Open Ownership response to the FATF consultation on the revision of Recommendation 25 and its Interpretive Note

  • Publication date: 06 December 2022
  • Author: Open Ownership

Revisions to FATF Recommendation 25

Response to the public consultation on the revision of R25 and its Interpretive Note – December 2022

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 BO 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 the revision of R25 and its Interpretive Note. The lack of governance to date of legal arrangements such as trusts and their status is a major obstacle to fighting financial crime, and also intersects with transparency in the BO of legal entities where legal arrangements appear in their ownership structures. In order to address this blindspot, and to ensure shortcomings in R25 do not undermine R24, OO recommends following a similar approach to legal arrangements that it requires for legal entities as part of R24. In response to the Financial Action Task Force’s questions:

1. Are FATF proposals adequate to mitigate the risk of misuse of legal arrangements and to ensure access to BO information?

While the proposed revisions are a step towards mitigating the risk of misuse of legal arrangements and to ensure access to BO information, they fall short of fully mitigating the risks posed by the misuse of legal arrangements and the need to ensure proper access to BO information. There is no registration requirement for trusts in many countries, to have legal validity or otherwise, as is the case with legal entities. In cases where there is a requirement to register information, there is little or no way to check what compliance rates are, to verify information given or to know whether information is up to date, or if the conditions or parties of a trust change. The findings of the June 2022 Cullen Commission of Enquiry into Money Laundering in British Columbia report are representative of the challenges faced in many jurisdictions. With respect to trusts which need to be reported where they hold property, it states:

The [...] Study suggests there is an under-reporting of [...] trusts for several reasons, including a lack of understanding of the meaning of a [trust] and difficulties in identifying [...] trusts, as they can exist with no formal agreement or documentation of any kind.

Unlike legal entities, trusts can be formed, exist and be legally valid without the knowledge and awareness of competent authorities. This makes it impossible to assess the risks posed, and therefore to mitigate them.

The conditions of the trust are often opaque and have many varying complicated control structures due to the flexibility afforded to them by the law. For example, a settlor might still retain control over a trustee (or the trust) through a letter of wishes, by appointing a protector, or by giving power of attorney to a close associate to either veto or remove the trustee. These issues are inherent to legal arrangements because trusts can own assets such as company shares and bank accounts. This is an unacceptable blind spot for competent authorities. To illustrate, a World Bank study of data from a 30 year period found that nearly 70% of more than 200 large-scale corruption cases relied on anonymously owned companies, including the use of trusts to disguise ownership. This not only obscures the ownership of assets, which in many cases are not legally by any natural person involved in the trust, but directly undermines all of FATF’s efforts towards better visibility of the ownership of legal entities under R24.

Countries implementing the registry approach as part of the multi-pronged approach for the beneficial ownership of legal entities under R24 have demonstrated the best results in FATF mutual evaluation reviews in terms of making adequate, accurate and up-to-date information available to competent authorities. FATF has acknowledged this introducing new requirements in recent revisions to R24. A similar approach should be taken for R25.

Other approaches will not lead to adequate, accurate and up-to-date information being available to competent authorities. Agents and service providers have a potential conflict of interest in providing accurate and up-to-date information about trusts to authorities, and experience with R24 shows that relying solely on the provision of information by these intermediaries provides unnecessary barriers to timely access, risks tipping o the subjects of investigation, limits proactive investigations and bulk analysis by competent authorities, and provides challenges with ensuring compliance.

OO proposes a multi-pronged approach for legal arrangements, consistent with R24. Lessons from R24 show that in order to make it most effective, a central registry approach should be required. In order to incentivise compliance, registration should have constitutive effect. This means that a trust would not be legally valid in a country where it has not been centrally registered. This approach has already been taken by some countries, such as South Africa, where trusts must be registered in order to be valid. Certain domestic trusts must be registered with the Master of the High Court, who subsequently issues letters of authority to the nominated trustee(s). No trustee may act as such without the written authority of the Master, thereby giving it legal validity upon registration. To further encourage compliance, R25 could require any new direct or indirect (classes of) beneficiaries to not be able to benefit from the trust property if their information has not been updated with the central register.

Governments are best placed to collect and verify beneficial ownership information. The registry approach also allows for the implementation of the most effective mechanisms to verify the information and ensure accuracy. In order to further ensure the proposals mitigate the risk of misuse of legal arrangements, countries should ensure access to the information by users who help further AML/CFT aims beyond competent authorities, FIs and DNFBPS.

2. Are proposals clear and are there any issues which need further clarification or that should be addressed in guidance?

OO has made in-line edits to the revision of R25 and its Interpretive Note to address issues relating to lack of clarity, insufficient clarification, and omissions. Proposed amendments are marked in blue, with additions underlined and deletions struck out.

3. What is the expected impact of the proposals on legitimate activity? In particular, what are the challenges for implementation?

Given the issues highlighted in response to questions 1 and 2, OO expects countries will face considerable challenges in implementing the proposals as they stand. It will be impossible for countries to assess the risks and, therefore, adequately mitigate them; know whether the requirements are being complied with; and enforce sanctions. Countries will face considerable challenges ensuring adequate, accurate, and up-to-date information is available to competent authorities without undue delays. Experience from other countries that centrally register trusts demonstrate that this has no adverse effect on legitimate activities. These countries have not done so primarily for the purpose of AML/CFT, but also to ensure the proper functioning of trusts to conduct legitimate activities, and to ensure trustees and other parties to a trust fulfil their (fiduciary) duties.

Finally, OO believes the recommendation can be written in simpler and clearer language. This is critical to ensure it does not cause confusion. In engagements with countries implementing reforms to comply with R24, OO has observed that the unclear phrasing of R24 has caused significant confusion not just with implementing agencies, but also with assessors of FATF-Style Regional Bodies. This highlights that this is not just an esoteric issue, but one that relates to the effectiveness of the FATF Standard itself.

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

Next page: Full draft amendment text of Recommendation 25 and its Interpretive Note