Common Practical Challenges

Various practical issues can be encountered in dealing with different types of legal persons, including the nature of shares and the way that ownership and/or control is exerted on the legal person. The following is a nonexhaustive overview of some of the common practical challenges that may be encountered when trying to identify ownership and/or control of a legal person.

Complex ownership and control structures. Complex legal structures can be created and exist for legitimate purposes, but the more complex they are (for example, multiple layers of ownership, spread across jurisdictions), the more difficult it is for competent authorities to identify who owns and/or controls the structure. However, even the most complex structure exists for a reason, and that reason should be understood (for example, by a bank taking on a legal person as a customer, or by a trust and company service provider [TCSP] forming the legal person). If there is no adequate explanation for the use of a complex legal structure, this could indicate that the company structure is deliberately complex to disguise the beneficial owner, or it may have been created to facilitate or commit a crime— and the relevant authority should treat this as a red flag.

Ownership thresholds. For practical purposes related to carrying out customer due diligence (CDD), countries often put thresholds in place for identifying beneficial owners regarding ownership levels (for example, 10 percent or 25 percent shareholdings). Share ownership above these thresholds can sometimes indicate beneficial ownership but is not necessarily the only determining factor in ascertaining the beneficial owner.

Legal persons can be vastly different from one another, and applying one threshold does not adequately capture the different ownership structures of these different legal entities. If thresholds are imposed, they should be set proportionate to the risk posed by the type of legal person. For example, a legal person that presents no particular risk factors might justify a maximum of 25 percent threshold (the FATF standards’ suggested maximum threshold), whereas higher-risk situations might warrant a lower threshold or even no threshold (FATF 2012).¹ Lower thresholds mean that more potential beneficial owners will be found. Lower thresholds are particularly relevant in relation to fit and proper requirements for ownership of financial institutions.

Furthermore, any threshold— regardless of how low it has been set— can be circumvented through exercising control of the legal person. Countries should clarify this in the legal framework and issue appropriate guidance to ensure that countries adopt a comprehensive definition of beneficial ownership that includes both concepts of ownership and control.

At some point, the number of shareholders might also dilute ownership enough that identifying each separate beneficial owner would not be possible and would create too heavy an administrative burden. The standards recognize that if ownership is so diversified that there are no natural persons (whether acting alone or together) exercising control of the legal person through ownership, then control through “other means” should be examined. Other means might include holding a significant influence function or being closely related to a shareholder and/or being able to exert influence on them. This may be the case for certain publicly traded companies.

Voting rights. Shareholder voting rights might be an indication of beneficial ownership because in theory, the power to direct the affairs of the legal person should lie ultimately in the hands of the voting shareholders. However, not all legal persons issue shares with voting rights or with equal voting rights. For example, a company might allow shareholders one vote per share, thus giving those with higher equity in the company more votes. Other companies might allocate one vote per shareholder, thus giving minority shareholders or groups of minority shareholders a bigger say in the company’s affairs than their equity stake would otherwise suggest.

Golden shares. Golden shares traditionally give the holder a majority of the voting rights, which means that the holder can outvote all other shareholders, and this often results in giving their holders effective control over the company. Although many such shares were originally given to governments after privatization of state-owned companies, their wider use could give a distorted view of control if the simple value of shares was viewed as the basis for ascertaining beneficial ownership information.

Nominee shareholders and directors. Legal persons that allow nominees to represent shareholders and directors can be misused by those trying to hide beneficial ownership information. Some nominee arrangements are legitimate and formal in nature (for example, governed by a written contract and disclosed to the legal person), but others can involve less formal or more opaque arrangements, in which the nominee is used primarily to conceal the beneficial owner’s identity. (See this chapter’s “Nominee Shareholders and Directors” section for a broader discussion of relevant issues.)

Undisclosed agent arrangements. Those seeking beneficial ownership information should be conscious of business and other relationships that may suggest that a director or shareholder is acting as an agent for another person. For example, a person may hold shares or a directorship in a company, but also be an employee of another person or company. It may be that the director or shareholder is acting at the behest of the controller of the company in which he is employed. This could also be a type of nominee arrangement.

Family members and other strawmen. The use of strawmen in such arrangements can be particularly challenging and can be a nominee arrangement. In such cases, the ownership and formal control of a legal person will be with a person that is (closely) related to or associated with another person. The fact that the true control may be with another person may be evident by the nature of the relationship between the legal owner and the actual beneficial owner, such as an (unequal) family relationship (for example, parent-child), an (unequal) professional relationship (for example, former employee-employer), or another link (for example, former colleagues). Another clue is the fact that the legal owner seems to have had no means to acquire the legal entity or has little (professional) experience to justify owning a company. This type of relationship between the legal and beneficial owner is especially prevalent in relation to politically exposed persons (PEPs), and FATF’s guidance provides more details in this area (FATF 2013a).

Publicly traded companies. The international standards acknowledge that being listed on a stock exchange already imposes sufficient transparency requirements that would enable a financial institution or designated nonfinancial business and profession (DNFBP) to accept information that is in a public register or available from the customer or from another reliable source. However, this provision’s usefulness will depend partly on the completeness and reliability of the relevant country’s company listing process, which would need to be enforced robustly.

Foreign legal persons. Where foreign legal persons are part of the chain of ownership of a legal person, challenges in accessing beneficial ownership information from host countries arise if countries do not have beneficial ownership information publicly available, do not register beneficial ownership information at all, or have a track record of not sharing accurate beneficial ownership information with other countries promptly. In addition, when relying on the information that can be accessed on a beneficial ownership register in another jurisdiction, consideration should be given to this information’s reliability (for example, whether the country has a weak regime for anti– money laundering and combating the financing of terrorism [AML/CFT]). Related to this, countries should consider additional measures where foreign legal persons have significant control/ownership of a legal person, such as requiring that beneficial ownership information of that foreign legal person be held in the country.

Figure 3.1 shows how legal ownership can be widespread, but by looking far enough up the ownership chain, the real beneficial owner can be traced by applying two tests: ownership (in this case, using ownership thresholds of up to 25 percent) and control.

