A history in the making – Revelations and evolution in beneficial ownership transparency

International efforts to expose hidden criminal wealth, through making beneficial ownership visible, has come a long way since their origins in the 1990s. Spurred on by a series of scandals that exposed the systematic abuse of offshore tax havens, bearer shares and the like, new regulations and approaches have evolved around the world to prevent criminals abusing arrangements that enabled them to hide their fortunes.

Looking at the history is informative. It tells us how change came about at the FATF, the European Union and in countries around the world. It gives us important lessons about how to address vulnerabilities and build alliances to expose criminal wealth.

“The history of beneficial ownership transparency is neither linear, nor is the story finished. Many loopholes and abuses remain. We’ve been looking at the evolution in beneficial ownership transparency to develop and improve our strategy of support and technical assistance to partners worldwide,” says Alexandre Taymans. He heads up technical support on beneficial ownership at the European Union’s Global Facility on AML/CFT, which is a team of experts tasked with assisting countries to fight money laundering and terrorist financing.

This article reviews the journey taken so far in strengthening transparency and registration of beneficial ownership. It highlights what has been learned and anticipates future challenges and solutions.

In the 1990s, anti-money laundering efforts were about tackling criminal cash deriving from drugs, and was largely focused on the Americas. At that time, the priority was to identify the legal owners of entities and assets like bank accounts.

Following the 9/11 attacks global measures to address abuses of the financial system underwent a step change. Measures to expose and prevent terrorism financing were assimilated with those that tackled money laundering, and as a result the whole agenda shifted up a gear.

The FATF’s 2003 recommendations represented the birth of the beneficial ownership concept that became the centre of anti-money laundering efforts going forward. They were the first global attempt to bring out into the open the true owners; those who benefited from and controlled criminal wealth. Though the initial set of standards were vague and ill-defined they set in motion a process of further learning and evolution in beneficial ownership transparency over the following decades.

In the following decade there was a worldwide effort to establish legal frameworks and authorities that could implement the far-reaching recommendations. By 2012 learning and feedback had fed into a further reform of the FATF recommendations. Alexandre Taymans stresses that these new recommendations, “reflected a growing recognition that laws and standards were not enough. Attention shifted to turning processes of beneficial ownership identification, registration and information-sharing into real-world effect.” This was a significant development, spurred on by events in the preceding period.

“Laws and standards were not enough. Attention shifted to turning processes of beneficial ownership identification, registration and information-sharing into real-world effect.”

The year before, a World Bank report had revealed the immensity of the problem and how much work was left to do. It documented the ease with which criminals could hide billions behind obscure financial and corporate arrangements. It also revealed the role of lawyers, financial advisers and other enablers in obfuscating the ownership of wealth.

At the same time, in the wake of the financial crisis, regulators, banks and governments had begun to recognise how the unregistered and unmanaged ownership of wealth and financial assets was impacting global financial stability. It was becoming clear to political leaders and a widening group of financial professions that clarity and openness around the beneficial ownership of corporations, trusts and the like was needed to develop sound policies and to re-establish the reputation and integrity of the financial system.

In 2014, LuxLeaks shifted policy makers thinking further when newly available data revealed the role of “letterbox” companies and complex corporate structures in avoiding tax. To date a lack of understanding about the meaning of beneficial ownership and the resulting failure to share information effectively meant that as often as not the ownership of criminal wealth stayed hidden.

Nevertheless, these revelations spurred on and focused attention on the European Union’s fourth anti-money laundering directive which was already being drafted. It emerged in 2015 and brought into legal effect the new FATF recommendations introduced a few years earlier. It represented a milestone as it obliged member states for the first time to set up beneficial ownership registers.

In the following years there were more financial investigations and scandals, some based on official data, which created political momentum and change. Media and advocacy organisations were the ones educating experts and the public on how globalisation, financial de-regulation and secret jurisdictions enabled criminal laundering and how much percolated into the legal economy. It also showed that no company or country was entirely immune, and revealed just how much criminals relied on Western banks, legal systems and financial markets to launder and protect their wealth.

As a result, a new anti-money laundering directive emerged from the European Union in 2018, its fifth. Recognising that governments, not journalists, had to be seen policing the system, the emphasis turned from written rules to reforming processes and work cultures to bring about real impact. Enforcement became the priority which meant coordinating a growing array of public and private sector professionals with a stake in the reputation of the financial system.

“Whistle blowers, investigative journalists and civil society had catalysed change at all levels.”

“Whistle blowers, investigative journalists and civil society had catalysed change at all levels,” says Alexandre Taymans. “The authorities that ran beneficial ownership registers emerged as central to an evolving system which pivoted from passively logging details to actively managing, sharing and verifying masses of data.” And across this expanding network, technology could contribute with databases, analysis and easing the flow of data across an ever-growing community of stakeholders.

It also became clear that within the EU and around the world the differences in rules around beneficial ownership information registration and sharing created loopholes and difficulties. In Europe, good and bad practices were revealed and drove competition amongst legislators for greater transparency. Standards laid out in the EU’s fifth anti-money laundering directive – those concerning the adequacy, accuracy and accessibility of data – became important standards for all those concerned with tightening the net on hidden criminal wealth.

Issues around beneficial ownership have become central to global efforts to tackle money laundering. Progress has been made in registering and verifying beneficial ownership information. Weaknesses are gradually being identified and addressed and good practice and experience is shared globally. Several benefits have emerged. Efforts to prevent conflicts of interest, improve public procurement, enforce financial sanctions and effectively collect tax all benefit from beneficial ownership transparency.

Yet, looking to the future a series of challenges persist. Beneficial ownership disclosure systems are dependent on the quality, timeliness and veracity of the data available and there are difficulties in defining what must be registered and when, as well as processes of verification. In 2021, the proposed European Union’s AML/CFT package of measures sought to harmonise the process of beneficial ownership data collection and management in Europe.

Around the world more work is needed to strengthen beneficial ownership transparency, particularly as beneficial ownership often straddles borders.  As the international standard-setter for AML/CFT rules, the FATF, continues to review recommendations relating to beneficial ownership transparency, there remains wide variation in disclosure standards for beneficial ownership information and registration around the world. Similarly, variations in technology and legal limits on sharing data across borders impede interoperability.

The Global Facility continues to learn from past developments to build a growing momentum for reform and strengthen global compliance with FATF standards. At the same time, the Global Facility works with countries and institutions to anticipate future challenges, revelations and requirements. The Global Facility joins up international organisations, such as the FATF associated regional bodies, as well as national authorities and agencies to strengthen beneficial ownership standards and frameworks. It advises governments to assess risks around the misuse of legal persons and arrangements, and assists on beneficial ownership legal frameworks that underpin beneficial ownership registers.

In addition, the Global Facility steers discussion and debate amongst authorities, professionals and experts on emerging issues of global concern. Alexandre Taymans explains, “We are identifying emerging operational needs, such as how to unravel complex ownership structures and enforce sanctions. By understanding the processes, knowledge and institutions we’ve built so far we can support governments to handle the next generation of challenges. We try to see the complete picture of beneficial ownership so we can provide a comprehensive service to our partner countries and the international community.”

© Unsplash – sharon-mccutcheon