment of nonprofits would focus on risks of abuse of control of the nonprofit organization and its funds. However, as with Recommendation 8 and nonprofit organizations and terrorist financing, Recommendation 24 should not be used to suppress legitimate nongovernmental organizations and their activities. The guidance that FATF issued for Recommendation 8 is applied by extension to Recommendation 24 (FATF 2015).
Consequently, the risks associated with different types of legal person will vary depending on the exact features of each legal person against the country’s specific risk profile, even if a type of legal person is known by the same name or title across state or national borders. This also considers that the characteristics and requirements may have changed over time, even if the legal characteristics and intended use of a legal person have a common (legal) origin.
Foreign Legal Persons
Under the revised FATF standards, the risk understanding should also extend to foreign legal persons that present money laundering or terrorist financing risks and have sufficient links with the country (even if they are not created in the country). The rationale for extending this risk assessment requirement follows from the recognition that if foreign legal persons are allowed to operate in or have a presence in a country in the same way as domestic legal persons, then the competent authorities in the country should be equally aware of those risks and take appropriate steps to manage and mitigate them. This mapping exercise should assess how foreign legal persons operate in the country. Countries vary in their openness to foreign legal persons, from barring them from conducting any business activities to allowing them to operate freely. A country’s framework for dealing with foreign legal persons should also inform the focus of the mapping exercise, risk assessment, and risk mitigation measures.
Measures to mitigate the risks of foreign legal persons can include requirements for high-risk, foreign-created legal persons to provide their beneficial ownership information directly to authorities in the same way legal persons could be required to share this information (for example, in a registry).
When assessing the risks and designing mitigation measures for legal persons, the country of origin and its beneficial ownership framework are important factors. In this regard, companies incorporated in countries with public beneficial ownership registries, provided the information of the registries is verified and accurate, certainly have an advantage and may need to provide less (or no) information to authorities in their host countries because there is no added value in asking for information that is already publicly available and reliable. The opposite is just as true— companies incorporated in countries that score low on beneficial ownership transparency may need to be subject to additional measures in their host countries. This also applies to transparency of legal arrangements, where these are part of the ownership or control chain of the legal person.
During any mutual evaluation, country officials may inform assessors that certain gaps the assessors may perceive are justified because of low money laundering and terrorist financing risks. Without a risk assessment, however, it appears very difficult to convince the assessors that these arguments are reasonable, especially if the perceived gaps in company law predate the creation of the AML/ CFT system.
The following are examples of relevant tests a country could use to determine which types of foreign legal persons present money laundering or terrorist financing risks and have a sufficient link with the country.
Examples of Sufficiency Tests
Business activity or permanent establishment. A country may deem a foreign legal entity to have a sufficient link to the country if it has significant operations (including providing or acquiring good or services) or has a permanent establishment, address, branch, and agency in the country. In some countries, if foreign legal persons offer such services or open establishments, they may already need to be registered with a relevant authority, for example, with the relevant ministries that provide permits for such operations or establishment or a Chamber of Commerce, and so on. Information on the type of foreign legal persons operating could be obtained from those agencies.
Business relations. A foreign legal person may have significant and ongoing business relationships with financial institutions (for example, holding a bank account in the country) or DNFBPs (for example, if they use accounting or legal services). The country could require financial institutions and DNFBPs to provide information on their relationships with foreign legal persons to inform this sufficiency test.
Significant assets in country. A foreign entity can own significant assets in the country. In instances where this asset is registrable (for example, real estate, artwork), the country could determine that the possession of these assets in the country is a sufficient link. A country could source information for this sufficiency test from relevant DNFBPs (for example, real estate agents, art dealers) and registries (for example, land registry).
Subject to tax obligations. A foreign legal entity may be considered to have a sufficient link to the country if it is a resident in the country for tax purposes or subject to tax obligations. Necessary information for this sufficiency test could be sourced from the country’s tax authority.
Local presence. A foreign entity may have a local presence through natural persons such as staff, director, or legal owner in the country. For example, in some countries, all foreign incorporated entities that employ any individuals within the country are required to register basic information with the country’s company register (FATF 2019).
Examples of Foreign Legal Persons That Present Money Laundering or Terrorist Financing Risks
Country risk factors. A foreign legal person may be considered higher risk as a result of its country of incorporation (for example, foreign legal persons from certain countries designated as not having adequate AML/CFT systems— that is, FATF gray listing) or countries subject to sanctions or embargoes (for example, such as those issued by the United Nations) or designated as posing a higher risk of corruption or terrorist financing risks. A country may also consider taking additional steps to mitigate risks posed by foreign legal persons if their country of residence has a lack of transparency of information (for example, if there are issues in getting access to beneficial ownership information from foreign countries where these legal persons are incorporated).
