Verifying identity: ink is not good enough

A tattoo artist inked his signature on a document to register that he was the owner of a company that was allegedly involved in money laundering. The company was not a new tattoo parlour but reportedly a front for a Russian oligarch and was apparently involved in the transfer of millions of dollars for real estate deals. Such stories create sensational headlines, especially at the moment when there is a lot of scrutiny on rich Russians, sanctions against them and the seizure of their assets including luxury properties, mega yachts and private jets. Yet the stories do not always detail specific offences or provide solid evidence of wrongdoing but link together a series of facts that paint a suspicious but ambiguous picture.

Ironically, these stories more often point to specific failings of those who are supposed to prevent and investigate money laundering and hiding the true ownership of assets. In this case, a bank failed to carry out sufficient due diligence enquiries, but it did raise a suspicious transaction report to US authorities, who then failed to investigate it. Such failings can put pressure on government agencies and bring accusations that they are not fully enforcing sanctions. These failings also undermine a reputation for integrity and a safe place to make investments.

These days, a signature on a piece of paper is not good enough to verify a person’s identity and hold them accountable for what they have signed. Signatures can be forged or coerced or a person with the same name can be used. Electronic signatures and scanned copies of documents can make it harder to verify signatures let alone the true identity of the person.

Campaigners against corruption, tax evasion and shady business transactions often cite registers of the ultimate beneficial owners of companies as part of the solution to dealing with the cases such as that of the tattoo artist and the Russian oligarch. Such registers are part of solution but as typically constituted at the moment, have too many loopholes. In any case, many controversies coming to light now, have their origins before beneficial ownership registers were established. Closure of these loopholes would make beneficial ownership registers more useful for all users including government agencies, private sector companies and civil society organisations.

Most beneficial ownership registers work by companies collecting information on their ultimate owners and reporting that data to the register. Few if any registers have robust measures in place to verify the information provided. In the case of the tattoo artist, the company will probably have provided his details (including address and unique identifier such as national identity card number) to the corporate register. The company may have even supplied supporting evidence such as a copy of the national identity card and proof of address. The register is likely to have taken the information at face value and conducted few if any checks on its veracity. That does not mean the tattoo artist was the real owner of the company or that he was even aware that a company was being established using his details.

A few straightforward (in this day and age) checks by the corporate register would have raised red flags and may have prevented further wrongdoing. A check of the tattoo artists’ details with the relevant tax authority would have verified that such a person did exist but also would have shown whether he had the income level to invest in a company making transfers worth millions of dollars in a business sector with which he had no prior connection. Such a check may have raised a red flag and prompted further investigation.

Such checks may also have another preventative effect. If those seeking to hide assets or disguise ownership know that stringent identity checks will be undertaken, they may be more reluctant to register companies in that jurisdiction. This may mean that they move to other, more secretive jurisdictions but stringent identity checks will reduce the number of hiding places for those trying to hide their true intentions and engage in criminal activities. Such checks need to be designed into a beneficial ownership reporting from the start. In our beneficial ownership implementation framework, BO6, design is stage three of the six stage process.

The real estate sector presents particular risks for hiding ownership for money laundering purposes and requires special attention. For example, the British government is legislating to establish a register of the ultimate owners of property in the UK. Under the sensational headlines of oligarchs, their families and luxury properties, there are often details of complex chains of corporate structures crossing several international borders. These details can give the impression that this is a difficult and complex problem to solve. In some ways it is, but some straightforward verification checks by government agencies would go a long way to preventing the creation of complex structures in the first place and make it harder to disguise the real ownership of companies. Governments need to pay particular attention to verification and cross-checking data with other databases at their disposal.

Michael Barron and Tim Law are independent consultants who have advised governments on four continents on implementing effective beneficial ownership reporting systems.