Example of Complex Structure

Source: IMF staff.

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Example of Complex Structure

Source: IMF staff.

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Example of Complex Structure

Source: IMF staff.

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The ownership interests in Company A are as follows:

Mrs. T. has 18 percent (she owns 90 percent of Company B, which owns 20 percent of Company A).

Ms. R. has 24 percent (she owns 20 percent of Company A directly and 20 percent of Company C, which owns 20 percent of Company A).

Mr. S. directly owns 20 percent of Company A.

Mr. Q. owns 38 percent (he owns 100 percent of Company D, which owns 20 percent of Company A and 80 percent of Company C [which owns 20 percent of Company A and 10 percent of Company B, which owns 20 percent of Company A]). Thus, by applying an ownership threshold of 25 percent, Mr. Q. is the beneficial owner of Company A. In addition, if the control structure of Company A was examined further (beyond ownership interest), Mr. Q. holds veto rights for decision-making processes in Company B, even though he owns only 10 percent of this company, and he also controls Ms. R. indirectly (who happens to be his daughter and a nominee shareholder). Mr. Q. therefore is a key beneficial owner with direct and indirect ownership and control of this legal structure.

Countries should also consider what constitutes adequate information to establish the identity of the beneficial owner or owners, for example, types of personal data and supporting documentation. The definition of adequate information includes, for example, the full name, nationality or nationalities, the full date and place of birth, residential address, national identification number and document type, and the tax identification number or equivalent in the country of residence. The types of information that should be collected to determine ownership and control are discussed in the next section.

Overview

A legal person should know who owns and controls it. Even in cases involving complicated legal structures, legitimate structures will be knowingly set up for a specific purpose, probably using specific structures (for example, tax planning). This means that those who create and/or administer the structure should also be able to provide accurate beneficial ownership information.

Therefore, when countries rely on legal persons and their representatives to obtain and hold beneficial ownership information, the requirement for them to do so should be clearly set out in law or enforceable means. The requirement to hold this information should apply not just to all legal persons in the future but also to all legal persons currently in existence and operating in a country.

It also follows that all legal persons must know their beneficial owners to be able to provide this information up front to the relevant public authority/body, financial institutions, and others in the context of CDD measures and to share this information with other competent authorities in a timely manner. If legal persons are unwilling or unable to provide this information or there are concerns regarding the accuracy of the information provided, then this could be a reason to not allow legal entities to be created or continue to exist or to form/maintain business relationships.

Challenges can arise when countries have legal persons that use complex structures (for example, involving multiple layers); have parts of the ownership and/or control structures in another jurisdiction; are subject to frequent changes regarding structure, legal, and beneficial ownership; or allow their beneficial ownership information to be held by a third-party professional who may use legal or professional privilege as a barrier to providing the information.

Under the earlier versions of the FATF standards, legal persons were permitted to have their beneficial ownership information held by third parties, typically lawyers, notaries, and other types of TCSPs, often operating in other jurisdictions. However, allowing third parties to hold such information and/or holding information in third countries proved particularly challenging with respect to timely access to this information. It also made it more difficult to verify the information for accuracy because sometimes third parties would attempt to use legal privilege, financial secrecy, or data protection rules to shield some or all information that would otherwise be necessary to accurately identify or verify the beneficial ownership. Additional challenges arose where such third parties were not subject to AML/CFT obligations in their home jurisdiction and therefore would not be under a legal obligation to maintain these records or were not subject to stringent supervision, affecting the quality of the information they held.

These gaps are now addressed under the revised FATF standards because legal persons are now required to obtain and hold their beneficial ownership information and to cooperate with competent authorities to the fullest extent possible in determining the beneficial owner, and this information is also expected to be registered within a country through a public authority/body or alternative mechanism.

The unwillingness or inability of a legal person’s representatives to explain their structure and their beneficial owners can be a red flag for potential suspicion of money laundering or terrorist financing for any competent authority or business (for example, a bank) that establishes or maintains a customer relationship. The caveat to this is that in some cases, beneficial ownership information may be temporarily confidential— for example, certain information might be sensitive during acquisitions and mergers. However, confidentiality and need-to-know principles do not justify a permanent lack of information or an inability to explain.

Legal persons should have the power to request information from their shareholders, even though shareholder information alone will often not be sufficient to prove the identity of the beneficial owner. To support legal persons in holding accurate information on their beneficial owners, competent authorities should issue guidance to assist the legal person in identifying who the beneficial owner might be, bearing in mind that the concept is different from the shareholder information to which legal persons might be more accustomed. If a competent authority wanted to obtain more recent beneficial ownership information from the legal person itself, then there is a danger (for example, in the case of law enforcement investigations) that approaching the legal person could alert its officials or shareholders that an investigation is underway. Therefore, countries should also impose a requirement that the legal person cooperate with the competent authorities to the fullest extent to determine the beneficial owner (without alerting or tipping off the beneficial owner in the context of ongoing investigations) and that the legal person should have one or more natural persons resident in the country to be accountable to the competent authorities (Box 3.1). See Guiding Questions for Legal Persons (Box 3.2).

Overview

Registries holding beneficial ownership information are a good way to centralize access to beneficial ownership information and allow competent authorities to have timely and efficient access to this information. Such beneficial ownership registries can be stand-alone or built upon existing databases (such as company registries that are maintained by or for an incorporating authority) and hold basic information (that is, information about legal ownership) of companies incorporated or licensed in the country.

The international standards do not prescribe which public authority should be tasked with the registration and ensuring the accuracy of beneficial ownership information, and the appropriate solution will differ from one country to another. Examples of possible government entities that can hold such registries are company or commercial registrars, ministries of justice, FIUs, and tax authorities.

Where other authorities are to hold beneficial ownership information (for example, tax authorities), countries should ensure that these authorities have a proper understanding of beneficial ownership requirements and comply with the FATF’s requirements for holding this information because they may be more familiar with how beneficial ownership information is used in the context of their own work (for example, tax authorities might be more familiar with exchange of information for tax purposes and not the FATF standards). In addition, fiscal confidentiality rules that tax authorities may otherwise be subject to should not apply to beneficial ownership information.