Entity ownership. Foreign legal persons that are owned or controlled by foreign politically exposed persons could be considered high risk, particularly where these foreign legal persons stem from high-risk countries. The identification of these entity-specific risk factors is dependent on financial institutions and DNFBPs implementing effective CDD systems.
Industry risk factors. The money laundering and terrorist financing risk factors posed by foreign legal persons can also be concentrated in specific sectors. A study by the Organisation for Economic Co-operation and Development found that 19 percent of all cases of foreign bribery identified occurred in the extractives industries (OECD 2014), and public procurement has received increased attention, given its importance during the COVID-19 pandemic. Countries have sought to mitigate these risks by establishing sector-specific public beneficial ownership requirements. For example, several Extractive Industries Transparency Initiative implementing countries have developed extractive industries– specific public beneficial ownership registries and require any legal entities operating in the sector (both domestic and foreign) to disclose their beneficial ownership information (EITI, n.d.). Similarly, certain countries have established public procurement beneficial ownership registers and require any company seeking to compete for government contracts to disclose their beneficial ownership information.
Requests for mutual legal assistance. A country may want to consider if they have received requests for information sharing or mutual legal assistance in the context of foreign investigations for certain types of foreign legal persons that may be operating or present in the country.
Countries are required to take appropriate steps to manage and mitigate the risks that they identified through the risk assessment. Such measures include ensuring that competent authorities have access to information on legal persons and their beneficial owners, including in the context of domestic and foreign investigations. For certain types of foreign legal persons (identified as having high money laundering or terrorist financing risks and a sufficient link to the country), this could include requirements to hold information, including beneficial ownership information about those foreign legal persons within the country itself (Box 2.3).
Guiding Questions: Risk Assessment of Legal Persons
Types of Risk Assessment
Has the country carried out a national risk assessment, and does it contain an in-depth assessment of legal persons?
If not part of the national risk assessment, has the country carried out a legal person’s specific or sectoral risk assessment?
Which authorities/agencies and/or private sector stakeholders participated in the specific or sectoral risk assessment (as part of the national risk assessment or otherwise)?
What was the scope of the risk assessment?
Does the study extend to all types of legal persons that can be set up in the country? If not, which types of legal persons did the risk assessment cover and not cover?
Does the risk assessment consider foreign legal persons that have sufficient links to the country? If so, what type of foreign legal persons did it consider and why?
How are those conclusions shared with and disseminated to the relevant agencies and authorities and to the private sector (for example, publication, guidance, awareness-raising events)?
How often is the risk assessment updated?
Methodology
Did the country use a dedicated methodology?
Does the methodology distinguish between money laundering and terrorist financing?
What were the sources of information: quantitative versus qualitative (for example, statistics on suspicious transaction reports regarding the misuse of legal persons, financial intelligence unit case studies on the matter, conclusions reached in the national risk assessment or supranational risk assessment)?
Are threats and vulnerabilities distinguished adequately?
Does the methodology define risk ratings and contain details on how to determine the risk rating?
Does the risk assessment contain information about the nature and scale of each type of legal person that can be set up in the country, such as the following?
Legal framework for each individual type of legal person;
Involvement of gatekeepers in the creation of the type of legal entity;
Lawful purposes (commercial and noncommercial) for which the type of legal person can be used or is usually used;
Limitations to the use of the type of legal person (that is, certain types of lawful activities in which the legal person cannot engage);
How common the type of legal person is, including the overall number and relative importance;
Information on the availability of basic information and how it can be accessed;
Information on the availability of beneficial ownership information, including the sources (for example, central register) and how it can be accessed; and
The basis for including certain types of foreign legal persons in the risk assessment (criteria used to determine sufficiency links)?
Does the risk assessment describe in sufficient detail the various scenarios of misuse of individual types of legal persons for money laundering or terrorist financing purposes?
Does it distinguish between domestic and international threats? Does the study identify a set of risk indicators (for example, cross-border activities, the use of cash, predicate offenses) with reference to the national risk assessment and/or other relevant risk assessments?
Do these allow for an adequate reflection of risk variations between different types of legal persons?
Is there a specific focus on the risk associated with the intervention of gatekeepers?
Does it address the risks related to third-party introducers?
Does it address the risks associated with nominee shareholders and directors?
Does it address the risks associated with bearer shares and bearer share warrants?
Is there a specific focus on the risk associated with foreign ownership?
Are data sufficiently detailed to identify the largest source countries for foreign ownership?
