The river Danube flows through Budapest, with the hills of Buda on one bank and the flat plain of Pest on the other. The banks lead in the same direction and are linked in several places, but are different in many ways.
Most rules, laws, regulations and even guidance take one of two forms. They are either prescriptive or take a principles-based approach. In the world of beneficial ownership (BO), we find both, and frequently in the same country. These laws are effectively the opposite banks of the same river.
Ask almost any bank, financial institution, law or accountancy firm in most countries around the world about BO and they would probably point you towards their compliance or client onboarding process. Identifying BO is a core element of the due diligence required of these institutions, sometimes called obliged entities. Only in some cases will they also jump to thinking of the other use of the term BO – central registers of BO held by a government agency, even though submitting BO data to this register represents an obligation for the clients they advise.
The BO obligations on obliged entities are often distinguished from central registers by being described as the “AML regime”. This isn’t because central registers don’t have a role to play in tackling money laundering, but rather that BO is part of wider AML requirements on obliged entities and is rooted in efforts to bring better governance to financial transactions. Indeed, it is often in the AML laws and regulations of a country that these BO due diligence (DD) rules are found.
In general, AML laws take a principles-based approach and are linked to risk. They require obliged entities to assess risk and carry out DD to mitigate that risk. The law will probably set a minimum standard for that DD but, might not be prescriptive on the details. And that makes sense, as obliged entities are dealing with diverse circumstances and risk patterns.
An AML law might include:
• An obligation on obliged entities to carry out DD on all prospective and ongoing clients,
• A definition of BO which refers to direct and indirect ownership and control.
It won’t always give a specific reporting threshold to be applied, and might instead state that the obliged entity needs to take a risk-based approach. However, even if it isn’t explicitly stated, this is usually expected to mean identifying all those with a 25% interest or above. Some countries will include a threshold in their AML law, but this doesn’t mean that smaller interests don’t get examined if the risk-based approach points that way.
In addition, an AML law might not give an exact list of information to be collected on each BO but, might simply require sufficient information to identify them.
Countries have been implementing these AML regimes for many years, and they are generally well established.
But in more recent years, countries have started implementing central registers of BO for all legal entities, and in some cases also legal arrangements (e.g. trusts). These new registers, often prompted by the need to meet the Financial Action Task Force (FATF) Recommendations, place an obligation on all those in scope to identify and report their BO to the register, normally held by a government agency, with a penalty regime for non-compliance.
Immediately here we have moved away from a principles-based approach. The rules governing BO registers need to be very specific about which entities are in scope, how they identify their BO (including any threshold), the data set to be collected and submitted, and the deadlines for complying. For this reason, the laws governing registers tend to be more detailed and prescribe exactly what companies need to do, in order to apply penalties effectively for non-compliance. There is plenty of guidance around on designing BO laws, such as the documents referenced at an Open Ownership facilitated webinar held on 3 December.
There are a few risks which arise here for jurisdictions with both AML and BO register legislation.
Mixed messages – obliged entities face a minimum standard and principles-based approach whereas their clients face a prescriptive reporting obligation.
Contradictions – although there is clearly a benefit to having the two pieces of legislation aligned, this doesn’t always happen. For example, the AML and BO register laws in Malawi each include a threshold, but one is 5% whereas the other is 10%. We have also seen examples where the definition of a BO is fundamentally different in older AML laws than in newer BO register laws.
Missed opportunities – in some countries the legislation for a BO register relies on the definitions already established for AML. This works when those existing laws are well drafted, reflect current practice and are sufficiently prescriptive. However, if they are not, countries can miss the opportunity to embed international best practice into their legislation.
So what do countries need to do?
It isn’t essential to completely align the laws governing AML and BO registers. The purpose and application of these laws is different. However, it is important to consider both sides of that metaphorical river when reviewing and designing new legislation to ensure that in implementing regimes to reduce the risk of financial crime the country doesn’t introduce unnecessary complexity or ambiguity.