Alternatively, the registry could be held by a private body that a public authority entrusts to do so, such as businesses or business associations that may already be involved in the creation of legal persons (for example, a Chamber of Commerce, notary association). The use of such private sector entities will require some form of oversight at the government level to ensure that tasks are performed effectively and in compliance with the relevant AML/CFT requirements, and clear criteria for competent authorities’ access and use of the information will need to be developed (as with government-run registries).

Key Considerations

Types of legal persons. In general, a registry should cover companies and other types of legal persons created in a country. Where a country adopts a decentralized registry approach (for example, in federal systems or between sectors), efforts should be made to ensure that all relevant legal persons are still covered, based on the risk assessment.

A country may consider that certain types of legal entities do not need to provide beneficial ownership information to the register; for example, companies listed on a stock exchange may not need to register if they are already subject to stringent disclosure and transparency requirements.² Another example is state-owned enterprises that are ultimately owned by the public and managed by the state (or state functionaries) as a fiduciary in the public interest. The concept of beneficial ownership in its traditional sense in the AML/CFT frameworks does not apply to state-owned enterprises. However, transparency of ownership and control is nevertheless critical for their effective functioning and for the detection of corruption, conflict of interest, or any rent-seeking behavior by their management. OECD (2015) prescribes as best practice the disclosure of governance, ownership, and voting structure of the entity, and civil society groups have also called for governments to include information on the ownership structure of state-owned enterprises in their beneficial ownership reporting requirements.³ In such cases, these entities can be included in the registry with a note that no beneficial ownership information is available or applies to them and where information on their ownership and/or control structures can otherwise be found. Countries should be able to provide clear reasoning based on their risk understanding if they do allow for any such related exemptions.

Based on the risk assessment, countries may choose which foreign legal persons with high money laundering or terrorist financing risks and a sufficient link to the country are required to also provide information to the registry on their beneficial owner. This can be a requirement imposed on the foreign legal person before they are permitted to operate in the country.

Data collection and verification. The type of information that a registry can collect will depend partly on what is needed to ensure that the information is accurate, adequate, and up to date. An authority/body running a database or registry should have the legal structure, resources (technical, financial, and human), and legal powers to request and obtain the information, including additional information as required for enhanced verification. To support verification processes, it would also help to hold these data in a machine-readable format.

Where countries have a system that has several interlinked registries/databases (for example, in federal systems or between sectors), it is important that the different registries comply with the same standards— including the same definition of beneficial ownership— and that they carry out verification checks to avoid regulatory arbitrage. Additionally, a variety of other information sources can provide insights into beneficial ownership information (for example, property registers, bank registers). Consideration should be given to allow the public authority/ body responsible for the registry to have access to this information to help with additional verification checks.

Timeliness of updates. Countries should clearly set out the timing of filing and updating information in a registry, and the registry should have relevant powers to enforce these requirements. Legal persons or others who provide information to the registry (such as TCSPs, in systems where TCSPs have responsibility for obtaining beneficial ownership information) must be provided with a legally binding time frame (about a month or sooner) to produce or update this information or face dissuasive sanctions for not doing so. To the extent possible, updates to information should be done in real time, and the registry should maintain historical records of changes in beneficial ownership.

Dissuasive sanctions. The operator of the register should have the power to impose penalties if this information is not provided or is inaccurate, and actually impose them in such cases. These should be sufficiently dissuasive so that they are not perceived as a cost of doing business. Penalties that can be imposed include administrative sanctions and criminal penalties against individuals (including the beneficial owner or officers of the company) or the legal person. These can include dissuasive monetary sanctions, making an individual criminally liable for failure to provide the information or providing inaccurate information, not permitting registration or incorporation of a legal person, or striking a legal person from a register.

The power to remove an existing legal person from the registry is a sanction that is typically available even where legal persons do not provide basic information to a company registry. However, this tends to be poorly enforced, even by company registries. Authorities should consider extending this sanction where legal persons fail to provide beneficial ownership or provide inaccurate information. Authorities should also consider publicly disclosing the reasons for the legal person to be removed from the register, that is, to issue a notice that the legal person failed to comply with the requirements for beneficial ownership information and, as a result, was removed from the register. Consideration should also be given to barring directors and managers of companies from operating other legal persons when they are found to have provided inaccurate beneficial ownership information or committed other relevant acts.

Sanctions should also extend to notaries and TCSPs and the like if they are responsible for submitting/updating beneficial ownership information in a register, including making them criminally liable if they are found to have purposefully or negligently provided inaccurate or misleading information.

Access to information, including tiered and public access. Public registries of beneficial ownership information, which already exist in some countries, have some important benefits compared with closed registries. It allows other competent authorities, the private sector, and interested parties (for example, civil society) to check legal and beneficial ownership information, which can reduce costs and burdens on other parts of the system. Public registers also simplify both domestic and cross-border information exchange and cooperation. For instance, if foreign competent authorities can directly access information in a public database, it can reduce the need for formal information exchange requests. Similarly, if a domestic competent authority has direct access to a central register, then there is no need to engage in information exchange upon request, which will save time and resources.

To address data privacy concerns, consideration should be given to offering tiered access to relevant stakeholders. For example, the general public might be given access to the name and country of residence of a beneficial owner. Financial institutions and DNFBPs, which are required to perform CDD obligations as well as any discrepancy reporting duties, may additionally be given access to the type of information that they would normally have to ask of customers (for example, date of birth, address). Competent authorities should be given direct and instant access to the full set of information held by the registry when they need it to carry out their normal duties (for example, supervisory authorities engaged in licensing, tax authorities issuing tax identification numbers) or when authorized to do so (for example, investigative bodies as part of a criminal investigation).

