Targeted Financial Sanctions

Access to beneficial ownership information contributes to preventing, detecting, and deterring evasion of targeted financial sanctions, including for terrorist financing and proliferation financing. To move funds or other assets (for example, weapons or vehicles) within and between jurisdictions, terrorist organizations have sometimes misused land, air, and sea trade and relied on complex legal structures to hide the underlying beneficial owner. FATF (2019) provides examples of such misuse. Persons and entities subject to sanctions use intermediaries or front companies to layer or obfuscate ownership/control information of companies or hide their true identity. In some instances, these front companies can also be used to move money on behalf of sanctioned entities, thereby acting as de facto banks for these entities. If the beneficial owners of legal companies are not accurately and timely identified, efforts to combat terrorist financing and proliferation financing could be circumvented.

Thus, effective implementation of targeted financial sanctions for terrorist financing and proliferation financing hinges on robust customer due diligence and ongoing monitoring by reporting entities, including the proper identification of their customers’ beneficial owners. Having timely access to up-to-date and accurate beneficial ownership information when dealing with customers or transactions can help reporting entities identify if the beneficial owners of their clients are persons on sanctions lists. Competent authorities can also use beneficial ownership information in their investigations into violations and evasions of sanctions (Open Ownership 2021). Notably, countries that are unable to effectively implement targeted financial sanctions create a vulnerability for their financial sector that can negatively impact correspondent banking relationships.

The FATF standards are concerned with the implementation of targeted financial sanctions related to terrorist financing and proliferation financing, but the United Nations and other international bodies and many countries will also impose and apply sanctions for other reasons such as (regional) armed conflict, human rights abuses, and transnational anti-corruption measures. Access to beneficial ownership information is equally important in such cases.

Fit and Proper Requirements

Financial institutions, designated nonfinancial businesses and professions, and virtual asset service providers are required to implement measures to ensure that their owners and controllers are F&P.¹ Supervisory authorities should also perform tests to assess the fitness and propriety of these owners and controllers. The focus of F&P checks is often on those directly involved in the activities/management of an entity (for example, the senior management or members of the board of directors), but requirements and checks to prohibit criminals and associates from being the beneficial owner are also important measures. For example, Basel Committee on Banking Supervision Principle 5 states that the licensing authority should identify and determine the suitability of the banks major shareholders, including the ultimate beneficial owners and others that may exert significant influence (Basel Committee on Banking Supervsion 2012). It also assesses the transparency of the ownership structure, the sources of initial capital, and the ability of shareholders to provide additional financial support, where needed. Note that prudential supervisors will tend to focus on the ability and capacity of a person to own/control a financial institution, but for AML/CFT, the focus should be on ensuring the person’s good standing (for example, that they are not criminals or cannot be subject to corruption or other types of influence).

The level of scrutiny on license applications (and ongoing checks) will vary depending on the significance of an entity (including the level of money laundering and terrorist financing risk); thus where F&P checks are carried out, they should extend to beneficial owners. For example, Basel Committee on Banking Supervision Principle 5 states that “the licensing authority should have the power to set criteria and reject applications for establishments that do not meet the criteria” (Basel Committee on Banking Supervision 2012). As such, the licensing authority has the scope to set the criteria, including imposing F&P requirements on beneficial owners.

Where applicable, F&P assessments of beneficial owners should be carried out at both the licensing stage and on an ongoing basis, including if there are any changes to the ownership/control structure. The review process should include collecting and assessing relevant information regarding F&P and AML/CFT considerations. More specifically, information should be sought on several criteria, including the beneficial owners reputation and any potential risk of links to money laundering or terrorist financing. This information should contain details on criminal investigations or proceedings, relevant civil and administrative cases, open investigations, and the like. Once obtained, the information should be validated to ensure its veracity and completeness.

In circumstances where information casts doubt on the fitness and propriety of the beneficial owner (that may also give rise to the risk of links to money laundering or terrorist financing), the licensing/supervisory authority should have a policy in place to guide the decision-making process and to assist in determining whether to approve or reject the application. This process should give due regard to all relevant information, including open investigations and proceedings.

Transparency in Procurement

In general, procuring agencies and the general public benefit from knowing the beneficial owners of companies that are contracted to deliver public goods and services. Fairness and efficiency of public spending is better assured if companies compete on the strength of their bids and not because of extraneous factors, such as the personal relationship of the company’s beneficial owner with the official responsible for approving procurement contracts. The procuring agencies’ improved understanding of the natural person behind a company bidding for contracts helps them detect any conflict of interest, collusion, fraud, or even corruption in public procurement.

