Challenges in Identifying Ultimate beneficial Owners (UBOs) - Looking Beyond Corporate Structures

1. CASE STUDIES OF OPAQUE CORPORATE
STRUCTURES AND BENEFICIAL OWNER ISSUES

2. SESSION OVERVIEW
 Secrecy for Sale: Key findings
 Short Video
 Discussion
 The AML Challenge
 Ultimate Beneficial Ownership
 Policy issues in Identifying the Ultimate Beneficial
Owner
 Short UBO unwrapping Exercise

3. SECRECY FOR SALE
 Report published by the International Consortium of Investigative Journalists (ICIJ):
``SECRECY FOR SALE: INSIDE THE GLOBAL OFFSHORE MONEY MAZE`` JUNE 2013
 Key Findings:
 Government officials and their families from around the World embrace the use of covert
companies and bank accounts
 The mega-rich use complex offshore structures to own property and other assets, gaining tax
advantages and anonymity not available to average people
 Many of the world’s top’s banks – including UBS and Deutsche Bank – have aggressively worked to
provide their customers with secrecy-cloaked companies in offshore hideaways
 Criminals and fraudsters routinely use offshore havens to pull off their deals and move their ill-
gotten gains
 A well-paid industry of accountants, middlemen and other operatives have helped them hide their
identities, facilitate money laundering or other misconduct

4.  http://www.youtube.com/watch?v=CnRihg6fNrk
#t=132

5. “Shell corporations and nominees are widely used mechanisms to launder the
proceeds from crime, particularly bribery (e.g.to build up slush funds). The ability
for competent authorities to obtain and share information regarding the
identification of companies and their beneficial owner(s) is therefore essential
for all the relevant authorities responsible for preventing and punishing money
laundering” Misuse of Corporate Vehicles including Trust and Company Service
Providers, FATF, October 2006, page 5.
THE AML CHALLENGE

6. “ALMOST EVERY ECONOMIC CRIME INVOLVES THE MISUSE OF
CORPORATE VEHICLES [I.E. COMPANIES AND TRUSTS]”
OECD, 2001
 All crimes involving ML, corruption, insider dealing, tax fraud, TCF all
have a common denominator: offshore corporate entities
 Despite the legitimate roles corporate entities, including trusts and
partnerships play, they can also be used for illicit purposes
 Used pervasively by serious money launderers and fraudsters
 Multi-layered corporate structures in particular present real problems
for financial institutions, regulators and law enforcement
 The most significant feature of misuse is hiding of the true beneficial
owner

7. THE ULTIMATE BENEFICIAL OWNER (UBO)
 Revealing the identity of criminals and fraudsters is the ultimate
goal in AML
 With out being able to determine the UBO of companies we are
unlikely to be able to achieve this aim

8. WHO OR WHAT IS THE UBO?

9. FATF DEFINITION OF UBO
“The natural person(s) who ultimately owns or controls a
customer and/or the person on whose behalf a
transaction is being conducted. It also incorporates those
persons who exercise ultimate effective control over a
legal person or arrangement”

10. IN THE CONTEXT OF FINANCIAL CRIME
 Beneficial owners are the real people who own and control legal
structures such as companies and trusts
 Their names might not appear on business registers or on bank
accounts but they are the ones who have ultimate control over
funds
 Considerable research has been done showing how criminals,
corrupt regimes and tax evaders use companies and other legal
structures, fronted by nominees, to conceal their ill-gotten gains
and hide behind opaque ownership structures to carry out their
crimes:

11. Ultimate Beneficial Owners - World Bank report
 Examines how bribes, embezzled
state assets and other criminal
proceeds are being hidden via
legal structures – shell
companies, foundations, trusts
and others
 Provides policy makers with
practical recommendations on
how to step up ongoing
international efforts to uncover
flows of criminal funds and
prevent criminals from misusing
shell companies and other legal
entities.

12. PRACTICAL APPLICATION
In practice for CDD/KYC measures this translates to:
‘A natural person, who ultimately owns or controls
(directly or indirectly) 25% and greater of a company
Or
‘A natural person who ultimately owns of controls (directly
or indirectly) the equivalent of 25% or more of a Trust,
Foundation or similar legal entity’
In some jurisdictions this may be reduced to an interest of
10% depending on risk factors

13. HIDDEN COMPANY OWNERSHIP AND THE PROFITS
FROM CONGOLESE COPPER AND COBALT

14. CASE STUDY 1
• Congo - a desperately poor, war-ravaged country - is losing out on billions of dollars of
revenues because the Congolese state is getting very little in return for many of its best
copper and cobalt mines
• Vast majority of the profits are going into the hands of unknown people
• Since early 2010 the Congolese state has sold off stakes in six prize mining projects - in
secret and at vastly undervalued prices. The immediate buyers of these mining assets
were predominantly companies in the British Virgin Islands
• Some of the mining stakes were sold on soon after to the FTSE-100 company, ENRC, for
much higher amounts
• Someone pocketed a fortune, but due to the fact that the British Virgin Islands does
not make legal shareholder owner information available, let alone beneficial owner
information, the Congolese people have no means of knowing who has benefited
from these secret deals.

