FATF's best practices on beneficial ownership for legal persons

Key points

• FATF’s Best Practices identify KYC Program features for beneficial ownership that many of its Member States continue to struggle with, limiting their effectiveness. Among these features are risk assessments of beneficial owners; adequacy, accuracy, and timeliness of beneficial ownership information; and access by competent authorities.
• FATF, in conjunction with the Egmont Group, has identified the root of the problem as being Member States’ weak implementation of the existing standard, rather than gaps in the standard itself.
• The Best Practices publication is aimed at clarifying the challenges Member States face, and providing potential solutions through the use of cases and examples of better practices across delegations.

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:

• 44% of Members, or 11 of 25, were rated as largely compliant
• 48% of Members, or 12 of 25, were rated as partially compliant
• 8% of Members, or 2 of 25, were rated as non-compliant.

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:

• Registry Approach – requiring company registries to obtain and hold up-to-date information on the company’s beneficial ownership
• Company Approach – requiring companies to obtain and hold up-to-date information on their beneficial ownership or, alternatively, to require companies to take reasonable measures to obtain and hold up-to-date information on the companies’ beneficial ownership proportionate to their ML/TF risk
• Existing Information Approach – using existing information.

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:

• Risk Assessment – inadequate risk assessments concerning the possible misuse of legal persons for ML/TF often include the following limitations:
  • Not all types of legal persons are covered in the risk assessment
    
  • Relevant risk assessments are not consistent with the results of national risk assessments
    
  • Only domestic threats and vulnerabilities associated with legal persons incorporated are considered
    
  • Registries, companies, financial institutions, designated non-financial businesses and professions, and competent authorities might not possess a good understanding and knowledge of the risks involved in legal persons.
    
• Adequacy, accuracy, and timeliness of information on beneficial ownership – inadequate measures hindering accurate and up-to-date information include:
  
  • Information is not accurate – it is not adequately and actively verified, tested or monitored; there is no obliged party to verify, test, or monitor the information or the obliged party might not have rigorous implementation of customer due diligence measures
  • Relevant parties are not required to keep records for a period of time (for at least five years)
    
  • Legal persons do not update their beneficial ownership information or inform the company registry when there was a change of beneficial ownership
    
  • There is a lack of coordination among different sources of information and no cross-checking to ensure the accuracy of the information
    
  • Information on beneficial ownership is difficult to identify when complex structures are involved
    
  • Information on beneficial ownership is not always available when foreign ownership is involved.
    
• Access by competent authorities – inadequate mechanisms to ensure competent authorities have timely access to beneficial ownership information on legal persons, such as:
  • Obstacles to information sharing including data protection and privacy laws, which can impede competent authorities from getting timely access to adequate, accurate, and up-to-date basic and beneficial ownership information
    
  • A lack of information sharing among competent authorities
    
  • Failure of the competent authority to establish procedures to seek information from obliged parties
    
  • No registration/licensing mechanism of obliged parties, which limits the competent authorities’ ability to identify the source of information
    
  • Insufficient resources to support the competent authorities’ efforts to carryout investigations or law enforcement actions.
    
• Fines and sanctions – lack of effective, proportionate, and dissuasive sanctions on organizations that fail to provide accurate and up-to-date information on beneficial ownership and reporting entities that fail to apply specific customer due diligence measures required for legal persons.

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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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