When the Panama Papers were released, beneficial ownership was once again the topic de jour in financial news.  Not only did their release bring the topic back into the spotlight but it also seemingly pushed through the proposed US beneficial ownership rules that have been in limbo for some time.  That said, for those of us who work closely with Anti-Money Laundering (AML) and Sanctions programs, the concern and difficulty of beneficial ownership has never left.  This is a complex problem that has constantly brought compliance to loggerheads with business, with regulations not doing enough to referee the fight.

WHAT ARE THEY AND WHY DO THEY MATTER?

Part of the complexity of beneficial ownership is making sure that we are speaking the same language. Beneficial ownership includes both those with ownership AND those with control of an entity (which is consistent with the definitions provided by FinCEN, FATF, and the Wolfsberg Group). An ultimate beneficial owner or UBO refers to the natural person(s) with ownership or control of an entity, meaning that a UBO cannot be an entity because all entities are owned or controlled by people. A beneficial owner is the more general term, which also encompasses UBOs, that refers to any person or entity with direct or indirect ownership or control of an entity. Many jurisdictions and regulations add threshold percentages to the ownership prong of their definitions, but for simplicity’s sake I am going to leave that out of the discussion in this post.

Obtaining accurate beneficial ownership information is important to:

1. Ensure that all of the correct required parties are screened by financial institutions. 
2. Allow financial institutions to properly risk rate their customers and accounts based on beneficial owners that are potentially identified as Politically Exposed Persons (PEPs) or as having negative news associated with them. 
3. Make certain financial institutions do not do business with sanctioned parties. For example, this is particularly relevant in satisfying the US’s Office of Foreign Assets Control sanctions against any entity owned 50% or more by a sanctioned party. 
4. Understand the true risk that a beneficial owner poses to a financial institution through its potential relationship with multiple customers and accounts.

WHAT MAKES THEM SO DIFFICULT TO FIND?

Beyond the terminology, the problem with beneficial owners is that they can be incredibly difficult to identify.  Sure, there can be simple cases but in most instances it is not straight forward (e.g., parent/subsidiary relationships, fund to funds, etc.). There can be multiple levels of control and ownership involving numerous entities, which can be owned and controlled by the same or different parties.  To get to the bottom of these complex ownership structures and identify the people that own or control them requires deep understanding of the business structures and a large amount of corporate documentation.

If the complexity wasn’t enough, add to it the difficulty in obtaining all of the documentation and information needed to identify the ultimate beneficial owners.  It becomes like finding a needle in a haystack but the haystack is hidden too. The control piece can generally be determined through publicly available documentation but identifying the ownership of private companies often forces financial institutions to rely on their customers to provide accurate information on who owns what and how much.  Leaving this detective work to individual financial institutions leads to inconsistent and sometimes incomplete information. Is this the best way to the truth?  Or are government beneficial ownership registries the key?  

HOW CAN GOVERNMENTS HELP?

In the European Union, centralized beneficial ownership registries are slowly coming into being as required by the 4th EU Money Laundering Directive.  In April 2016, while urging the rest of the G20 countries to do the same, the G5 countries (UK, France, Germany, Italy and Spain) indicated that not only would they be creating centralized beneficial ownership registries but that they would be sharing the collected information with one another. In the UK specifically, companies and limited partnerships have been required to report certain beneficial owners since June 30, 2016.  This is juxtaposed with the US, where new UBO rules were enacted earlier this year by the US Secretary of Treasury, codifying existing regulatory expectations around UBOs. These rules, however, did not (and could not) include the creation of a centralized UBO registry.  In fact, when enacting the new rules, US Secretary of the Treasury Jacob Lew made a plea to members of the US Congress asking that they pass legislation to give him the authority to create a centralized registry to help in the fight against financial crime. For now, it seems that plea has been largely ignored.

WHAT TO DO IN THE MEANTIME?

For the time being, financial institutions still carry a heavy burden when it comes to beneficial ownership and understanding what it means for their customer relationships and risks to the bank.  While they still have to rely on the accuracy of data provided by their customers, banks can use technology to track beneficial ownership through master customer profiles that maintain beneficial ownership information and how it links across customer relationships. Centralizing customer and beneficial ownership information across lines of business will go far to helping ensure that financial institutions have the right information, are screening the right parties, and fully understand the risks their customers pose.