Toddling Towards Transparency: Why Visibility into Beneficial Ownership is a Critical Component of Effective Due Diligence

A few years ago, corruption watchdog Global Witness reported that thousands of toddlers were listed as beneficial owners of companies registered in the UK. While imagining a horde of tots dressed in business casual may sound amusing, the use of beneficial ownership to disguise financial crimes is no laughing matter. Beneficial ownership information on the companies or individuals who ultimately own, control or benefit from a legal entity can have valid purposes.

Too often, however, the anonymity of shell corporations and other beneficial ownership vehicles make it more difficult to detect conflicts of interest or illicit activities that could expose your company to regulatory, reputational, and financial risk. And it’s not just companies that may pay the price when beneficial ownership remains hidden. In a statement on International Anti-Corruption Day last December, Transparency.org noted, “Ever since the Panama Papers in 2016, it has been painfully clear that large-scale theft of public resources is possible because the corrupt can hide behind opaque corporate structures.” 

The World Bank estimates that nearly one trillion dollars is diverted from developing countries through illicit activities ranging from bribery to tax evasion. “These form the complex web of subterfuge in financial crimes cases, behind which hides the beneficial owner—the puppet master and beneficiary of it all,” says the World Bank. Unfortunately, in the absence of a global registry of beneficial owners, companies face a serious challenge.

Identifying ultimate beneficial owners through due diligence

 According to Hogan Lovells Global Bribery & Corruption Outlook for 2021, the combination of the pandemic and political disruption only increases compliance risks. The report identifies several sectors that will face extra scrutiny under the FCPA as countries work together to identify and prosecute corrupt activities that ultimately hurt economic recovery worldwide.

One sector that will likely see increased enforcement actions is Financial Services. Already feeling the pressure of new beneficial ownership requirements passed in the recent Corporate Transparency Act,  Hogan Lovells partner Ann C. Kim says, “Financial services institutions should anticipate and prepare for heightened attention from the Department of Justice, Securities and Exchange Commission, and regulators worldwide in anti-bribery enforcement. Given the current economic climate, now is the time to examine compliance efforts and identify and remediate any issues, before enforcement officials come knocking.”

Other sectors that need to ramp up their due diligence and risk monitoring processes in anticipation of more robust enforcement include:

• High tech companies have earned regulators’ attention for many reasons—from the spread of disinformation to security and privacy concerns. As a result, regulators will be taking a hard look at the tech industry for compliance failures on multiple fronts. The report predicts “… a likely surge in FCPA enforcement actions in the U.S.”
• Life sciences and pharmaceuticals are also under the microscope, thanks to efforts to develop a COVID-19 vaccine. Regulators will be watching closely for potential FCPA violations, particularly because many countries have state-owned medical facilities which elevate PEP exposure and consequently, bribery risk.
• Aerospace and defense industries are going to be a focus as well, after the record-breaking, $4 billion in fines paid by Airbus following a long, cross-border corruption investigation.

With governments expanding regulations and strengthening enforcement, organizations worldwide should assess the effectiveness of current due diligence processes and make sure that they have access to crucial data—adverse news; PEPs, sanctions and watchlists; beneficial ownership information; and more—to mitigate risk in the coming year.

Arrange a personalized demo of Nexis Diligence™ to see how our world-leading source universe —including Dun & Bradstreet® Ultimate Beneficial Ownership data—can help you mitigate regulatory risk more efficiently.