Connecting the Dots on Beneficial Ownership
Scott Hanson, Principal, Public Policy & Regulation, IFAC | May 27, 2020
Prior to the emergence of the COVID-19 crisis, financial crime was a front-of-mind issue for global policymakers, law enforcement authorities and other stakeholders, including the accountancy profession. For good reason: the scale of financial crime is incredible, with global estimates ranging from US$1.4 trillion to US$3.5 trillion annually, and underlying these trillions of dollars is criminal activity that damages economies and societies throughout the world.
In the months since, the COVID-19 pandemic has had an unprecedented impact on the lives and livelihoods of countless millions around the world. In line with the human and economic impacts has been an unprecedented expansion in public sector expenditure, rightfully implemented quickly in a crisis management mindset.
At the same time, the COVID-19 response has had the unfortunate side effect of creating new opportunities for corruption, bribery and fraud. As recently recognized by the Organisation for Economic Co-operation and Development (OECD), “This crisis creates opportunities for many integrity violations and could intensify fraud and corruption, particularly in public procurement, economic stimulus packages and public organizations. This could significantly undermine government action.”
The Financial Action Task Force (FATF), the global anti-money laundering standard-setter, has also addressed this issue, noting that, “the increase in COVID-19-related crimes, such as fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, is creating new sources of proceeds for illicit actors.” So while the COVID crisis is new, it has reiterated the importance of the pre-crisis priorities like the fight against financial crime, including money laundering.
Although there has been significant progress toward combat money laundering over the past decades, there is still much more to do. David Lewis, the executive secretary of the FATF, recently said, “I would sum up the results as ‘everyone is doing badly, but some are doing worse than others.” Recognizing this, it is important that all stakeholders step up their activities against money laundering and other financial crimes.
Approaches to Transparency
Uncovering and fighting illicit financial flows requires information, including on who owns, controls or ultimately benefits from any business involved in potentially illegal activities: namely, the beneficial owners. By concealing and/or disguising the beneficial owners of their assets, lawbreakers hide their activities, their proceeds of crime and their real identities. Accordingly, timely access to accurate beneficial ownership information plays a critical role for law enforcement and other authorities in identifying, preventing and prosecuting money laundering, terrorist financing, and tax evasion, among other financial crimes. In this context—made all the more acute by the COVID-19 pandemic and response—IFAC and CPA Canada have published a new report on the global approaches to beneficial ownership transparency with views from the accountancy profession.
FATF’s internationally endorsed standards have been instrumental in spurring progress in preventing and detecting money laundering and terrorist financing. The FATF Recommendations identify beneficial ownership information as a key factor in fighting these crimes and provide options for national policymakers to effectively integrate this information into their national frameworks.
Our report looks at each of these options and considers the tradeoffs that must come with each. Of particular interest is the public registry approach to beneficial ownership information. These are, essentially, websites where anyone can type in the name of a company and access information on the beneficial owners. In recent years, much of the discussion regarding beneficial ownership has focused on public registries. Although not mandated by the FATF Recommendations, the public registry approach is lauded by civil society organizations such as Transparency International. In terms of implementation, a public registry approach has been adopted in the UK and is currently being rolled out across the European Union under the Fifth Anti-Money Laundering Directive.
Focus on the Outcomes
However, keeping in mind what we are trying to achieve, the situation with public registries becomes more complicated. In the first instance, the priority is putting reliable, actionable information in the hands of law enforcement and other authorities so that they may take timely action to prevent and catch money launderers. In the second instance, this information should be available for service providers such as banks, lawyers and accountants so that they may effectively comply with their know-your-customer regulatory obligations.
Public beneficial ownership registries have clear benefits. There is an open question, however, as to the extent to which a publicly accessible registry enhances outcomes from an anti-money laundering enforcement and prevention perspective. A decision by a jurisdiction to adopt a public beneficial ownership registry is not an immediate solution in ensuring that law enforcement and others have access to accurate information in a timely manner. The same holds for professional service providers looking to comply with their know-your-customer obligations.
For the information in a registry to be actionable for law enforcement and others, it needs to be fully up-to-date and accurate. This is no insignificant challenge, especially considering the sheer numbers of companies and beneficial owners in larger, more active jurisdictions. Privacy concerns also play a significant role in the discussion, as publicizing ownership information may provide a tool for bad actors to exploit.
To help law enforcement to effectively do their job, public registries need to offer verified and current information, while minimizing the risks to personal privacy and safety. In short, in order to realize their full potential, public registries need to be done well, and they are not the solution to stopping money laundering in and of themselves.
The Accountancy Profession as Committed Partner
The IFAC and CPA Canada report considers these issues along with the perspectives of several leading professional accountancy organizations (PAOs) around the world. The report brings into the focus the complexities of beneficial ownership transparency in order to assist policymakers worldwide as they map the best way forward.
The global accountancy profession is a committed partner in the fight against money laundering and financial crime—a fight that is more important now than ever.
Issues and Insights
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