Shedding Light on the True Identities of Company Owners Takes Centre Stage in Combating AML and Financial Crimes

From money laundering to terrorist financing to tax evasion, opaque businesses and corporate vehicles have become a useful tool for international criminals. For governments and regulators attempting to battle these financial crimes, it has become vitally important to establish the true identity of a business's ultimate owner or beneficiary. Unfortunately, it has also become more difficult, as wrongdoers are using ever-more elaborate ownership structures and corporate vehicles -- including shell companies, bearer shares and trusts -- to obscure the true purpose of their financial activities and the identities of those involved.

This requirement to discover the owners -- or, to use the industry term, the ultimate beneficial ownership (UBO) -- of companies has been a legal and regulatory requirement in many countries for years and sits at the heart of financial crime risk mitigation strategies for regulated firms. Recently, however, it landed squarely in the international spotlight thanks to international efforts to tighten standards. In 2014, the inter-governmental Financial Action Task Force (FATF) laid out several recommendations for enhancing ownership transparency, urging organisations to better assess the risks associated with opaque vehicles and structures and to ensure accurate ownership information is available to authorities. Last November, the G20 codified these recommendations into the G20 High-Level Principles on Beneficial Ownership Transparency -- 10 guidelines that its member countries are committed to taking concrete action to address.

At a national government level, the UK has aimed to lead the way in UBO. One of the FATF's recommendations was that authorities should have easy access to relevant ownership information. In 2013, the UK committed to build a publicly-accessible registry of company owners -- an effort that has been deemed by many experts to be the strongest interpretation of the FATF's recommendation.

All of Europe will soon follow in similar footsteps: on June 26, the fourth Anti-Money Laundering Directive (AMLD) came into force, requiring all member states to build central registries, though this doesn't mandate that registries be publically-accessible. And all the G20 countries have begun developing their National Action Plans for the implementation of last November's high-level principles.

But this impending regulatory change isn't the only thing keeping UBO at the forefront of business leaders' minds. Research from the London School of Economics' Roger McCormick suggests that over the five years ending in 2013, the world's 10 leading banks paid £157bn in fines and damages for non-compliance and misconduct; in the UK alone, this worked out at an average of £6bn per annum. And the figures for the period ending in 2014 are unlikely to show any improvement. Beyond the direct cost of these fines, banks and other businesses have faced significant reputational costs. The impacts of this are felt not least on share prices; Neil Woodford, a high-profile fund manager, announced in September 2014 that he had sold his £159 billion holding in HSBC as a direct result of concerns about the impact of future fines, despite praising the chief executive's work over the previous four years.

Given the potential danger of insufficient UBO identification, it's not surprising that companies are increasingly seeing it not just as a cost of doing business, but also as a key competitive advantage. Easier identification of an entity's ownership arrangements creates a smoother, quicker process for taking them on as a new client. One figure from a recent white paper by Jim Roth, with Thomson Reuters Client On-Boarding,reveals that clients may wait up to 34 weeks before they are fully on-boarded with a bank and each week of delay costs both the client and their bank.

These drivers demand material change at company level. It is business organizations first and foremost that will need to maintain their own UBO records. And beyond their own walls, the most successful companies will be those that adopt a risk-based approach in verifying, screening and monitoring customers and third parties -- and, ultimately, those that refuse to do business with any entity that they suspect of being linked to criminal activity. Many businesses are already leading the way with best practice; it is now imperative that the rest of the business community take on the mantle of UBO transparency too.

Against this backdrop, members of the B20 Anti-Corruption Task Force -- the group representing the international business community in the dialogue on anti-corruption alongside the G20 Anti-Corruption Working Group -- ran a workshop in June to address company-level implementation of UBO transparency. The meeting brought together business leaders from financial services, professional services, manufacturing, the consumer goods industry, as well as members of international NGOs; this was the first time that such a group had been convened. As such, it represented a significant initial step in building a network of global businesses and civil society organizations committed to delivering UBO transparency. Three major insights emerged from this first session:

1. Companies -- especially global ones -- that adopt high-standard risk-based approaches will be the ones that succeed

As demonstrated by the contrast between the UK's regulation and other EU countries (only France, Denmark and the Netherlands have also committed to public registries), different governments will approach UBO standards in different ways. While companies will of course have to respond to the requirements of each individual country, those that base internal policies only on governmental standards will come up against inconsistencies between the approaches of various countries. Done in a piecemeal way, it's very likely that this will be more costly and less effective.

Instead, companies must look to deploy globally aligned, enterprise-wide UBO identification systems. This approach is especially compelling given the fact that, while identifying and verifying UBO is a difficult task anywhere in the world, it is made even more complex by the fact that ownership is often spread across jurisdictions.

2. Examples of best practice are out there already

It is not unrealistic to aim for an approach to transparency that goes beyond what is required by any single piece of legislation -- many businesses already are doing more than is mandated by the fourth AMLD or the G20 principles. For example, one workshop participant from a global bank explained that, while the international standard defines UBO as any individual with an interest in more than 25 percent of the shares or voting rights of a company, her bank has set a 10 percent threshold, and requires that identity verification be done face to face.

3. The wider the network, the greater the value

One session, attended by roughly 20 participants, identified several distinct cases of best practice. As our network grows, it will generate more insights that are increasingly refined. And, as more businesses share their best practices, these policies will become more widely available -- and more widely put to use.

Ultimately, the solution to the challenges posed by financial crimes requires unified and timely action by the international business community. EU member states have until June 2017 to transpose the fourth AML Directive into national law, and the National Action Plans for implementing the G20 principles won't be drafted until the end of 2016, but businesses cannot afford to sit back in the meantime. We have a window of opportunity to take the reins in achieving a viable global standard of UBO transparency, thereby advancing and simplifying the flow of business worldwide.

We urge anyone from business who would be interested in being involved in future workshops to contact us.

Christine O'Connell is Global Head of Strategy and Business Development for the Risk business at Thomson Reuters. She is also a member of the Steering Committee of the World Economic Forum's Partnership Against Corruption Initiative, and through her engagement with the B20, works with a cross-section of industry, civil society and government to address transparency and corruption.

Tom Golding is responsible for proposition development and product strategy within Thomson Reuters Financial Crime and Reputational Risk business, a business that focuses on identifying regulatory or reputational risks of doing business with companies and individuals. Tom has worked on developing the Risk Intelligence capability to evaluate labor brokers against risk indicators around human trafficking and bonded labor.

This blog post is part of the Plan B for Business series produced by The Huffington Post and The B Team community to help articulate a Plan B for Business. To see other posts in the series, click here. For more information about The B Team, click here.