Advancing AML: Why ultimate beneficial owners must be properly identified

In March 2022, global regulatory watchdog the Financial Action Task Force (FATF) adopted amendments to Recommendation 24 (R.24) of its 40 Recommendations that govern global anti-money laundering (AML) policy. This concerns Ultimate Beneficial Ownership (UBO), i.e., the person who profits from money moving into or out of a business.

These are significant changes as R.24 has faced criticism in the past for being a blanket approach that did not consider the variances of a risk-based approach or the unique needs of non-profit organisations (NPO). R.24 has been under scrutiny for the past two years. Following input from the Global NPO Coalition, the private sector, and FATF itself, the recommendation has been rewritten to strengthen requirements for transparency on beneficial ownership globally and legal persons.

Why do legal persons matter?

Understanding legal persons is important as, under the old version of R.24, financial institutions (FI) were responsible for finding the UBO of a company, whereas now the legal persons are obliged to have that information on record and make it available to the country they’re operating in.

This information must be publicly available through a beneficial ownership registry. It’s likely that this will be folded into existing registers such as Companies House in the UK or the Dutch Business Register (Handelsregister). This information is easily accessed by FIs, Designated Non-financial Businesses or Persons (DNFBPs), and regulators, which would make investigations much simpler.

Before the update

Prior to the revision to R.24 there was a requirement to have a register for UBOs, but this was often separate from specific business information. The FATF’s exact wording was: “Countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities, through either a register of beneficial ownership or an alternative mechanism.”

In the UK, there is the persons with significant control (PSC) register. It is widely regarded as a failure and filled with incomplete, incorrect or inadequate information.

This was not just a problem in the UK, but a global issue – and it rendered R.24 ineffective at tackling money laundering and terrorism financing. Companies were able to be formed and trade without any clarity as to the UBO. It meant that money was circulating through companies without any substantial knowledge as to who the real beneficiary was.

Operating in this way means that transaction monitoring struggles to provide a full picture of customer behaviour at pace. Instead, compliance officers normally must wait for patterns to emerge and determine suspicious activity from there. This process has been sped up thanks to the advent of real-time transaction monitoring, but it could be even faster if UBOs were properly identified.

The six challenges to identifying UBOs

There are a few key difficulties that regulated businesses face when identifying UBOs:

1. Risk assessment

Not all risk-based approaches are the same, and with good reason as every business has unique requirements depending on where they operate and their industry. But certain standards must be met regardless of these factors.

Legal persons are a common issue when conducting risk assessments. Across the fourth round of Mutual Evaluation Reports from FATF (the investigations and evaluations of a country’s AML capabilities), there is a trend where not all types of legal persons are covered. This oversight results in varying levels of scrutiny being applied to companies. It may be an issue of education, as not all businesses may be aware of the full range of legal persons that can exist.

By standardising the issue in domestic law, FIs, DNFBPs and regulators will all be immediately aware of what legal persons to consider – rather than letting misuse of legal persons slip through unnoticed.

2. Accurate UBO information

Having accurate information is vital to any AML activity, but especially when conducting transaction monitoring and investigating how suspicious a transaction may be. Without accurate UBO information that has been verified and monitored, it is far more difficult to understand whether the flow of money is illicit.

The importance of accurate UBO information increases when looking at foreign transactions and businesses. Many criminals route their money across borders to get around sanctions and to simply make their money harder to track.

By creating a UBO register that is accurate and verified, countries will make it far easier for FIs and DNFBPs to investigate transactions and understand whose hands money is flowing through.

3. Communicating UBO information

Making UBO information easily and quickly accessible to authorities is vital for investigations. However, with weak registers and some FIs and DNFBPs failing to provide that information in a timely manner – if they had it at all – many countries fail at this hurdle.

Technology can help with this element. While UBO registers are being built, businesses can implement API-based solutions that can quickly convey all the necessary information to the local regulator to cross-check this information.

4. Shareholder arrangements

For nations that use nominee shareholder arrangements, the AML risk increases for any business, domestic or foreign, that chooses to work with companies in that country. A nominee shareholder is someone who holds shares in benefit for another person. This creates a thick layer of obscurity that needs investigation and businesses should have on record who the nominee is holding shares for and log that information for simpler transaction monitoring.

As part of the revision to R.24, it may also be that countries no longer allow bearer shares and bearer share warrants to be issued. These are shares in securities held in custody by an agent who is merely a licensed provider, not necessarily an FI.

FATF’s revisions to R.24 would see immobilized bearer shares held with financial institutions rather than licensed providers (mobile bearer shares are illegal worldwide). This would also come with a requirement for timely access to the UBO information for those shares. FIs may see stricter accessibility regulations come into effect to facilitate this revision and may not be able to provide as much privacy to customers as a result.

5. Penalties

Fines and fees are one of the most headline-grabbing aspects of AML and carry huge reputational – and occasionally existential – threats for businesses. But when it comes to UBOs there is little that regulators can do.

However, this is certain to change following FATF’s review of R.24. The global watchdog has made clear that it wants an overhaul of the approach that countries and companies take towards UBO information. And encouraging harsh fines is a powerful way to achieve that.

6. International alignment

Regulatory harmonisation has been a popular talking point at AML conferences for years. And due to a lack of standards, some nations have not considered UBO information in any degree – making sharing information across borders far more difficult.

Language barriers do not help but creating registers and potentially centralising information, as the European Banking Authority’s EuReCa is set to do, may see greater efficiency in the future in some parts of the world.

What this means for businesses

In its public statement on the revision to Recommendation 24, FATF ended with this line: “The FATF expects all countries to take concrete steps to implement these new standards promptly, and to determine the appropriate sequence and timeframe for implementation at national level.”

Every business should expect significant legal changes to occur soon with regards to R.24 and should encourage updating the UBO information for customers. Otherwise, they risk the dubious honour of being the first to suffer AML penalties for UBO failures.