The FATF standards include as a requirement the need to ensure that public authorities have timely access to basic and beneficial ownership information on legal persons during the process of public procurement. To this end, bidding companies should be required to submit adequate, accurate, and up-to-date beneficial ownership information to the procurement authority, including any changes of beneficial ownership after the contract award. This should be a requirement for participating in public procurement contracts, leveraging the different approaches in the jurisdiction for reporting beneficial ownership information, such as a centralized registry. This does not impose any additional burden on the legal persons because they will already be expected to hold this information themselves and should also submit this information to banks when opening bank accounts.

Procurement agencies should consider undertaking reasonable due diligence efforts in checking the beneficial ownership information submitted by bidding companies and implement additional scrutiny and/or relevant sanctions if any observable red flags or suspicions of inaccuracies are detected (for example, inconsistent information, forged documents, or the beneficial owner is not a natural person) against the beneficial ownership information to which they were given access.

Beneficial ownership information of awarded companies should be published, in line with commitments made by many countries. Public access to this information also allows civil society and journalists to better monitor and scrutinize the awarding of procurement contracts and their implementation. The IMF has been encouraging countries to commit to publishing beneficial ownership information of companies awarded procurement contracts, including in the context of emergency COVID-19 lending (IMF 2021).

Tax Transparency

Criminals can use legal structures (for example, shell companies) to obfuscate ownership structures to hide their wealth from the purview of tax authorities and evade taxes. Transparency of beneficial ownership information can help tax authorities identify the assets and wealth owned by a natural person and thus adequately determine the applicable tax liabilities, thereby helping jurisdictions preserve the integrity and the fairness of their tax systems and achieve their tax goals.

Ensuring tax compliance in the globalized world of finance and movement of people requires close international cooperation to prevent tax evaders from hiding their untaxed proceeds abroad. To this end, the Group of Twenty tasked the Global Forum on Transparency and Exchange of Information for Tax Purposes to ensure that its members and other relevant jurisdictions implement international tax transparency standards effectively and thus support domestic enforcement of tax liabilities. Thus, under its two tax transparency standards (the Exchange of Information on Request Standard and Automatic Exchange of Information Standard), the Global Forum requires jurisdictions to exchange a wide range of tax-relevant information—including beneficial ownership information (as defined under the FATF recommendations)—on foreign taxpayers with the jurisdictions of their tax residence (Global Forum and IDB 2021).

Under the Exchange of Information on Request Standard, tax authorities are required to provide to their foreign counterparts on request any information (including beneficial ownership information) that is foreseeably relevant for the administration or enforcement of their domestic tax laws or for carrying out the provisions of a relevant tax agreement. The standard requires that information be exchanged as relevant for tax purposes, which means that the scope of the beneficial ownership information exchanged may differ from that otherwise collected pursuant to the FATF standards (even if the definition is the same).

The Exchange of Information on Request Standard requires that up-to-date beneficial ownership information be available for all legal persons considered relevant from a tax perspective and for all bank accounts. Similarly, the standard requires that beneficial ownership information be collected on foreign entities with a sufficient tax nexus with the jurisdictions (for example, foreign companies that are tax resident in a jurisdiction by virtue of their place of effective management or administration in that jurisdiction).

The Automatic Exchange of Information Standard, which comprises the Common Reporting Standard,² provides for the automatic exchange of a predefined set of financial account information between tax authorities regarding the accounts of foreign tax residents. In situations that are considered higher risk for tax evasion, the information exchanged needs to include both the information on the account holder and its “controlling person(s).” The term “controlling person” has the same meaning as beneficial owner under the FATF standards, which is helpful, given that the Automatic Exchange of Information Standard leverages on the information that is required to be collected under the domestic AML/CFT framework. The situations in which information on the “controlling persons” needs to be exchanged are defined under the standard and include cases in which the entity account holder’s business generates mostly passive income flows (for example, dividends, interest, or royalties). This is because such entities may not have a strong nexus with the jurisdiction where they operate, and there is a higher risk that they are misused to evade taxes. The United States also carries out automatic exchange of financial account information by implementing the Foreign Account Tax Compliance Act, which includes the same provisions related to “controlling persons.”

Third-Party Lending and Creditors’ Rights

An appropriate understanding of the beneficial ownership of legal persons is also important for supervisory authorities from a prudential point of view. Banking supervisors are also required to monitor transactions between banks and their related parties and ensure that these are carried out on an arm’ s-length basis. This is a requirement under Basel Committee on Banking Supervision (2012), Principle 20. There are usually statutory limits on exposures to related persons and mandatory write-offs that must be monitored for compliance. Understanding the beneficial ownership of legal persons in commercial relationships with the bank assists supervisory authorities in identifying undisclosed related parties and associated transactions. Access to beneficial ownership information is also important to authorized securities service providers and their regulators to both ensure compliance with anti– money laundering obligations and guard against fraud and market abuse, such as insider trading (IOSCO 2004).

