FATF Revisits Transparency Standards

The UN resolution calls for Russia to:

 “immediately, completely and unconditionally withdraw all of its military forces from the territory of Ukraine within its internationally recognised borders”.

The IMF and World Bank have similarly issued a joint statement:

“We are deeply shocked and saddened by the devastating human and economic toll brought by the war in Ukraine. People are being killed, injured, and forced to flee, and massive damage is caused to the country’s physical infrastructure. We stand with the Ukrainian people through these horrifying developments.”

Attempts at a negotiated settlement have given a glimmer of hope for a peaceful resolution to the conflict but for the time being, outcomes remain uncertain.

Given the wall of news media on the subject, it is not too surprising that a statement by the Financial Action Task Force (FATF) has received less pickup, but notwithstanding, in terms of the tone usually adopted by international standard setters, it certainly pulls no punches:

“The FATF expresses deep sorrow due to the loss of people’s lives in connection with the tragic developments in Ukraine.

“At the heart of the work of the FATF are the principles of international cooperation, dialogue and mutual respect among countries. In light of the Russian Federation’s military invasion of Ukraine, the FATF, as the global standard-setting body for combating money laundering, terrorist financing and proliferation financing, expresses its grave concern about the invasion’s impact on money laundering, terrorist financing and proliferation financing risk environment as well as the integrity of the financial system, the broader economy and safety and security.

“The actions of the Government of the Russian Federation run counter to the FATF core principles and represent a gross violation of the commitment upon which FATF Ministers agree to implement and support the FATF Standards. The FATF reviews Russia’s role at the FATF and considers what future steps are necessary to uphold these core values.

“The FATF calls on all jurisdictions’ competent authorities to provide advice and facilitate information sharing with their private sectors on assessing and mitigating any emerging ML/TF/PF risks identified, including in relation to virtual assets, as well as other threats to international safety and security from the region.”

Many countries have issued sanctions regimes targeted at Russia, most prominent being the US, EU, and the UK. They have now been joined by Australia, New Zealand, Singapore, Switzerland, Japan, and Taiwan. There have been sanctions against individuals, against Russian Banks including the Central Bank, flight bans for Aeroflot, and restrictions on shipping. The total sanctions figure has passed 5,000, the highest ever implemented against a single country.

Sanctions can be highly dissuasive, but they take time to work, and of course, data is essential if the assets of those sanctioned are to be traced, blocked and or seized. Some have described the sanctions on individuals as taking a peashooter to a gunfight. Still, advocates would argue a combination of political, corporate, and individual sanctions do bring high costs and pause for thought, acting as a brake on further aggression. Following the money and understanding who  the ultimate beneficial owner is, is vital for tackling criminal activity effectively. On a comparative basis, IFCs have excelled with many operating verified registries of corporate information and beneficial ownership for more than 30 years. 

Of course, there is an enormous range of views on the extent of financial crime, including money laundering, human trafficking, terrorist financing, counterfeiting and illicit trade.

David Lewis, until recently FATF Executive Secretary, was recently quoted as saying:

 “Money fuels serious crime, including drugs trafficking, human slavery and terrorism. The UN has estimated that between USD 800 billion and USD 2 trillion is laundered around the world each year.”

So, whilst the quantum may be debated, the problem is undoubtedly significant with tragic and hugely damaging consequences in terms of fraudulent activity and human misery.

For these reasons, the FATF has undertaken a strategic review on the efficiency and effectiveness of the FATF recommendations and the global anti-money laundering system over the last three years. The study was given added urgency and impetus by the highly publicised cases of money laundering failures that continue to feature in news headlines worldwide and more recently through the Russian invasion of Ukraine.

In my role as Chair of the STEP Global Public Policy Committee, I was privileged, together with colleagues, to have the opportunity to provide private sector input. Our contribution focused on the working group consultations, particularly regarding ownership. The study involved an in-depth review of one of the key 40 + 9 recommendations - Recommendation 24 - on the transparency of beneficial ownership of legal persons.

Recommendation 24 requires competent authorities to have access to adequate, accurate and up-to-date information on the actual owners of companies. The consultation aimed to address several perceived weaknesses that might increase the risk of ownership being disguised through using anonymous shell companies and other businesses and instruments, allowing organised crime and sanctions evaders to circumvent the regulation.

As a result of this comprehensive review work, which included numerous working group meetings and two public consultations, the FATF has agreed to revise recommendation 24 and  has adopted amendments to the recommendation and its interpretive note.

The revisions require countries to follow a risk-based approach and consider the risks of legal persons in their countries. They must assess and address the risks posed by legal persons; but in a new move, this must include those created in their countries and foreign-created persons who have sufficient links with their country.

The FATF plenary statement further specifies that access to information by competent authorities should be timely and information should be adequate for identifying the beneficial owner; accurate - based on verification;  and, up-to-date. Furthermore, the revisions require countries to ensure that public authorities have access to beneficial ownership information of legal persons during public procurement.

Finally, the changes include more robust controls to prevent the misuse of bearer shares and nominee arrangements, including prohibiting the issuance of new bearer shares and bearer share warrants and conversion or immobilisation of the existing stock. Further measures are set to introduce complete transparency requirements for nominee arrangements.

These new arrangements explicitly call for a multi-pronged approach for collecting beneficial ownership information and ensuring it is available to competent authorities promptly.

Ownership information will need to be held by a public authority or body functioning as beneficial ownership registry. An alternative mechanism may be used if such a mechanism also provides efficient access to adequate, accurate and up-to-date beneficial ownership information by competent authorities. It isn’t clear what alternative mechanisms are in mind but further guidance is expected.

Moreover, countries should apply any additional supplementary measures necessary to ensure the determination of beneficial ownership of a company. These other measures include holding beneficial ownership information obtained by regulated financial institutions and professionals or held by regulators or stock exchanges.

Rapid information sharing will be expected – critical to the effectiveness of criminal investigations – and information on foreign created entities will also be needed. New bearer shares are banned, and disclosure obligations on existing instruments and the use of nominees will enhance the ability to establish actual ownership. The intention is to mitigate against the layering up of chains of company structures without a serious purpose other than to disguise ownership. Pleasingly, legitimate privacy safeguards continue to be respected.

In summary, the changes are significant and will require many countries to up their game on beneficial ownership collection and sharing. The layering up of complex structures designed to disguise ownership will be much more difficult. Governments will have to introduce registries that capture beneficial ownership or explain why their alternative is just as effective, with any assurances likely to be rigorously tested through the mutual evaluation process.

International Finance Centre cross-border investment hubs already have considerable expertise in capturing and sharing beneficial ownership information, including registries. They should be confident of their ability to continue to meet and exceed international transparency standards.

Geoff Cook
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is an Advisor and non-executive director to a select number of Family Office, Private Capital, and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also Chair of Apex Financial Services (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.