To determine which information should be made available to the public or should be restricted, countries could adhere to need-to-know principles and/or have opt-out principles (certain information will not be disclosed because of data privacy, identity theft, or other risk considerations). These considerations will vary from country to country.⁴ That said, even in such cases, law enforcement should continue to have full access to the information in the registry. The FATF standards encourage countries to consider facilitating public access to this information.

If a country chooses to hold beneficial ownership information in multiple registries rather than one central registry (for example, in a federal system), its effectiveness and usefulness might be affected negatively if these databases lack a central access point. Having beneficial ownership information held in different systems can also increase the burden on financial institutions and DNFBPs and others who may need to check these registries for information. Therefore, it is important to ensure that in such a decentralized system, efforts are made to interlink the different registries where data are held and ensure that these data are in the same format (for ease of comparison). If they are not interlinked, a country should allow all its registries to be searched at the same time.

Discrepancy reporting. Regardless of whether a country chooses to adopt a public database or a closed database, consideration should be given to extending access to the information in this registry to reporting entities, including FIs and DNFBPs. This can help with verifying information in the registry but also help reporting entities in carrying out their own CDD obligations. For this to be effective, countries should strongly consider introducing legal or administrative requirements for discrepancy reporting. For the reporting entity, such findings could also be considered a potential red flag that can support filing suspicious transaction information. Countries could also consider extending such discrepancy reporting requirements to competent authorities that have access to beneficial ownership information through their core work. In addition, civil society organizations and the general public could also be allowed to report discrepancies noted in public registries.

Resource implications. Depending on their forms, registries can be costly to set up and maintain. Their most basic function is to provide a mechanism for the authorities (and other relevant stakeholders or the public) to keep track of legal persons. Beyond updating the legal framework and finding resources, the public authority or body must be able to have systems (for example, information technology systems) in place to receive beneficial ownership information and to maintain and update them. In addition, training on beneficial ownership must be provided to a potentially large number of staff to understand relevant tax, company, and AML/CFT laws and to recognize potential abuse (for example, red flags), especially because the registry will also have a verification role.

In particular, creating databases to collect and hold beneficial ownership information from scratch can take a considerable amount of time. For databases working with paper files, this means clearing backlogs, removing defunct legal persons, and implementing some form of automation/digitalization as a priority. Nevertheless, ongoing technological developments can help drive down the cost of establishing and maintaining registries. In addition, any cost-benefit analysis of registries should also consider the long-term benefits of registries, for example, to reduce costs associated with investigations and responding to international cooperation requests.⁵

Some countries have implemented a fee structure to provide access to information from a register. This can help generate the necessary resources and financing to run the registry. However, it is important to ensure that the fee structure imposed does not inhibit the broader objective of transparency. Competent authorities and those that need to check the register (for example, banks) should always be able to access it without payment, and for other interested parties, consideration should be given to imposing a reasonable/nominal fee to allow them to search the registry (for example, countries should avoid requiring a payment for each search entry). See further discussion in Chapter 5, “Policy Considerations and Reg ulatory Impact.”

Role of technology. Technological advances such as interoperable data standards and blockchain can support measures to verify and enhance the accuracy and timeliness of beneficial ownership information. A number of emerging initiatives are promising in this respect (see Box 3.3). See Guiding Questions for Registry Approach (Box 3.4).

Overview

The FATF recommendations (for example, FATF Recommendations 8, 10, 12, 16, and 22) require financial institutions and DNFBPs, as part of their CDD measures, to identify and verify the beneficial ownership of their clients who are legal persons.⁶ Financial institutions such as banks will often have legal persons as clients. DNFBPs might act for legal persons, such as real estate agents acting for legal persons who are buying or selling real estate and thus will need to know who is the beneficial owner. TCSPs, accountants, and lawyers or notaries often act on behalf of legal person clients and/or are involved in the creation of legal persons and thus need to understand their beneficial ownership if they are carrying out one of the activities covered by the FATF recommendations.⁷

In some jurisdictions, TCSPs often have initial and ongoing contact with legal persons, which can be of assistance when keeping track of beneficial ownership. They can be involved in creating a legal person but also in providing ongoing services, such as acting as nominee directors or shareholders or offering company secretarial services. In some countries, it is compulsory to use a TCSP when forming a legal person, whereas their use is optional in others. In other countries, these roles are often taken by the legal or accounting sectors acting in their traditional capacity. TCSPs can vary in size and complexity, often with many small players operating on behalf of domestic and international clients. As such, the quality of compliance with AML/CFT requirements can vary greatly.

Notarial models generally entail an attestation of registry filings by a notary who is a public employee directly responsible to a government ministry, or a legal professional entrusted by law to perform certain tasks for these filings to take legal effect. In this model, notaries are obliged to identify and maintain beneficial ownership information. They are required to collect information pertaining to all parties involved in an activity or transaction, including the beneficial owner. Such a model requires proper resourcing and an appropriate legal structure (including penalties for notaries who fail to collect that information and for legal persons providing incorrect information) to ensure that the information is accurate. Furthermore, for such a system to work, the risk and context of each country must be evaluated, including the sector’s level of integrity.

Therefore, to clarify, financial institutions and DNFBPs can have two distinct roles that should not be confused. They may have a role in company creation— in general, this relates to DNFBPs such as TCSPs or notaries. However, financial institutions and DNFBPs also have regular CDD obligations— which include obtaining beneficial ownership information— when doing business with a legal person.

Key Considerations

Financial institutions and DNFBPs can be a good source of beneficial ownership information. However, there are some limitations that must be mitigated for them to be effective sources of information. The lack of effective implementation of even basic CDD measures by financial institutions and DNFBPs in many countries is a potential challenge. If financial institutions and DNFBPs are not effectively implementing basic CDD measures, then it is likely to be very difficult to ensure that they are willing or able to effectively implement the more elaborate beneficial ownership requirements.

