Over a year has passed since the publication of the Panama Papers, an unprecedented data leak of 11.5 million documents that revealed the secret financial dealings of over 214,488 offshore entities. This high-profile leak ultimately brought to the fore the
lack of transparency surrounding shell companies. The records revealed the multitude of ways in which numerous legal structures and corporate vehicles can be used to obscure the ownership of a legal entity for a myriad of tax and financial crimes such as tax
evasion, money laundering, terrorism financing and arms trafficking. In the wake of these revelations, the global regulatory landscape has undergone significant reform to strengthen and enhance existing beneficial ownership requirements over several regulatory
frameworks, which we will examine in detail.
The Challenge of UBO Identification
Improving the transparency of company ownership and control has always been a key element in Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CTF) legislations. These regulations obligate financial institutions to identify the true
ownership of all assets by providing names of beneficial owners who ultimately own or control the legal entity, either directly or indirectly. In many jurisdictions, however, UBO identification and verification can prove to be an arduous task for financial
institutions, as the information is often not readily available on corporate filings. Moreover, the use of proxy or nominee shareholders or bearer shares, as evidenced in tax havens like Panama, can complicate matters even further.
UBO & AML – INTERNATIONAL APPROACHES
The Panama Papers has generated a wave of regulatory scrutiny and brought forth enhancements intended to bolster corporate tax transparency and improve client due diligence requirements. These initiatives cover the entire regulatory and data spectrum, from
the imposition of stricter AML rules, the implementation of Common Reporting Standards (CRS) and the introduction of national beneficial ownership registries. The drawback to this, however, is that all of these separate regulatory approaches designed with
the same objective has led to a clear lack of uniformity.
Europe – Fourth (and Fifth) EU Anti-Money Laundering Directive(s)
In Europe, the 4th EU Anti-Money Laundering Directive (4 MLD), effective since June 26th, 2017, has introduced mandatory central UBO registers for each EU member state.
This means that information on individuals who ultimately own or control more than 25% and one share of a company will need to be obtained and held by the company and issued to the central register. It is up to each member state to decide whether to make the
data publicly accessible. The 4 MLD currently states that the information should always be accessible to the competent authorities and FIUs. It must be made available to “obliged entities” (including investment funds and banks) when carrying out client due
diligence procedures, and to those who can demonstrate a legitimate business interest in the entity, in accordance with data protection rules. In 2016, the UK set up the first publicly searchable register (the PSC Register); other member states may instead
choose to make the information accessible only to the parties specified in the directive. Financial institutions are expecting further regulatory change in the form of the 5th Anti-Money Laundering Directive (5 MLD). Current proposals by the European Commission
seek to lower the threshold to 10% for certain limited types of entities that present an increased risk of being used for money laundering and tax evasion. These beneficial owners would also be added to each member state’s central register. Trusts are currently
not required to be included in the registries but they will be brought under the remit of 5 MLD. Trust beneficial ownership details will only be available to companies who can demonstrate a legitimate business interest, however, across all EU countries. It
is estimated that the 5th Anti-Money Laundering Directive could be enacted by early 2018.
US FinCEN – Lifting the Corporate Veil
On May 11th 2018, the Financial Crimes Enforcement Network (FinCEN) will enforce its fifth and final AML rule, adding to the original four pillars of the AML program under the Patriot Act. Although this legislation has been in the pipeline since 2012, there
has been a definite drive to issue a final rule concerning beneficial ownership in the immediate aftermath of the Panama papers publication. Up until recently, there have been no agreed federal rules regarding ongoing identification of beneficial ownership
in the US - it has been applied on a best practice approach basis. Now, FinCEN is officially implementing the de facto global standard around identification of beneficial ownership of entities, recommended by FATF back in 2012. From May 2018, a beneficial
owner will be defined as an individual who - directly or indirectly - controls 25% or more of the equity interests of the legal entity customer. Furthermore, covered institutions are obliged to identify and verify the identity of beneficial owners of all legal
entity customers for every new account. This applies even if the institution has previously identified and verified the customer’s beneficial owners at the time of them opening another account. As FinCEN is a federal rule, it will be worth monitoring how states
like Delaware adapt to this new AML regime. Delaware is often accused of being the epicenter of corporate secrecy in the U.S, due to the fact anonymous holding companies can be incorporated there legally.
