Open Ownership response to the FATF consultation on revisions to Recommendation 24 and the Interpretive Note

  • Publication date: 01 December 2021

Overview

Open Ownership (OO) provides technical assistance to countries implementing beneficial ownership (BO) transparency reforms, to help generate accurate data on BO that complies with international standards and meets the needs of data users across government, obliged entities and the wider private sector, and civil society.

Since 2017, OO has worked with over 40 countries to advance implementation of beneficial ownership reforms, as well as supporting the creation of over 15 new central and sectoral registers. OO has developed the world’s leading data standard for beneficial ownership information, co-founded the international Beneficial Ownership Leadership Group, and built the world’s first transnational public beneficial ownership register.

OO is pleased to contribute to the public consultation on revisions to the FATF Recommendation 24. In summary:

  • Open Ownership welcomes stronger language around central BO registries as part of the multi-pronged approach under Recommendation 24.
  • A central registry is the most effective way to ensure competent authorities, obliged entities and all other actors fighting financial crime have timely access to accurate BO data.
  • Registrars should be primarily responsible for ensuring the verification of BO data in these registers, although all users of the data have a role to play in improving data accuracy.
  • In order to address some of the current challenges, FATF should set clear language around minimum standards and unambiguously outline the role regulators should play. This will lead to accurate, usable data, which is fundamental in fighting financial crime, but in itself does not automatically lead to data use and impact.
  • Governments should take a proactive approach to increasing the capacity for proactive data use amongst all actors fighting financial crime. Central registries have been and are being implemented in major financial centres, and it is here that the evidence must be gathered and the models developed for other countries to emulate.

For further information or to discuss these responses in further detail, please contact [email protected]

Multipronged approach to collection of Beneficial Ownership information

The requirement in paragraph 7 includes a compulsory company approach, a requirement for a public authority or body to hold beneficial ownership information (a beneficial ownership registry or another body) or an alternative mechanism, and the supplementary measures. Countries should decide, on the basis of risk, context and materiality, what form of registry or alternative mechanisms they will use to enable efficient access to information by competent authorities, and should document their decision. Do you agree with the approach set out in paragraph 7 of the Interpretive Note?

OO welcomes the requirement of the multi-pronged approach to the collection of BO information. Reviews of FATF MERs have shown that central BO registers provide competent authorities with the most efficient access to BO information. Therefore, OO recommends making central registers a required element of the multi-pronged approach. If BO data is not held by a single body or in an alternative mechanism, this should not impede efficient access and it should be clear to users where specific data is held. Where data is not held by a single body, to ensure efficient access it is critical that information held by all bodies should conform to the same standards and definitions, and that legislation governing this should be harmonised to prevent regulatory arbitrage. For example, the definition of a beneficial owner and the key fields of information collected should be the same for all data sources.

OO recommends that FATF define what it means with “efficient access” under paragraph 7 as direct and unfiltered, enabling analysis, and include examples of mechanisms that can facilitate this, such as ensuring data is structured and machine-readable, making data available through an API and in bulk.

If FATF does opt to retain the draft wording that permits use of alternative mechanisms, FATF should be unambiguous that any such mechanisms should be specific, additional and dedicated mechanisms which should still provide efficient (i.e. direct and unfiltered) access.

Bearer Shares and Nominee arrangements

Should bearer shares and bearer share warrants without any traceability be subject to additional controls as set out in amendments to paragraph 14 of the Interpretive Note?

Yes. OO welcomes the proposed changes, specifically banning the issuance of new bearer shares and bearer share warrants, but suggests clarifying the changes to the Interpretive Note. FATF should ensure to close loopholes in instances where professional intermediaries hold immobilised bearer shares. For example, if ownership of bearer shares is transferred to a foreign legal entity or arrangement in another jurisdiction that does not require the BO to be registered with authorities, competent authorities will not have access to the real BO of the bearer shares.

Is the draft glossary definition sufficiently clear to avoid inadvertently applying excessive controls to traceable and legitimate uses of such instruments?

The draft glossary definition is sufficiently clear as it also accounts for similar mechanisms.

If there remains undue controls, how should this be mitigated?

OO proposes amendments to the Interpretive Note to mitigate remaining undue controls.

Should nominee arrangements be subject to the disclosure requirements as set out in amendments to paragraph 15 of the Interpretive Note?

Option 15 (b) does not provide up to date information on nominators and the and the natural person(s) on whose behalf the nominee is ultimately acting to the registers. We therefore propose to change the wording in 15 (b), and suggest adding prohibiting nominee arrangements and the enforcement of such a prohibition – as some jurisdictions have already done – as an option.

Will the proposed rules and the new glossary definitions create undue restrictions for institutional investors or other legitimate uses of such instruments, and if so, how should this be mitigated?