In addition, financial institutions and DNFBPs can also face challenges with identifying and verifying beneficial ownership information, including a lack of capacity and resources. Investments are needed up front, including to train staff to understand the concept of beneficial ownership and identify circumstances where it is not being provided or is being provided in a way that might be suspicious. One of the common challenges that financial institutions and DNFBPs face is to what level they should search for a beneficial owner and the proof they require to establish that a natural person is a beneficial owner. Nevertheless, as part of regular onboarding of new customers, financial institutions and DNFBPs should have a good understanding of the customer’s business profile and structure, which is useful information to identify and verify the beneficial owner.

The international standards technically allow financial institutions and DNFBPs to list the identity of the senior managing official if there is either doubt that the controlling legal owner is the beneficial owner or that no natural person exerts control through ownership interests. However, this should be permitted only in very exceptional circumstances (for example, it could be considered when dealing with very large public or multinational corporations where the ownership structures of such companies are highly diversified but also well known). If no natural person is identified as beneficial owner, the natural person identified as a senior managing official should be recorded and identified as holding this position, and not identified as the beneficial owner. In all other instances, there should be little to no excuse as to why a financial institution or DNFBP cannot identify the beneficial owner. Given that companies are expected to know their beneficial owners (under the revised FATF standards), there should be little reason for them to not share this information with the financial institution or DNFBP or other competent authorities. If companies are unwilling to share this information, then this would be a red flag for the financial institution or DNFBP. Furthermore, under the FATF standards, financial institutions and DNFBPs are required to not open accounts, commence business relationships, or perform transactions or terminate business relationships if they are unable to comply with relevant CDD measures.

This discrepancy has also been recognized in the context of the March 2022 changes to the FATF’s definition of beneficial ownership, which now clarifies that this provision of Recommendation 10 does not amend or supersede the definition of who is the beneficial owner but only sets out how CDD should be conducted in situations where the beneficial owner cannot be identified. In this regard, countries should ensure that existing definitions of beneficial ownership in their relevant laws reflect this accurately and make relevant amendments if they drafted these definitions based on the FATF Recommendation 10 test for beneficial ownership.

In addition, even if accurate beneficial ownership information has been obtained at the start of the customer relationship, if the legal person’s risk and business profile does not change, or as long as the legal person does not obtain new products or services, the financial institution or DNFBP may not be aware of any changes to the legal person’s beneficial ownership information unless changes are communicated to the financial institution or DNFBP. Although this has a limited impact on the CDD of the bank, it has a negative impact on the usefulness for other purposes of beneficial ownership information obtained and held by financial institutions or DNFBPs. Financial institutions and DNFBPs should have processes in place to ensure that beneficial ownership information they hold for their customers remains up to date as part of their ongoing customer relationship monitoring (for example, by requiring the relevant customer to file know-your-customer documents regularly).

It is highly recommended that, if TCSPs or other gatekeepers (notaries, lawyers, accountants) are responsible for setting up legal persons, they should be required to maintain records of the beneficial ownership information that they collect through their role in company formation and for their CDD purposes. This information should be maintained in the country of incorporation. In some cases, the gatekeeper might also be responsible for providing beneficial ownership information directly to the public authority or body that will hold this information.

Competent authorities such as supervisors should set out clear expectations as to what is required of gatekeepers and take steps via the supervisory process to ensure that identification and verification of beneficial ownership information is happening in practice. A system relying on collection and verification of beneficial ownership by TCSPs, lawyers, accountants, or notaries is more likely to be effective in a country where the authorities properly supervise and oversee such DNFBPs and where the DNFBPs tend to act with integrity. But such a system will not be as reliable in countries where these sectors are more susceptible to corruption (see further discussion in this chapter’s “Supervision and Monitoring” section).

The information that financial institutions and DNFBPs collect may not necessarily or immediately be available to third parties, including to competent authorities. The revised FATF standards require that countries should be able to determine in a timely manner whether a company has or controls an account with a financial institution within a country. To do this, countries should consider having centralized or interconnected bank account registries that competent authorities can check to determine if a legal person is a client of one or more financial institutions as one way to ensure that countries have timely access to this information.

Once financial institutions and DNFBPs collect beneficial ownership information, this could become information that is potentially subject to financial secrecy and data protection provisions. Depending on a country’s legal system, competent authorities may need different legal powers to obtain information (for example, court orders or warrants). In countries where TCSPs and other gatekeepers play a role in the creation, registration, or incorporation of legal persons, access to beneficial ownership information may be affected by claims of legal or professional privilege. Countries using such systems should have clear rules that legal or professional privilege does not apply with respect to beneficial ownership information (see Box 3.5). See Guiding Questions for Financial Institutions and DNFBPs (Box 3.6).

Basic or Legal Information to Be Collected at Creation and Registration

The following is the minimum basic information on legal persons that countries are required to collect:

• Company name;

• Proof of incorporation;

• Legal form and status;

• Address of the registered office;

• Basic regulating powers (for example, for companies, the memorandum and articles of association for companies and for other legal persons, laws, founding documents, bylaws, deeds);

• List of directors; and

• Unique identifier such as a tax identification number or equivalent (where this exists).

The legal person should obtain and record this information. It should also be recorded in a company registry and be publicly available.

In addition, legal persons are required to maintain a register of their shareholders or members. The company should keep this information within the country at its registered office or at another location notified to the company registry (for example, with a third party under the company’s responsibility). This register should contain the number of shares held by each shareholder and categories of shares (including the nature of the associated voting rights).

Note that the FATF standards allow that, if the legal person or the relevant company registry also holds beneficial ownership information within the country, then the register of shareholders does not necessarily have to be in the country if the legal persons can provide this information promptly on request. This is because in most cases, the same shareholders will also be the beneficial owners. What is important is to ensure that competent authorities can access beneficial ownership information promptly within the country.

In addition to the regular basic and legal information that the international standards require, some countries also collect additional information (for example, a legal person identifier where one exists, legal and trading addresses, names of all senior managers, and the like).⁹

See Guiding Questions for Basic Information (Box 3.7).

