Beneficial Ownership: A KYC opportunity or data nightmare?

Beneficial ownership is gaining significant exposure at the moment, with the UK intending to use its presidency of the G8 Leaders’ Summit next month to promote the improvement of international co-operation on tax evasion and push for greater transparency and accountability.

As David Cameron, Prime Minister of Britain, states, “… dealing with tax evasion is not just about exchanging information. It is also about improving the quality and accuracy of that information. Put simply, that means we need to know who really owns and controls each and every company.”

As part of this, the G20 has called on all nations to improve standards on beneficial ownership and has put forward the idea of implementing a multinational exchange of bank data that emulates the FATCA model. At the same time, EU nations will consider augmenting the beneficial ownership standards in the 4th EU Money Laundering Directive and AUSTRAC is currently considering amending its AML/KYC laws to incorporate beneficial ownership checks accordingly.

So why now?

It is commonly cited that a lack of transparency in financial services caused the global financial meltdown. It’s a well-known fact that corporations and other business legal entities are vehicles for money laundering, terrorism financing and other financial crimes. There appears to be a distinct lack of knowledge about who ultimately controls, owns and profits from companies. Failure to understand beneficial ownership contributes to the growth industries of money laundering, fraud, tax evasion and terrorism financing. It is all too easy for criminal, terrorist and tax evading individuals and groups to hide behind shell companies and legal structures to fund their criminal and terrorist industries.

That’s why new regulations, such as FATCA, Dodd-Frank and the 4th EU Money Laundering Directive, are being introduced – to increase the transparency of the global financial system. Beneficial ownership is one such regulatory strategy for increasing transparency into the otherwise murky world of finance. Beneficial ownership is defined as “the level of ownership in funds that, as a practical matter, equates with control over such funds or entitlement to such funds” (The Wolfsberg Group).

FATCA, in particular, introduces a requirement for a 10% threshold for beneficial ownership (if the person displays U.S. indicia), which is significantly higher than the 25% norm, which most AML/KYC regulations currently demand (for low risk entities). Therefore, FATCA requires a level of Customer Due Diligence that goes beyond that with which AML professionals are currently familiar.

In light of this, perhaps current beneficial ownership identification thresholds under AML / Customer Due Diligence laws are not enough. Maybe FATCA has the right idea by imposing ambitious initiatives that force financial institutions to identify and classify clients accurately and appropriately based on accurate information held on the true owners of bank accounts and corporate vehicles, thereby, introducing the transparency that the financial services industry so badly needs.

The flip side to this is that a 10% beneficial ownership threshold will require more data and document collection, as well as the sharing of beneficial ownership information – across institutions and across entire nations. For FATCA alone, the identification of a new legal entity customer who is a U.S. Person may require full due diligence to look for U.S. indicia. This is time consuming and, in certain scenarios, it is practically impossible to request each 10% business owner to provide documentary evidence or information to assess if U.S. indicia is present or not.

However, given its regulatory status, FATCA obligations need to be met.

Having asked a number of our clients how they will handle this increased documentary obligation in line with other lower beneficial ownership levels, it would seem that some financial institutions are seeking to maintain the 10% beneficial ownership threshold across all regulatory obligations, helping them to maintain a higher level of compliance with Know Your Customer and Customer Due Diligence obligations across the spectrum of regulations.

In many ways, these financial institutions prefer to view the high FATCA beneficial ownership thresholds as an opportunity to introduce standardisation of compliance across various regulatory streams (e.g. AML/KYC, Dodd-Frank, EMIR, MiFID II). The additional data and documentation collected as part of this process can be adopted and re-used for other regulatory compliance programmes, helping to raise the overall bar of compliance across all regulations. It may also help institutions to more accurately measure the size of the exposure facing their organisations, enabling them to take proactive corrective measures ahead of regulatory intervention.

At the end of the day, whatever your views are on FATCA or other regulations, the fact remains that focus on increased compliance standards and demands are set to increase. It makes good business sense to try to align and standardise regulatory obligations as much as possible.

By adopting the same high standard across all regulatory requirements and re-using as much of the data and documentation collected for all existing or new regulations, financial institutions can transform the nightmare of data collection into an enhanced compliance opportunity.