OO has no reason to believe the proposed rules and definitions create undue restrictions for institutional investors or other legitimate uses of such instruments as similar rules have already been implemented in a range of jurisdictions without significant impact on these actors.

Are there other specific mechanisms that should be permitted, in addition to those proposed, which could ensure their transparency?

OO has proposed amendments to the Interpretive Note to ensure transparency.

Risk-Based Approach

Should countries be required to assess the ML and TF risks associated with foreign-created legal persons and take appropriate steps to manage and mitigate them?

OO takes the position that all types of foreign-created entities and arrangements through which ownership and control can be exercised that establish a business relationship in a jurisdiction should be subject to disclosing beneficial ownership, as part of the principle of comprehensive coverage. Research has shown all such entities can potentially be abused for ML and TF. Experiences in the United Kingdom have demonstrated how a legal entity not included within disclosure requirements, the Scottish Limited Partnership (SLP), became “the getaway vehicle for corrupt individuals and organised criminal gangs” according to Transparency International, until they were brought within the scope of disclosure requirements (see also p9 of this impact study). Therefore, risk assessments should not form the basis for exemptions from disclosure.

Assessing ML and TF risks to types of foreign-created legal persons, can be valuable to raise red flags for subsequent investigation.

What constitutes a sufficient link with the country?

From Open Ownership’s work on trusts, the threshold for “sufficient link” should be any connection with the jurisdiction. This includes if a foreign entity holds assets (e.g. real estate), or the entity establishes a business relationship in the jurisdiction with service providers subject to AML/CFT law and regulations. This includes, for instance, banks, investment managers, lawyers, accountants, tax advisers, trust and company service providers, and real estate agents.

Currently these domestic service providers may be under an obligation to identify beneficial owners of foreign created legal persons when they establish a business relationship. However, domestically these legal persons may not be under the same BO disclosure requirements, for instance if they are incorporated in a secrecy jurisdiction. This disparity in the availability of information can create substantial problems for identifying BO of foreign legal persons.

OO welcomes the requirement of foreign-created entities to disclose their BO when they establish a “sufficient link”. OO recommends that FATF defines “sufficient link” as suggested in the text edits in the Interpretive Note. In the absence of the availability of BO information in all jurisdictions, OO recommends collecting this information in a central BO registry for foreign legal persons (some jurisdictions, e.g. the United Kingdom, have proposed implementing a register for entities that engage in specific activities). As there are substantial challenges to this approach, not least the challenge in verifying BO of foreign legal persons, international cooperation as outlined in paragraph 19 will be essential.

Should a risk-based approach be applied to verification of beneficial ownership information?

As part of the Open Ownership principle on verification, a risk-based approach to verification is recommended for certain verification mechanisms. The best combination of verification mechanisms varies per jurisdiction, and depends on a number of factors. For instance, whether the government holds other datasets that BO statements can be verified against. When BO information is collected and held as structured data, a number of verification checks can be automated at the point of and after the submission of BO information to reduce accidental errors and identify deliberate falsehoods. Automated checks should apply to all BO information and are not resource intensive if implemented well.

A risk-based approach is relevant for certain resource-intense verification mechanisms. A number of jurisdictions, for instance Denmark, check random samples of BO information. In this case, it would be more effective to check a random sample of companies deemed to be high risk.

Access to Information

Taking into account needs of competent authorities and other stakeholders, and concerns relating to privacy, security and other potential misuse of BO information, do you agree with the requirements on access to information as set out in paragraphs 12 and 13?

OO welcomes FATF’s proposal to require to make BO information available to public authorities over the course of procurement, as it supports the FATF Standard’s aim to ensure a coordinated global response to prevent organised crime, corruption and terrorism. According to the OECD, public procurement is the most common purpose of all bribes. OO has highlighted in detail how BO information can help prevent fraud and corruption in procurement. Due to the sums of money involved in public procurement, this requirement could prevent the generation of a substantial amount of illicit funds.

OO recommends that access to all relevant information to fight financial crime (information covered in paragraphs 4 and 7) should be made accessible to financial institutions, DNFBPs and foreign countries’ competent authorities. Barring financial institutions from using registry information for those purposes would render the registry less useful in combating illicit activity and create restrictions that have no statutory basis. FATF should make clear that jurisdictions implementing a central registry as outlined in paragraph 7 (b) (i) with public access will satisfy all requirements under paragraphs 12 and 13. Making information public has a range of benefits from making information available to a broader range of actors fighting financial crime, and the potential to facilitate efficient access for international competent authorities, thereby contributing to the aims set in under paragraph 19.

Next page: Draft Amendment Text to R.24 and INR.24