Consultation heralds change in beneficial ownership transparency
02 September 2021
Those working in cross-border information exchange have become used to operating in an environment where obligations around reporting and transparency are subject to frequent change – particularly with Governments and global authorities often turning to new regulatory regimes in response to disruptive market events.
The COVID-19 pandemic may well prove to be such a trigger event, with cash strapped Governments keen to ensure they are collecting every tax dollar they can after a period of high public spending, whilst at the same time focusing on rooting out criminal activity.
In recent years, approaches to capturing, managing and sharing ultimate beneficial ownership information (UBO) have very much been in the spotlight as a critical area in the fight against financial crime.
Transparency moves centre stage again
Now it seems that UBO transparency will move centre stage once again. Remarks made by the Financial Action Taskforce (FATF), the global standard-setter for UBO information management and sharing, suggest a further significant change in international standards could be on the horizon.
Speaking at the G20 Finance Ministers meeting in February, FATF President Dr Marcus Pleyer commented that ensuring transparency of beneficial ownership is "critical for everything from a fair tax system to stopping money laundering". Dr Pleyer confirmed that the FATF is now "reviewing the standard to consider how it can be strengthened further".
Further steps in this agenda have been taken, with a pre-consultation white paper issued concerning potential amendments to FATF Recommendation 24 and its implementation. An additional white paper on Recommendation 25 is anticipated in the autumn, ahead of further consultation.
There is still some way to modify international norms in the UBO space. Still, this consultation phase marks a significant milestone in the evolution of global standards in this critical area – from capturing and recording UBO information to sharing it consistently and responsibly.
So what does this consultation phase mean in practice for practitioners, and what might be on the horizon for UBO information management?
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The Transparency Journey
The history of information exchange is complex, with a wide variety of measures such as TIEAs, FATCA, Common Reporting Standard (CRS) and UBO registers introduced or augmented over the last two decades, often in response to prominent examples of criminal abuse of the financial or tax system.
Information exchange on request emerged via the OECD's Global Forum Working Group on Effective Information Exchange, with nations launching throughout the early 00s into signing rafts of 'Tax Information Exchange Agreements' (TIEAs).
Since then, hundreds of TIEAs have been signed based on the principle of supplying information on request, where an overseas authority had a legitimate reason for considering an individual to be a financial crime risk.
The transparency agenda evolved into an increasingly sophisticated framework, with a gradual movement towards the automatic exchange of information and central registers. The fight against financial crime received fresh impetus during the 2008-2009 financial crisis - with all G20 nations keen to plug widening deficits, the London Summit was the driver for thinking around exchanging information to accelerate rapidly.
The debate over the accuracy, timeliness and quality of beneficial ownership information and the misuse of financial and legal instruments were recurring themes – the introduction of FATCA by the US followed in 2010. The development in 2014 of the OECD's Common Reporting Standard was a significant initiative to encourage swifter automatic exchange of information between firms and the relevant authorities.
Since then, key debates have been around data accuracy, who has access, and the benefits and workability of public registers. The G8 Summit of 2013 saw public registers firmly on the agenda, with the G8 countries ultimately endorsing core principles on UBO consistent with the FATF standards and that adequate, accurate and timely information on the ultimate beneficial ownership of corporate vehicles should be available and readily accessible by competent authorities in a timely fashion.
Nevertheless, debates around public access to UBO have persisted – and most recently, the EU has made commitments, through the 5th Anti-Money Laundering Directive, to work towards public registers, with a number of the Crown Dependencies and Overseas Territories making similar commitments. Generally, however, implementation and progress in this space remain mixed worldwide.
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Future Direction
So what can we expect from the FATF over the coming months?
Looking at the detail further, the FATF has already published a pre-consultation white paper around Recommendation 24, which indicates the areas where there could be some change, particularly around the transparency of beneficial ownership (BO) of 'legal persons'.
Through its white paper and subsequent consultation, the FATF's objective is to strengthen the international standard on beneficial ownership of legal persons to ensure greater transparency about ultimate ownership and control. The aim is to provide competent authorities timely access to adequate, accurate and up-to-date beneficial ownership information and take more effective action to mitigate the risks of misuse.
More specifically, the review will consider measures to improve the understanding of risks posed by all types of legal person created in a country (as currently required) and also to certain foreign-created legal persons; how a multi-pronged approach to the collection of BO information can be achieved; how to ensure adequate, accurate, and up-to-date information is obtained; and who should have access to this information, and finally, how confidentiality and privacy can be safeguarded.
The consultation will run until 20 August 2021. It will undoubtedly attract industry feedback, including clarification that it is common for a company to be owned by a trust or other legal arrangement, and with the ability to have a nexus with a financial intermediary proving to be a significant additional benefit in terms of the gathering of BO information.
Meanwhile, a similar white paper looking at Recommendation 25 - focusing on 'legal entities' - is expected later this year. It is expected to examine the definition of trusts across both common law and civil law jurisdictions, consider complex ownership structures and assess the obligations of other countries. The role of registries will also no doubt come under the spotlight once more.
Following the white paper and consultation exercise, the FATF will then consider the views received and propose revisions to the recommendations for discussion at its October 2021 meetings.
Whilst it may seem to some that these consultations are going over familiar ground, the fact that the FATF is reviewing its approach is a significant development. It reflects that policy in this area rarely stands still and that financial crime will remain at the top of the agenda for the trust and private client sector for the foreseeable future. Professionals in this space will be well-advised to participate in the consultations and to track any resulting change, given the implications for clients are potentially quite profound.
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Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