Relationship with Financial Institutions and DNFBPs

The requirements on financial institutions and DNFBPs and the challenges they face are set out in Chapter 3, “Additional Supplementary Measures—Information Held by Financial Institutions and DNFBPs.” Additionally, legal persons should be required to cooperate with requests for information in relation to beneficial ownership from financial institutions and DNFBPs. Failure to do so can ultimately lead to the financial institution or DNFBP submitting a suspicious transaction report on the legal person, putting accounts on hold, and/or terminating a business relationship.

Financial institutions and DNFBPs are also required to consider beneficial ownership in the wider context of carrying out CDD, namely in relation to third-party reliance and when taking steps to identify customers who might be PEPs or the family and close associates of a PEP. If financial institutions and DNFBPs are allowed to rely on third parties to carry out certain CDD functions, including identification of the beneficial owner of a customer, additional requirements apply. These include making sure that the information about, inter alia, the identity of the beneficial owner is obtained immediately and ensuring that copies of identification data will be made available on request. Countries should ensure that where they permit third-party reliance, there are provisions requiring financial institutions and DNFBPs to obtain the information requested and to consider the information available based on the level of country risk, when determining in which countries such a third party can be based.

Financial institutions and DNFBPs should also have risk management systems to enable them to determine whether a beneficial owner of a customer is a foreign PEP or a family member or a close associate of one. If a beneficial owner falls into one of these categories, the financial institution or DNFBP must take additional measures to manage the risk. These measures include obtaining senior management approval before establishing or continuing with the customer relationship, establishing the beneficial owner’s source of funds and source of wealth, and conducting enhanced ongoing monitoring of the customer relationship. They should also take reasonable measures to determine whether the beneficial owner of a customer is a domestic PEP and adopt the same risk management measures in higher-risk situations. Special measures are also required where a financial institution detects that a PEP is the beneficial owner entitled to the proceeds of a life insurance policy. See FATF (2013a) for detailed guidance on PEPs.

See Guiding Questions for Third-Party Reliance (Box 3.9).

Cooperation with Other Competent Authorities

Numerous authorities have a legal need for obtaining information on ownership and control of legal persons for various reasons besides AML/ CFT— for example, tax authorities are likely to always need some information on legal persons to determine tax liabilities; procurement authorities might require beneficial ownership information in the context of granting procurement contracts; and supervisors of the financial and nonfinancial sectors will have an interest in knowing who is the beneficial owner of legal persons that they supervise (for example, fitness and propriety issues related to banks). See Chapter 4 for broader applications of beneficial ownership information.

The FATF standards explicitly recognize the importance of having beneficial ownership information available in the course of public procurement. The standards require countries to ensure that public authorities at the national level and others as appropriate, have access to basic and beneficial ownership in the course of public procurement (see discussion in Chapter 4).

Legal persons should cooperate in a timely manner with all relevant government authorities in respect of providing information on their beneficial ownership and control during their day-to-day operations. Their duty to cooperate is complemented by the powers granted to competent authorities to obtain timely access to the basic and beneficial ownership information held by relevant parties and sanctioning powers.

These competent authorities should also be able to access beneficial ownership information held by the public authority/body or alternative mechanism. Countries should consider giving relevant competent authorities direct access to this information to streamline processes and reduce the need for beneficial ownership information on the same company being collected more than once by different competent authorities unnecessarily. This can help reduce bureaucratic red tape and also remove opportunities for corruption (when different agencies are collecting the same information, each having an opportunity to extract bribes from the company).

Monitoring of Companies

Countries often conduct a degree of general monitoring of companies and their activities, not necessarily related to AML/CFT. This might include checking that they still meet listing/capital adequacy requirements and extend to wider fraud-related checks. A register could have a reporting mechanism for activity that might be deemed suspicious (for example, if an individual has been appointed as a company officer without their knowledge or consent, if the registered office has been changed without the company’s knowledge or consent, or if the company’s name has been changed without permission). Although not directly related to the issue of beneficial ownership, this type of ongoing scrutiny of a legal person’s activities can be a useful good practice in determining whether a legal person is being used for illicit purposes, and it can be a red flag to check that other information, such as beneficial ownership information, is still accurate. In general, though, many company registries face challenges with enforcing even these basic monitoring requirements.

Supervision or Monitoring of Gatekeepers

If countries require or allow companies to be formed by gatekeepers such as TCSPs, lawyers, notaries, and accountants, it is critical that these gatekeepers’ activities be supervised appropriately and that enforcement action be taken where appropriate. AML/CFT assessments to date suggest that there are often technical deficiencies and effectiveness challenges when it comes to the application of AML/CFT measures by DNFBPs. For example, some sectors have yet to be brought into the AML/CFT system in some countries (such as lawyers and notaries) and even when there is formally a coverage, supervision of the sectors is often nascent (for example, regarding TCSPs). In some instances, this can be aggravated where countries permit self-regulatory bodies to monitor certain types of DNFBP (for example, notaries or lawyers can often be monitored by self-regulatory bodies). Where the self-regulatory body has a dual supervisory and representational function, there is a potential conflict of interest that can lead to a reluctance to sanction its own membership.

Countries with significant and well-developed corporate service provider sectors and countries that market themselves as hubs for international finance should ensure that they are dedicating appropriate resources for supervising these sectors. The resources and supervisory efforts should be in line with the size of the sector and the number of legal persons being incorporated in the country, regardless of the country’s size. This can require a significant investment to enhance supervisory capacity and supervisors’ efforts to conduct outreach and awareness raising in these key sectors. Supervisors should ensure that gatekeepers that are responsible for incorporating large volumes of legal persons are able to properly understand the ownership and/or control structures of these legal persons and are able to work with the beneficial ownership information of these legal persons regardless of whether they are complex or multijurisdictional structures. Under the FATF requirements, beneficial ownership information also needs to be held by a relevant public authority/body or a related alternative mechanism of that country, but this could also depend on the information that gatekeepers will be providing to the relevant authority/body or alternative mechanism.