15. ISSUES IN IDENTIFYING THE UBO
 Reasonable to assume that if you looked up the shareholders of a company
that you would have found the list of people who own the company; those
who control it and benefit from any profits that it might make or any dividends
it might pay out
 Not true! As the people listed in the corporate registry are the legal owners of
the company, who are often not the same as the people who enjoy the
benefits of the company, the beneficial owners.

16. ISSUES IN IDENTIFYING THE UBO
In other words, the legal title to a company may not be in the name of
the person who actually controls it. This may happen in three ways:
1. ‘Nominee` shareholders & directors may be listed on the corporate
registry
2. The legal owner of the company might be another company (or trust
which can be even more opaque than companies), usually in another
jurisdiction
3. The beneficial owner of a company may ask someone else, typically a
relative, business associate or trusted friend, to front the company for
them, in order to hide their involvement in the company

17. SCALE OF THE PROBLEM?
• While it can also be difficult to get hold of information on the legal
owners of a company, it is even more difficult to get hold of
information on the beneficial owners
• According to the World Bank corporate registries only ‘sometimes’
collect information on the legal owners but ‘very rarely’ of beneficial
owners
• And yet it is the beneficial owners that are relevant for financial crime
purposes
• The global AML standards require banks and other institutions to
identify the real, beneficial owners of accounts, since without this
information they cannot meaningfully assess the risk of the money
deposited being the proceeds of crime

18. AML STANDARDS
 Crucially, global AML standards require governments to take
measures to prevent the unlawful use of ‘legal persons’ – i.e.
companies – by criminals
 Countries are supposed to do this by making sure that
information is available on the beneficial owners of companies
incorporated under their laws
 However, there are two problems with this:
 Lots of countries do not comply with this AML standard
 The anti-money laundering requirements on beneficial ownership do not
go far enough

19. NON-COMPLIANCE
 The FATF carries out ‘mutual evaluations’ of countries to assess
their degree of compliance with the global anti money laundering
standard
 Of the 34 countries that are FATF member states an astonishing
30 were deemed to be ‘not compliant’ or ‘partially compliant’
with this particular recommendation

20. EU COUNTRIES COMPLIANT WITH FATF STANDARDS

21. NOT FAR ENOUGH
 AML standards requires that financial services
businesses IDENTIFY the beneficial ownership.
They do NOT expect this information to be
verified!

22. HIDDEN COMPANY OWNERSHIP AND ZIMBABWE’S
DIAMOND FIELDS

23. CASE STUDY 2
 In 2008 the Zimbabwean army took control of the country’s Marange
diamond fields using troops and helicopter gunships, killing and
wounding many small scale miners in the process
 Since then diamond mining concessions have been allocated to several
companies with hidden ownership
 For example, Global Witness’ investigations revealed that Mbada
Diamonds (one of the companies) is partly owned by a complex web of
intermediate companies registered in the British Virgin Islands, Hong
Kong and Mauritius, connected to a former Air Vice Marshal in the
Zimbabwean military.
 What is impossible to find out, however, is who ultimately behind
these companies?

24. WHAT SHOULD BE DONE ABOUT IT?
 Countries should not only publish the legal owners of companies, but
should also collect, verify and publish the names of the beneficial
owners of companies. Such beneficial owners should be actual people,
not a further layer of companies or trusts
 In particular:
 The EU should adopt a beneficial ownership registries standard as part of
its Fourth Anti-Money Laundering Directive
 Note that FATF spent the last two years reviewing its standards, including
the ownership information that countries should require from companies
incorporating in their jurisdiction but missed the opportunity to DEMAND
recording of beneficial ownership

25. HIDING BEHIND NOMINEE DIRECTORS &
SHAREHOLDERS
 What are nominee directors and nominee shareholders?
 It is perfectly legal in many countries to avoid having your
name appear as the director or owner of a company by
employing the services of a nominee, whose name appears
instead
 Nominees are, in essence, renting out their name, and
providing the anonymity that corrupt officials, tax evaders
and fraudsters require to move dirty money around the world
 This service is provided TCSP, Lawyers, accountants and others

26. LOTS OF COUNTRIES ALLOW THE USE OF
NOMINEES
 The World Bank, as part of the report, Puppet Masters: how the
corrupt use legal structures to hide stolen assets and what to do
about it, surveyed 37 jurisdictions to determine whether nominee
directors are permitted
 Results: 34 out of the 37 jurisdictions allow companies to use
nominees.

