The Global South Dialogue on Economic Crime Network - Logo

Challenges of Beneficial Ownership and Financial Crime Regulation

Abstract

Financial crimes have over the last 30 years increasingly become of great concern to governments throughout the world. In response to this, several regulations have come up over the years to fight financial crimes. On May 11, 2018, a ‘rule’, known as the ‘Beneficial Ownership Rule’ was implemented, intended to crack down on and combat illegal financial activities. In this article, we will discuss the requirement of the Beneficial Ownership Rule and its challenges so far in financial crime regulation.

Introduction

Invisibility is a money Launder’s aim. The lack of Beneficial Ownership ‘BO’ requirements aids invisibility and enables financial criminals to raise, move, store, access illicit funds and succeed with their illegal activities while inhibiting law enforcement.

Challenges of Beneficial Ownership and Financial Crime Regulation

BO is a requirement from the Financial Crimes Enforcement Network ‘FinCEN’ which mandates all covered financial institutions to collect and verify from certain non-exempt legal entities specific information about the Beneficial Owners of the entity the moment a new account is opened.

Beneficial owners ‘Owners’ are natural persons on whose behalf a transaction is being conducted, having ultimate effective control over legal person or arrangements. The BO requirement exists to expose financial criminals. However, criminals employ a range of techniques and mechanisms to obscure the BO of assets and transactions.

According to the Financial Action Task Force ‘FATF’ guidance report, BO information is commonly obscured through the use of:

  1. Shell Companies
  2. Complex ownership and control structures
  3. Bearer shares and bearer share warrants
  4. Unrestricted use of legal persons as directors
  5. Formal nominee shareholders as directors such a close associates and family.
  6. Intermediates in forming legal persons including professional intermediaries

Despite the many financial crime regulations, countries struggle in futility because many states do not require persons forming corporations to name Owners at the time of corporate formation.

In June, 2012, former Assistant Attorney General, Lanny A. Breuer stated ‘’Shells are the number one vehicle for laundering illicit money and criminal proceeds’’. The U.S has over two million corporations formed each year in Delaware, Nevada, Wyoming, providing opportunities for criminals via its unimpeded anonymous formation of corporations for criminal purposes.

In Nigeria, it was disclosed that over $1 billion has so far been recovered using BO data.

The rationale behind the BO intervention is to ensure Owners are identified to enhance the possibility of tracing money linked to tax evasion, corruption etc. this was hinged upon the amendment of the Companies and Allied Matters Act (1990) to implement Nigeria’s BO commitment to create a register of Bos. However, the application process is cumbersome.

Conclusion   

To address these challenges, the FATF is an inter-governmental body which sets standards, develops, and promotes policies against money laundering and terrorist financing, therefore there must be strict adherence at country specific level to its guidance/recommendations regarding beneficial ownership.