KPMG regularly assists clients in their periodic reviews and/or remediation of Know Your Customer (KYC) information, including information and verification of ultimate beneficial ownership (UBO) and controlling parties’. Many of our clients find it challenging to maintain currency in UBO and controlling party information and often struggle to meet regulatory and internal requirements for KYC of these parties. FATF’s addition of a Best Practices publication to its existing beneficial ownership library, reflects the continued global focus on this element of a KYC Program within a strong, effective anti-money laundering (AML) and terrorist financing (TF) Program. Strong customer risk assessments and documented controls, policies and procedures to help ensure compliance, are foundational. However a risk based KYC program that refreshes customer information, re-evaluates customer risk ratings, and subjects all parties to negative news screenings, can help organizations to more proactively address and mitigate AML and TF risks and issues.
In October 2019, the Financial Action Task Force (FATF) published its Best Practices on Beneficial Ownership for Legal Persons (FATF Best Practices), building on its previously issued 2014 guidance for Transparency and Beneficial Ownership* and its 2012 strengthened Standards,* which include Recommendation 24 pertaining to beneficial ownership. In the FATF Best Practices, FATF recognizes certain challenges that Member States face in implementing effective beneficial ownership mechanisms and requirements, and provides cases and examples of better practices across certain Member State delegations and suggested solutions.
From FATF’s assessments of 25 Member States, beginning in 2012, it has found more than half of Member States are not largely in compliance with Recommendation 24 Standards. Specifically:
Through further analysis of this sample population, FATF and the Egmont Group,* identified the root of the problem as laying in weak implementation of the existing standard, rather than in the gaps of the standard itself and therefore within this Best Practices publication, aims to clarify the challenges that exist and potential solutions.
FATF’s Best Practices on Beneficial Ownership for Legal Persons
The FATF Best Practices notes that FATF Recommendation 24 establishes technical requirements for identifying the beneficial owner(s) behind the legal entity persons, such as companies and foundations. The FATF sets forth that when appropriate mechanisms exist to identify these owner(s) then effectiveness is achieved: legal persons are prevented from being used for criminal purposes; legal persons are sufficiently transparent; and accurate and up-to-date basic and beneficial ownership information, including on controllers, is available on a timely basis.
According to this publication, Recommendation 24 Interpretative Note indicates that countries should use one or more mechanisms to ensure information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country, or can be otherwise determined in a timely manner by a competent authority. FATF states that a multi-pronged approach using several sources of information is often more effective in preventing the misuse of legal persons for criminal purposes and implementing measures that make the beneficial ownership of legal persons sufficiently transparent. It also helps mitigate accuracy problems. Specific mechanisms identified include the:
Key challenges to implementing an effective beneficial ownership system
Within the FATF Best Practices, the organization lists certain challenges across the beneficial ownership system structure that continue to plague Member States and recommends certain key features that can help Member States craft a more effective system. The challenges identified included the following areas:
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* FATF’s earlier guidance, studies, and reports are available here: FATF Guidance on Transparency and Beneficial Ownership (Oct 2014), FATF Recommendations (2012), and The Joint FATF and Egmont Group Report on Concealment of Beneficial Ownership (July 2018). More information on the Egmont Group, a united body of 164 Financial Intelligence Units, is available here.
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