What are the mitigation measures in place? A nonexhaustive list of examples of mitigation measures includes (and consideration should be given to the adequacy of these measures and whether there are any deficiencies that should be addressed):
The legal framework, including filing of basic and beneficial ownership information;
Accessible registers with basic and beneficial ownership information by FIs/DNFBPs and/or general public;
Supervisory efforts to ensure that legal requirements are implemented adequately (for example, oversight measures to ensure that legal persons obtain and hold information on their beneficial owners through an up-to-date register to be kept, if any, and file changes in a timely manner);
Anti– money laundering and combating the financing of terrorism (AML/CFT) preventive measures for obliged entities, including adequate beneficial ownership requirements; and
AML/CFT supervisory measures to ensure effective implementation of AML/ CFT preventive measures by obliged entities.
Does the risk assessment arrive at a residual risk rating, taking mitigation measures into account?
What are the risk assessment’s conclusions regarding residual money laundering and terrorist financing risks?
Foreign Legal Persons
Has the country conducted a risk assessment that considers foreign legal persons with a sufficient link to the country?
What factors were used to identify foreign legal persons with a sufficient link?
What factors are considered with respect to risks of foreign legal persons with a sufficient link to the country?
References
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As of February 2022, 120 of the 205 countries and jurisdictions that are part of FATF’s global network have been assessed against the 2012 FATF recommendations. Regarding beneficial ownership transparency, none was considered compliant with Recommendation 24, and only 37 were found largely compliant. Sixty-five countries were partially compliant and 18 countries noncompliant. Regarding the prevention of legal persons and arrangements for money laundering and terrorist financing purposes, and the availability of their beneficial ownership to competent authorities (Immediate Outcome 5), no country reached a high level of effectiveness, 11 reached a substantial level, 53 reached a moderate level, and 56 reached a low level. For an updated analysis, see the FATF Report on State of Effectiveness and Compliance with the FATF Standard (FATF 2022).
The technical guide to the United Nations Convention against Corruption suggests that the term “beneficial owner” should be regarded as covering any person with a direct or indirect interest in or control over assets or transactions, along with varying requirements for identification and verification.
For example, because of their narrow sectoral focus, compliance with the Extractive Industries Transparency Initiative (EITI) standards alone will not satisfy the FATF requirements that apply to all companies, whereas compliance with the FATF requirements would have a positive impact on compliance with the EITI standards.
The specific levels of ownership, control, and functions required for an entity to be considered a state-owned enterprise differ on a country-by-country basis. Given this, it can often be difficult to establish which entities are state owned and conversely whether a state-owned enterprise has privately owned shares. The inclusion of state-owned enterprises in the mapping of legal persons can help inform an assessment as to whether a state-owned enterprise should be subject to beneficial ownership disclosure requirements.
In addition, some countries have statutory corporations, which, though practice varies from country to country, often have no shareholders and are set up and governed by legislation. Examples include state broadcasting authorities and railways.
For an extensive analysis of the characteristics of a corporation, see Armour, Hansmann, and Kraakman (2009, 6–15).
Examples of limited liability companies in different countries include limited liability company (LLC) in the United States; private limited company (Pvt. Ltd.) in Hong Kong Special Administrative Region, India, Ireland, and the United Kingdom; Gesellschaft mit beschränkter Haftung (GmbH) in Austria, Germany, and Lichtenstein; besloten vennootschap (BV) in the Netherlands; and société à responsabilité limitée (SARL) in France (FATF Risk, Trends, and Methods Group report).
According to the definition developed by the European Foundation Center (http://www.efc.be/), Charitable “Foundations are separately constituted nonprofit bodies with their own established and reliable source of income (usually, but not exclusively) from an endowment or capital. These bodies have their own governing board. They distribute their financial resources for educational, cultural, religious, social, or other public benefit purposes either by supporting associations, charities, educational institutions, or individuals or by operating their own programs.” See also O’Halloran (2012, 196–201) on the lack of an agreed system for mutual recognition of foundations in Europe.
See, for example, FATF and Egmont Group (2018, Section 3) and reports and prosecutions stemming from the Panama Papers and Luanda leaks (for example, https://www.justice.gov/opa/pr/us-accountant-panama-papers-investigation-sentenced-prison; and https://www.icij.org/investigations/luanda-leaks/).
In FATF terms, “legal arrangements” refers to express trusts or other similar legal arrangements, such as fducie, treuhand, and fdeicomiso. Legal arrangements such as trusts separate the legal property, administration, and economic benefit of an asset. As such, the beneficial ownership of property subject to a trust-like legal arrangement might be exercised by one person (for example, the trustee, who has legal ownership of the asset) or be influenced by more than one legal person in circumstances, for example, where the settlor might still be exercising discretion over who benefits from the asset. Some legal arrangements can be created without the need to produce formal documentation to competent authorities, and thus proving the beneficial owner can be difficult.
A review of FATF’s Recommendation 25, which covers beneficial ownership transparency of trusts and other types of legal arrangements, is currently ongoing.
