FATF Consultation Paper on Beneficial Ownership

July 12, 2011

FATF Weighing New Beneficial Ownership, Data Privacy Suggestions

Alert Global Media, Brian Monroe

The Financial Action Task Force is weighing whether to ask jurisdictions to loosen their privacy laws and require companies to retain data on their owners, among other changes to the group’s standards.

The potential changes to the group’s 49 recommendations and separate guidance would be in addition to revisions proposed in October, the organization said in a June 27 consultation paper. The Paris-based organization, known as FATF, is expected to decide on dozens of proposed changes to its widely-adopted anti-money laundering (AML) and counterterrorism financing standards by February.

Should the group adopt the latest plan, it would call on its members to require that corporations be responsible for “holding both basic information and information about their beneficial ownership” that is accessible to investigators via company officials, financial institutions or other intermediaries, according to the consultation paper.

While FATF currently asks that banks and company formation agents identify beneficial owners, the group’s latest round of mutual evaluations revealed a “generally low level of compliance” to the recommendation, according to the report.

That conclusion prompted the intergovernmental group to better look at “how countries can actually do this,” said John Carlson, FATF’s principal administrator. “The nature of money laundering is to be complicated and disguise ownership, making it quite difficult to find out who really owns a company even if [the relevant authorities] have all the powers,” he said.

For example, foreign companies that are shielded by bank secrecy laws can act as shareholders in domestic corporations, said Carlson. But governments could require their domestic companies to collect and retain data on their corporate shareholders so that investigators and tax authorities would have access to the information, he said.

Some corporations may find it difficult to collect the data because their foreign corporate shareholders will be protected under privacy laws, and the businesses will have no legal powers to obtain the information, said William Clark, a partner in the Philadelphia, PA office of Drinker, Biddle, and Reath LLP.

And if company officials are asked to keep the data instead of third-parties, the plan might do little to root out existing shell companies used for corrupt ends, said Heather Lowe, legal counsel at Washington, D.C.-based Global Financial Integrity, a Center for International Policy program.

The risk is “high” that domestic corporations will, in some instances, warn their shareholders when investigators make queries, giving them time to move their assets or dodge further inquiries, she said.

If banks are asked to retain the data, the plan would mean greater compliance work, said a Bank Secrecy Act officer at a bank in the eastern part of the country.

“We are looking for beneficial ownership information for closely held entities,” but trying to keep track of directors that may number in the thousands, or constantly update information “seems a bit over the top,” said the person, who asked not to be named.

The June consultation paper also outlines possible changes to FATF recommendations and guidance on wire transfers, United Nations asset freezes and cooperation on international investigations that can be hampered by bank secrecy laws.

The intergovernmental group is additionally considering asking members to permit their banks to share data with other financial institutions during AML and counterterrorism financing investigations. The data sharing, which would require exemptions to privacy laws, would occur only “when it’s fair, right and reasonable to do,” said Carlson.

The proposals could see some political pushback from FATF member-states ahead of February. The United States, for example, may not quickly sign on to plans to bolster beneficial ownership data requirements, according to Duncan Osborne, a partner for Austin, TX-based Osborne, Helman, Knebel & Deleery, LLP.

Many U.S. companies would be reluctant to share such information for legitimate reasons, said Osborne. “Most companies are playing by the rules and just trying to make a buck,” he said.

Comments on the organization’s latest proposals are due Sept. 16.

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