Supervision of Financial Institutions and Other DNFBPs

Under the multipronged approach, countries should also rely on beneficial ownership information obtained by financial institutions and/or other types of DNFBPs than gatekeepers (for example, real estate agents). It is therefore important that supervision of these obliged entities also considers their ability to collect and hold adequate, accurate, and up-to-date beneficial ownership information. Results from AML/CFT assessments suggest that CDD requirements— especially in relation to beneficial ownership— are not always implemented effectively, because of confusion over definitions of beneficial ownership or financial institutions and DNFBPs’ reluctance to look beyond legal ownership. In addition, supervisors do not always use an effective risk-based approach when overseeing sectors for which they are responsible. Again, it is important to have skilled and experienced staff both at financial institutions and DNFBPs and at the supervisor level. Beneficial ownership concepts can appear complex, and as a matter of practice, it is critical that staff involved at all levels of dealing with these issues are properly trained to deal with them. Supervisors also need appropriate powers to supervise and monitor, along with robust enforcement/sanctioning powers to act when a financial institution or DNFBP fails to meet the required standard.

Domestic Cooperation

Several different types of authorities will also require access to beneficial ownership information in the context of ongoing investigations into suspected illicit activities. These include— but are not limited to— law enforcement authorities, including FIUs, investigating and prosecuting money laundering and other crimes; intelligence bodies investigating national security issues; securities regulators investigating market manipulation, insider trading, or fraud; courts hearing cases of corporate self-dealing and other litigation cases; and public officials administering insolvency cases, public authorities involved in public procurement processes, among others.

Legal persons and all others holding beneficial ownership information should cooperate with all relevant government authorities in the context of these ongoing investigations and to the extent possible, avoiding tipping off any shareholders. Law enforcement and other relevant authorities should have all the necessary powers to obtain timely access to the basic and beneficial ownership information held by a legal person, the public authority/body or alternative mechanism, and financial institutions and DNFBPs.

The ability to share information among domestic authorities is important because certain agencies may possess or have better access to more accurate beneficial ownership information than is available to other domestic authorities for supervisory or law enforcement purposes. This can be extremely useful during the life cycle of a legal person because real-time information sharing is often necessary to investigate and prevent criminal activity (see Chapter 5).

Mechanisms, such as legal provisions or memorandums of understanding that allow domestic exchange of such information, facilitate the effective use of scarce resources and prevent duplicate efforts in obtaining the same information more than once from the same company. When possible, authorities should be given direct access to the relevant government and nongovernment databases because a cumbersome system for requesting access could lead to delays and undermine the usefulness of the information source. Competent authorities should also be encouraged to establish informal channels of communication and cooperation.

See Guiding Questions for Access to Information (Box 3.11).

International Cooperation

The ability to exchange information among different countries is critical because anonymity can be enhanced using corporate vehicles established in foreign countries. Criminals can use a chain of different companies incorporated in various jurisdictions to conceal their identities. It is therefore crucial that foreign competent authorities can access information on foreign legal persons created in or operating from other countries, especially in the context of ongoing investigations.

It is helpful for such investigations if countries determine that foreign legal persons (subject to the sufficiency test) are required to hold beneficial ownership information within the country. However, there will still be several instances in which competent authorities will need to reach out to other countries to obtain information on legal persons created/operating in those jurisdictions.

In this respect, the FATF standards require that foreign competent authorities can access basic information held by company registries and information held on shareholders. In addition, domestic competent authorities should use the powers available to them to obtain beneficial ownership information on behalf of foreign competent authorities.

Having public beneficial ownership registries in a country would be one of the quickest ways for foreign competent authorities to have access to information because they will not need to go through domestic counterparts to request this information. However, even then, cooperation between foreign competent authorities and domestic authorities would still be needed, including to follow up on any information in the beneficial ownership register if it appears that this information is not accurate.

As a good practice, assistance could be requested either through informal information and intelligence sharing or through formal mutual legal assistance in criminal matters. Informal information and intelligence sharing in this case refers to a broad category of information that law enforcement authorities, including FIUs, can obtain from their foreign counterparts, such as assistance in obtaining public documents and source searches, interviews with witnesses, and information in government databases. Seeking informal assistance before sending a formal request for mutual legal assistance could also ensure that the requests have a sufficient basis and are less likely to be delayed or rejected.

In cases where sources may not be accessible via informal channels, as a good practice, law enforcement authorities could seek formal mutual legal assistance in criminal matters or via regulator-to-regulator mechanisms, as established in formal agreements. Such formal assistance by foreign authorities can be provided for gathering evidence, obtaining testimony under oath, or executing searches and seizures.

As a starting point for effective international exchange of information, FATF recommends ensuring that foreign competent authorities— especially those that need to make frequent requests— have guidance on how they can access publicly available information (for example, a step-by-step guide). This would enable foreign competent authorities to check first whether the information is already accessible to them before making a formal request for information, such as through a mutual legal assistance request.

Countries should not impose unduly restrictive conditions on the exchange of information or assistance (for example, by claiming that such information is subject to tax or banking secrecy and other confidentiality rules). This could be included as a legal principle in relevant AML/CFT legislation, namely, to ensure that principles related to tax and banking secrecy do not apply as grounds for not sharing information on companies with foreign competent authorities in the context of AML/CFT and other criminal investigations related to legal persons. Where such considerations lie, additional guidance can be developed in terms of how this information can be shared with and used by the foreign competent authority. Note that beneficial ownership information is already public in several countries.

However, ensuring that this information is made available to foreign counterparts in a timely manner also depends largely on the way that beneficial ownership information is held in the country. Challenges can arise when the information is available only in a hard copy (rather than online), where an online system is difficult to access for technical reasons, or there is no central point of access for this information. To the extent possible, countries should consider providing foreign competent authorities with direct access to beneficial ownership information held by public authorities/bodies or through an alternative mechanism— especially if the information is held through a registry format. This information should be available to them without requiring any payment of fees or imposing any other restrictions on access to this information.

See Guiding Questions for International Cooperation (Box 3.12).

