Governments have recently increased efforts to eradicate illicit shell corporations by driving transparency down to the level of shareholders and other individuals who have effective control of companies involved in international payments and flows. Almost immediately after the U.K. announced in March 2016 its plan to create a public register revealing the identities of the beneficial owners of shell companies,1 Australia signalled that it would follow suit – making them the first two of the world’s top economies to do so.2
Expectations Changing for Bank Accounts and International Payments To Foreign Contractors
While these governments may not come knocking on your company’s door to ask for this “beneficial ownership” information, they are directing banks to begin collecting it from business account holders. For example, in July 2016 a European Commission proposal followed the U.K. and Australian announcements. The EU also seeks to establish public registries of information regarding the identity of individuals with significant equity ownership or management control of companies holding business accounts in order to prevent criminals from anonymously accessing the financial system.3 The EU proposal applies the concept of beneficial ownership not only to new business bank accounts but to existing accounts as well.
From one country to the next, the specific information to be collected varies. For example, in the U.S., beneficial ownership rules will only apply when a new business bank account is opened. To date, U.S. banks and other financial services companies have not been required to know the identity of individuals with significant equity ownership or management control of companies holding business accounts. Now, U.S. banks have until May 2018 to begin collecting beneficial ownership information for new business accounts based on rules issued in May 2016 by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).4
Many banks already collect some beneficial ownership information on their own initiative, but inconsistently.5 With the requirements changing and being overseen more rigorously by regulators, companies outside of the financial services industry need to be aware of what will be expected of them and their contractors when conducting bank business to make international payments. A first principle of avoiding regulatory risk is knowing how the landscape is shifting and taking proactive measures to avoid missteps and potentially costly bureaucratic delays.
Consider, for example, Australia’s new Anti-Money Laundering and Counter-Terrorism Financing program (AML/CTF) program. AML/CTF focuses on gathering beneficial ownership information about a customer or company to manage and mitigate money laundering risks.6 Obligations under AML/CTF contain two main parts: part a covers “identifying, managing and reducing the money laundering and terrorism financing risk faced by a reporting entity” and part b covers a reporting entity’s due diligence by “establishing a framework for identifying customers and beneficial owners of customers so the reporting entity can be reasonably satisfied a customer is who they claim to be.”7
Imperative Comes From The Top
As technical as beneficial ownership may sound, it has captured enough of the world’s attention to be included in the communique from the Group of 20 (G20) Summit in September 2016 in Hangzhou, China. There, world leaders declared that: “Financial transparency and effective implementation of the standards on transparency by all, in particular with regard to the beneficial ownership of legal persons and legal arrangements, is vital to protecting the integrity of the international financial system.”8
Some of the drive for greater transparency when paying foreign contractors has come from recently leaked revelations of questionable offshore banking practices in the so-called Panama Papers. In an official statement responding to the May 2016 leaks, Angel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development, said: “The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20. Establishing global standards and making commitments are just the start. Effective implementation is the key to lifting the veil of secrecy once and for all.”9
The U.K., Australia and their counterparts around the world are tightening requirements on banks to better understand the identities of their business account holders – down to the level of significant shareholders and even including some senior managers. Companies making international payments to foreign contractors need to familiarise themselves and their business partners with these new beneficial ownership rules and be prepared as their banks come into compliance with them.
- Enhancing transparency of beneficial ownership information of foreign companies, Department for Business Innovation & Skills; https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/512333/bis-16-161-beneficial-ownership-transparency.pdf.
- "Australia to follow UK in creating public register of shell companies", The Guardian; https://www.theguardian.com/world/2016/apr/22/australia-to-follow-uk-in-creating-public-register-of-shell-companies."Commission strengthens transparency rules to tackle terrorism financing, tax avoidance and money laundering", European Commission Press Release; http://europa.eu/rapid/press-release_IP-16-2380_en.htm
- "Customer Due Diligence Requirements for Financial Institutions", Federal Register; https://www.federalregister.gov/documents/2016/05/11/2016-10567/customer-due-diligence-requirements-for-financial-institutions
- "INDUSTRY ADVISORY: FinCEN Issues Final Rules on Customer Due Diligence Requirements for Financial Institutions", Treliant Risk Advisors; http://treliant.com/News-and-Events/Announcements-and-Releases/Announcements-Details/ArticleID/27017/INDUSTRY-ADVISORY-FinCEN-Issues-Final-Rules-on-Customer-Due-Diligence-Requirements-for-Financial-Institutions
- "Chater 6 – AML/CTF Programs", Australian Transaction Reports and Analysis Centre; http://www.austrac.gov.au/chapter-6-amlctf-programs
- "G20 Leaders' Communique Hangzhou Summit", G20.org; http://www.g20.org/English/Documents/Current/201609/t20160906_3395.html
- "OECD reaction to the ‘Panama Papers’", OECD; http://oecdinsights.org/2016/04/05/oecd-reaction-to-the-panama-papers/