Beneficial ownership information is also important to both the public and private sectors in commercial transactions. A creditor institution will want to know the beneficial owners behind a corporate entity. Given the ease of incorporation, it would be possible for the beneficial owners of a defaulting company to incorporate a new entity and seek credit from the same creditor. If the information on the commonality of the beneficial owners were available to that institution, it might consider the credit decision in a different light. Similarly, credit bureaus, which specialize in assessing the creditworthiness of consumers, may wish to incorporate beneficial ownership information into their analysis and scoring processes.

Beneficial ownership information can also be a critical part of the due diligence exercise performed for issuing loan and demand guarantees. Banks can use available beneficial ownership information on the borrower/applicant (as their customer) to detect fraud or impropriety (see, for example, Wolfsberg Group, ICC, and BAFT [2019]). Parties involved in commercial transactions— especially lending, capital raising activities, and joint ventures— could also incorporate beneficial ownership information into their due diligence processes as a precursor to entering into a significant relationship with a corporate entity. Similar considerations arise for governmental entities in their contracting and procurement processes to ensure that risks of fraud, corruption, and other forms of reputational damage are identified and contained.

Asset Disclosure Frameworks

Asset disclosure regimes are those requiring a certain group of public officials,³ generally those in high-level and higher-risk positions, to periodically submit detailed information to a government authority on their incomes, assets, liabilities, and interests.⁴ Typically, the mandated government authority should also verify this information, and it should be published to facilitate its use for accountability and enhanced social monitoring. Broadly, the objective of these regimes is to capture information and monitor the wealth of public officials across time to detect unusual or unexplained assets or income (unexplained wealth) and/or seek information to prevent private interests from influencing public decisions (conflict of interests).

The content of financial disclosure forms (the forms that public officials must complete to declare their personal information) can vary between countries and are constantly evolving, reflecting the shifting nature of corruption risks. Traditionally, financial disclosures required categories of information that would allow an individual to identify and value a public official’s assets and interests. Over time, this has been extended to also consider assets and interests of close family members.

More recently, it has become evident that financial disclosures need to expand the notion of ownership to include assets and interests beneficially owned and controlled to ensure that public officials cannot hide behind a corporate veil— for example, if a public official owns a vacation home that is registered to a company of which they are the beneficial owner. Incorporating the concept of beneficial ownership can increase the usefulness of financial disclosures for anti-corruption purposes, facilitating corruption investigations, and the detection of potential conflicts of interest and also assist the financial sector when undertaking due diligence of politically exposed persons and support civil society involved in ensuring the integrity of public officials.⁵

Extractive Industries

Extractive industries such as oil, gas, and mining are very lucrative both for extractive companies and the governments that award these contracts. The opportunities for corruption and bribe-taking in these sectors are significant, including bribery of public officials responsible for awarding these lucrative contracts, contracts awarded to companies owned or connected to politically exposed persons, and contracts awarded to companies that might overexploit or misuse the natural resources or engage in other questionable deals. Disclosure of beneficial ownership information can enhance the transparency of this sector, including by identifying the persons who ultimately benefit from it.

The Extractive Industries Transparency Initiative (EITI) is a public-private initiative that seeks to promote the open and accountable management of oil, gas, and mineral resources and greater transparency of these sectors, including by requiring the disclosure of information along the extractive industry value chain.⁶ The EITI standard recommends that implementing countries maintain a publicly available register of the beneficial owners of the corporate entity or entities that apply for or hold a participating interest in an exploration or production oil, gas, or mining license or contract, including their identities, the level of ownership, and details about how ownership or control is exerted (EITI 2019). They are required to document the government’s policy and multistakeholder group’s discussion on disclosure of beneficial ownership and to request and publicly disclose beneficial ownership information of these companies (since January 2020). Additionally, a multistakeholder group should assess any existing mechanisms for ensuring the reliability of beneficial ownership information and agree on an approach for corporate entities to ensure the accuracy of the beneficial ownership information they provide.⁷

EITI suggests a broad definition of beneficial ownership, but it also introduces an element of subjectivity among countries, noting that multistakeholder groups should agree on an appropriate definition of beneficial owners for their countries— including by exploring international norms and relevant national laws— and should include ownership thresholds. This can introduce variance among countries on how to determine beneficial owners. In cases of countries that need to implement both FATF and EITI requirements, countries should follow the FATF definition of beneficial ownership and approach to identifying and verifying this information.

Furthermore, if countries maintain central and public beneficial ownership registries, then this could also be sufficient to satisfy the requirements under the EITI standard, whereas implementing EITI requirements alone would not be sufficient to meet the FATF requirements. Although EITI focuses on high-risk extractive sectors, note that similar risks are prevalent in other sectors such as defense and military, real estate, and infrastructure, which also would benefit from enhanced transparency of beneficial ownership information. Countries can identify such high-risk sectors through their national risk assessments or targeted risk assessments of legal persons.