Regulatory changes require deeper due diligence for beneficial owners

The release of the Panama Papers in 2016 brought the world’s attention to the problem of ultimate beneficial owners —those entities or individuals who disguise interests in an organisation using shell corporations. Beneficial ownership isn’t inherently illegal. Unfortunately, the anonymity makes it possible for the ethically challenged to evade taxes, launder money, or hide illicit assets. Those who have used this tactic to conceal ill-gotten gains have faced reputational damage in the world’s media—and in some cases, criminal prosecution.

The Panama Papers fallout has inspired a raft of regulatory developments, exposing companies to greater risk should they fail to identify beneficial owners among customers, business partners and other third parties. Nexis® Solutions understands the challenge, and we’ve added Dun & Bradstreet Ultimate Beneficial Ownership data to our powerful due diligence platform, Nexis Diligence™.  Get the details.

Beneficial ownership remains in the media spotlight

Due diligence for beneficial ownership has become even more urgent for organisations. At the start of 2020, an investigation revealed that some suppliers to the U.S. Department of Defense used shell companies to fraudulently win manufacturing bids . More recently, the FCPA blog reported on another data leak—this time from a firm in the heart of London—that exposed the beneficial owners of 400,000 anonymous companies. Continued media scrutiny, coupled with an increase in regulation, ups the pressure on companies’ risk management processes.

Beneficial ownership regulation has been strengthened across the world:

• New rules issued by the U.S. Financial Crimes Enforcement Network (FinCEN) in 2018 require large financial institutions to identify beneficial owners with 25% or more ownership and conduct ongoing monitoring to identify suspicious transactions. Then in June 2019, the U.S. Corporate Transparency Act was approved by the House Financial Services Committee.
• The EU’s Fifth Money Laundering Directive (5AMLD), which comes into force this month, requires companies to do enhanced due diligence on transactions from high-risk countries. Companies need to act quickly, because over 170,000 companies in Ireland are facing prosecution for failing to record their details with a new Register of Beneficial Ownership in time for the deadline set after 4AMLD. The International Consortium of Investigative Journalists warned last month that Malta and Cyprus are “poised” to miss the deadline to meet 5AMLD enforcement deadline in January.
• A further EU Anti‐Money Laundering Directive (6AMLD) will take effect on 3 December 2020. It introduces tougher punishments for money laundering, including maximum imprisonments for
• New Unexplained Wealth Orders (UWO) in the UK allow the National Crime Agency to seize assets from anyone believed to be involved in crime who cannot account for their wealth.
• The 2018 Companies Law in Hong Kong requires companies to maintain a register of beneficial ownership information.

Regulators are using the tougher laws to carry out more enforcement actions. According to the Global Bribery and Corruption Outlook 2019 published by Hogan Lovells, fines for bribery and corruption have continued to grow across the globe. Action is increasingly being taken against individuals as well as firms. In the first half of 2019, 11 individuals were charged under the U.S. Foreign Corrupt Practices Act. While in Singapore, individual prison sentences for bribery and corruption averaged 43 months in 2018—an increase from 14 months in 2017.

The bottom line? Establishing the ultimate beneficial ownership of third parties you do business with is more important than ever. Is your current due diligence process up to the challenge?