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6 Familiar Hurdles of Uncovering Beneficial Ownership & How Robust Due Diligence Can Help

March 04, 2021

The regulatory landscape is increasingly fluid, which means your risk management approach must adapt to go with the flow. One area of risk that has garnered more attention in recent years is beneficial ownership—thanks in part to several major document leaks—from the Panama Papers in 2016 to the FinCen Files in 2020. Why is beneficial ownership transparency so hard to achieve? Beneficial ownership isn’t inherently illegal. Unfortunately, the anonymity makes it possible for the ethically challenged to conceal ill-gotten gains. 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 Financial Action Task Force (FATF), a global watchdog that promotes “legal, regulatory and operational remedies” to prevent financial crime, has identified six common challenges that must be addressed:

  1. Failure to adequately assess the risk of beneficial ownership being used for criminal purposes.
  2. Reliance on inaccurate or out-of-date beneficial ownership information.
  3. Lack of universal database to provide timely access to relevant beneficial ownership data.
  4. Insufficient transparency into bearer shares and nominee shareholder arrangements which could pose a risk of financial crime.
  5. Lax legal penalties for companies that fail to provide accurate information on beneficial owners.
  6. Inadequate tracking of the quality of cross-border support in identifying beneficial ownership.

As governments and regulators work to address some of those challenges with legislation, the first three on the list are issues that many organizations must tackle on their own. And the pressure to do so is growing quickly.

Better data helps identify ultimate beneficial owners

Last year, an investigation revealed that some suppliers to the U.S. Department of Defense used shell companies to fraudulently win manufacturing bids and  another data leak—this time from a firm in the heart of London—exposed the beneficial owners of 400,000 anonymous companies. Continued media scrutiny, coupled with an increase in regulation, only ups the pressure on companies’ risk management processes.

For instance, At the start of 2021, Congress enacted the Corporate Transparency Act to put the brakes on bad actors’ use of shell corporations to disguise corrupt activities. The law requires corporations, limited liability companies, and similar entities to report current information about their beneficial ownership to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

This comes on the heals of rules issued by the FinCEN in 2018 requiring large financial institutions to identify beneficial owners with 25% or more ownership and conduct ongoing monitoring to identify suspicious transactions.

Regulators are using the tougher laws to carry out more enforcement actions. In introducing is Global Bribery and Corruption Outlook for 2021, Hogan Lovells notes, "Over the course of 2021, we expect to see continued cross-border enforcement activity and collaboration, the alignment of European corporate criminal liability laws with equivalent U.S. legislation, and a more global crackdown on bribery and money laundering."

Barring creation of a global registry of beneficial owners, companies must rely on their own due diligence and risk monitoring processes to identify signs of beneficial ownership. Nexis® Solutions understands the challenge, and we’ve added Dun & Bradstreet Ultimate Beneficial Ownership data to our powerful due diligence platform, Nexis Diligence™.

This dataset complements other key sources for mitigating the reputational, regulatory, financial, and strategic risks companies face, including:

  • PEPs, Sanctions and Watchlists
  • State Owned Enterprises
  • Company Financials
  • Adverse and General News
  • Legal Data

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?