APAC: The Region of 40+ Regulators & Varying UBO Thresholds
As one of the founders of FATF, Australia has already implemented the taskforce’s recommendations in relation to the 25% beneficial ownership threshold and they are currently reviewing the introduction of a beneficial ownership register. Equally, in Singapore,
the Companies (Amendment) Act 2017, effective since March 31st 2017, states that all companies incorporated in Singapore and foreign companies must keep a register of registrable controllers. The Panama files exposed Hong Kong as the most active center in
the world for the creation of shell companies. The Chinese territory was listed as being home to 2,212 intermediaries — middlemen entities that established companies, foundations and trusts to help clients conceal their wealth.
Hong Kong's Financial Services and Treasury Bureau (FSTB) is, therefore, seeking to implement a central register in 2018, obliging private companies to reveal who their true owners are. To achieve this, they will remove their 25%:10% threshold split for medium-
to high-risk businesses. The FATF-recommended 25% threshold will be applied instead across the board to all non-financial businesses by Q3 this year. If we compare these stricter AML approaches with the Philippines, where the beneficial ownership threshold
of 2% for high-risk entities is due to be removed in September (to be replaced with a risk-based approach), outlined in Circular 950, it’s clear that there is still an uneven playing field globally. In stark contrast, Dubai requires documentary evidence of
identity for any shareholders that hold more than 5% of the issued capital. This lack of uniformity is equally reflected in the international tax regulatory framework and the automatic exchange of information regarding legal entities between jurisdictions.
UBO & TAX - COMMON REPORTING STANDARD (CRS)
One of the main regulatory deficiencies that Panama highlighted was the lack of inter-jurisdictional cooperation related to corporate tax transparency. The Common Reporting Standard (CRS), released by the OECD CFA on 15th July 2014, recommends that jurisdictions
acquire information from their financial institutions and exchange that data with other jurisdictions annually. The main goal of CRS is to improve beneficial ownership regulations by obliging jurisdictions to put in place anti-abuse rules to prevent any practices
intended to evade reporting and due diligence procedures. It also specifies that enhanced client due diligence is required during the onboarding process. Several new jurisdictions adopted the CRS this year. Another 50 jurisdictions, including China, Hong Kong,
Russia, Singapore and most notably, Panama, announced their intention to implement the Standard in 2018. This will bring the total number of participating jurisdictions to 101. Around 50 jurisdictions are working towards having their first information exchange
by September 2017. There are certain nuances, however, in CRS, that inhibit the automatic exchange of information. Two participating jurisdictions, for example, need to have an activated bilateral relationship under the CRS Multilateral Competent Authority
Agreement (MCAA) to automatically share information on legal entities. Remarkably, the U.S has opted not to join the Standard yet. Although, FATCA maintains that foreign financial institutions must provide reports to the IRS either directly or indirectly through
their tax authority, the U.S does not facilitate the sharing of information unless there is a specific Model 1 IGA reciprocal agreement with the jurisdiction in question.
With the recent enactment of the 4th Anti-Money Laundering Directive and FinCEN on the horizon, it’s evident that several regulatory initiatives are coming into effect in the wake of the Panama papers publication. Many jurisdictions are now choosing to embrace
FATF recommendations, reflected heightened global regulatory sensitivity. On June 29th, the OECD increased Panama’s global financial transparency ratings from “non-compliant” to “largely compliant”, demonstrating the substantial progress made in the global
system of exchanging tax-related information. The implementation of central UBO registers should, furthermore, lift the veil on beneficial ownership and enhance corporate transparency, particularly in relation to offshore entities and inter-jurisdictional