28. 1 NOMINEE TO X AMOUNT OF COMPANIES
 Some people act as nominee directors for so many
companies that they cannot possibly provide any sort of
meaningful oversight to all of them
 Being a director (or nominee director) does not just require
sending signing forms it requires a knowledge of the
company
 The fact that nominees are happy to take on this business in
such volumes demonstrates they do not fear any
meaningful penalty for breach

29. EURAL TRANS GAS & THE ROMANIAN ACTRESS

30. CASE STUDY 3
• Billions of dollars of natural gas are transported each year from the Central
Asian country of Turkmenistan through Russia and the Ukraine and to Europe
• For years, it was not clear who controlled this trade
• Global Witness published a report, It’s a Gas, on the mysterious intermediary
companies that were used to transport the gas in order to highlights how
nominee shareholders were used to hide the identities of the people
benefiting from the trade
• One such company, Eural Trans Gas, that made millions was legally owned by
an elderly Romanian actress who said she got involved with the company in
order to pay her phone bill
• These companies were used to obscure the identity of the real owner, who
was later revealed to be a Ukrainian oligarch

31. WHAT SHOULD BE DONE ABOUT IT?
 Nominee directors should be required to identify themselves, and be held responsible
for the actions of the company. This is a key aspect of preventing companies being
misused for money laundering
 As part of its current review into its Third Anti-Money Laundering Directive, the EU
should require member states to require directors to state whether they are nominees
and say on whose behalf they are working,. The information should be made public by
national corporate registries
 The FATF, has recently stated that countries should ‘consider’ requiring nominees to
declare themselves as such and say on whose behalf they are working
 Serious penalties should be imposed on company officers who provide false
information or fail to provide legally-required information, so that nominees think twice
about pimping their identity to people whose business they do not really understand

32. THE ROLE OF CORPORATE SERVICE PROVIDERS
• CSPs provide the following three key roles:
1. First, they can be used to set up companies and legal arrangements such as trusts
2. Second, they can play a role in running these vehicles, for example, acting as trustees or as
company officers
3. Third, they can provide an address and mailbox for the company, foundation or trust
• These functions can all be legitimate but under current rules they can also be corrosive
for three reasons:
1. Help provide opacity or even deception
2. Set up shell companies and other opaque vehicles in various jurisdictions to take advantage of
laxer AML standards
3. Set up structures that render the owners unaccountable for their actions and obligations,
including to tax authorities, creditors and other victims

33. WHAT IS THE PROBLEM?
• Global AML standards require company service providers that set up
companies and that act as nominee directors, shareholders and
company secretaries to know whom they are acting for and to report
any potential suspicions
• In other words, to identify beneficial owners, identify people at high
risk of corruption who require Enhance Due Diligence, identify the
source of their clients’ funds, and file suspicious activity reports to the
authorities if necessary
• But there are a number of problems with this:
 Some countries have not incorporated this aspect of the AML
requirement into law
 Some countries, including the USA, Russia do not regulate their company
service providers in any way.

34. THERE IS A LEGAL LOOPHOLE IN THE UK’S
REQUIREMENTS
 CSPs take advantage of the one off transaction loop hole:
anything below a €15k threshold CDD does not apply
 Company set up is viewed as a one off event especially
when no subsequent services are provided
 This means that the UBO does not have to be identified
and no checks to see if unusually large amounts of money
start flowing through the company

35. The offices of company service provider @UKplc in West
Berkshire: the former registered address of a number of
companies named in corruption cases and over 15,000 other
companies (Credit:)

36. WHAT SHOULD BE DONE?
 CSPs should know for whom they are acting for and report
any suspicions they have about any businesses to the relevant
authorities. Regulators should ensure this occurs
 Countries should regulate their TCPs with criminal penalties
for the worst failures. FATF should penalise countries that fail
to do so
 At the EU level, there should be clarification and closure of the
loop hole. That CSPs are required to collect beneficial
ownership even if they are not providing further services
beyond the set up of the company

37. THE ECONOMIST, JANUARY 2012
“Anyone registering a limited company should have
to declare the names of the real people who
ultimately own it, wherever they are, and report
any changes. Lying about this should be a crime.”

38. OPAQUE COMPANIES & TRANSNATIONAL CRIME

39. 39
WHO AND WHAT DO WE NEED TO IDENTIFY IN THIS
STRUCTURE?
Company X
(means Co. X is
effectively 20%
shareholder of Co.
A)
Private Company A
is our direct customer / original applicant
(US$1 m paid-up capital, 1m shares)
Company
C
Company
B
Mr. D
Company
Y
100%
Mr. D owns a proportionate
interest of 30%
Mr. F owns a proportionate interest
of 12%
40%
Mr. E
Mr. F
60% 40%
Mr. E owns a proportionate
interest of 20%
Company Z
(Co. Z is a publicly
listed company on
a regulated market)
Co. Z owns a proportionate interest
of 18%
Mr. E
0.5m shares (50%) 0.5m shares (50%)
60%
60% 40%

40. Mushtaq Dost
International Compliance Specialist
Dost@traffordconsulting.com
September 2013
THANK YOU