Bearer Shares and Bearer Share Warrants

The use of bearer shares and bearer share warrants can obscure ownership of a legal person. In the case of bearer shares/share warrants, the person in physical possession of a share certificate/share warrant certificate is entitled to ownership and control and other interests in the legal persons (for example, payment of a dividend on presentation of a physical certificate). In addition, ownership can be transferred very easily by simply handing over the physical share/share warrant certificate (similar to transfer of cash). These certificates do not contain the names of the shareholders and are not registered, even though the ownership trail may sometimes be recorded on the share/share warrant certificate itself.

Bearer shares/share warrants may have had some limited advantages in the past, but their high level of anonymity results in significant enforcement challenges when abuse occurs. Possession of a bearer share does necessarily equate to beneficial ownership of a legal person, but establishing beneficial ownership in a legal person where bearer shares are used is extremely difficult because the shares can be held by anyone, anywhere, and without any trace.

Most countries have increasingly immobilized or dematerialized/registered bearer shares, with only very few countries still allowing such instruments.¹¹ The FATF recognized this, and in 2022, it required that countries prohibit the issuance of new bearer shares and bearer share warrants and take steps to register or immobilize any existing bearer shares and bearer share warrants— in line with the growing trend in this direction over the years. This is the best way to ensure that bearer shares and bearer share warrants or similar instruments without traceability can no longer be used to hide ownership and control of a legal person.

Therefore, countries should make amendments to relevant legislation to no longer allow the physical issuance and transfer of new bearer shares and bearer share warrants (if these were previously permitted under their legal framework) and ensure that measures are taken to register and dematerialize existing bearer shares. Countries should put a clear implementation plan in place to address existing bearer shares in line with these legal requirements (for example, to establish a clear time frame by which the existing bearer shares need to be registered).

If countries choose to convert existing bearer shares into a registered form, they should clearly set out a reasonable time frame within which the relevant persons holding these shares must register them (for example, within two years). This process should align with the way other registered shares are held within a country.

Countries can also decide to immobilize bearer shares by requiring them to be held with a regulated financial institution or professional intermediary (for example, a licensed fiduciary) or national depository entity, which in turn should maintain a record of the ownership of the share and when any transfers are made. Where countries choose this option, supervisors have a key role in ensuring that the financial institution or professional intermediary is carrying out its obligations and holding this information on the record of ownership so that it is easily accessible and available to competent authorities in a timely manner. There should be clear requirements on when these records of ownership are to be updated upon transfer of ownership, and this should be done as soon as possible. Countries could implement legislation to ensure that a shareholder cannot use bearer shares unless the record of ownership is accurate and up to date.

In addition, while these shares are being converted or immobilized, countries should require all shareholders holding bearer instruments to notify the company, and for the company to record their identity before any rights associated with these shares can be exercised. This requirement to notify could also be extended to the national depository entity. Countries could also consider putting more stringent requirements in place such as the cancellation of shares without any compensation once the implementation deadline has passed.

Note that once a bearer share/share warrant has been registered or immobilized or there is a clear and traceable record of its ownership, it can no longer be considered a “bearer share or bearer share warrant,” even if it continues to be called by that name in the law. The key point is that the concept of bearer shares and bearer share warrants needs to be removed from the law.

These requirements for newly issued or existing bearer shares do not apply with respect to companies listed on the stock exchange that will already be subject to disclosure requirements.

See Guiding Questions for Bearer Shares and Bearer Share Warrants (Box 3.14).

Nominee Shareholders and Directors

Nominee arrangements refer to situations in which an individual or several individuals (the nominator) issue instructions (directly or indirectly) to another individual (nominee) to act on their behalf either in the capacity of the director or a shareholder. Other terms used to refer to such nominees include shadow director, silent partner, or strawman, depending on their degree of formality. As the FATF and several others acknowledge, nominee arrangements— particularly informal ones— are a key vulnerability and are often identified in cases related to the misuse of legal persons. This issue has been covered widely, for example, in FATF and Egmont Group (2018) and most recently by the Stolen Asset Recovery Initiative (2022).

The FATF standards require countries to take steps to mitigate the risk of misuse of nominee shareholders and directors. These include outright prohibition of the use of nominee shareholders or nominee directors, or taking steps to ensure that information about the nominee shareholders or directors is more readily available in a country and accessible by the relevant competent authorities.

This can be done in one of two ways, either by:

• Requiring nominee shareholders and directors to disclose their nominee status (which should be public information) and the identity of their nominator to the company and to any relevant registry, and for this information to be obtained, held, or recorded by the public authority/body or alternative mechanism, or by

• Requiring nominee shareholders and directors to be licensed; for their nominee status and the identity of their nominator to be obtained, held, or recorded by the public authority/body or alternative mechanism, and for them to maintain information identifying their nominator and the natural person on whose behalf the nominee is ultimately acting; and to ensure that this information is available to the competent authorities upon request.

These requirements may necessitate amendments to relevant legal frameworks.

The public authority/body or alternative mechanism will need to hold information on the nominator based on either approach the authorities take. This information should be collected at the same time that beneficial ownership information is being required to be submitted to the public authority/body or alternative mechanism. Similar to the beneficial ownership, the information held on the nominator should help establish the nominator’s identity (for example, passport and other identification documents) and proof of their nominee status (for example, formal documents outlining the nominee arrangement, any instructions issued by the nominator).

Natural or legal persons may already be licensed or registered as financial institutions or DNFBPs within that country and permitted to perform nominee activities. In such cases, the licensing requirement for nominees is not intended to create a new licensing/registration regime. The rationale for this is that financial institutions and DNFBPs would already be subject to the full range of obligations under the FATF recommendations, including to conduct CDD measures on their clients on behalf of whom they are acting. The standards make it clear that intermediaries acting in such capacity should comply with the requirements of FATF Recommendations 22 and 28. The focus should be on supervisors to ensure that such licensed entities are holding adequate and accurate information on their nominator (who in many cases could also be the beneficial owner of the legal persons) and are able to share this information with competent authorities on request. Furthermore, it should be made clear to intermediaries that they cannot use legal or professional privilege to avoid disclosing this information.

See Guiding Questions for Nominee Shareholders and Directors (Box 3.15).