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What the Panama Papers and Bahamian offshore leaks reveal about challenges of identifying Ultimate Beneficial Owner

James Swenson

08 Apr 2016

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The Panama Papers as well as the Bahamian leaks serve as another reminder of the challenges and importance of conducting proper due diligence. James Swenson, Head of Financial Crime and Reputational Risk Managed Services, looks in particular at the barriers to identifying Ultimate Beneficial Owners (UBOs).

The recent cache of leaked documents, published by The International Consortium of Investigative Journalists (ICIJ) has unleashed worldwide controversy around the widespread use of offshore companies, particularly in private wealth management.

Whether established for legitimate or illicit means — coverage of offshore corporations has been linked to politicians, dictators, sanctioned entities and even soccer stars across the globe and throughout the wealth spectrum.

Watch video — UBO and the risk of not knowing 

Additional linkages and scandals will inevitably arise as the Panama Papers are further scrutinized. Perhaps somewhat behind the headlines, the recent coverage of offshore banking and the law firms churning out secretive corporate structures once again highlights the increasingly onerous task compliance officers and financial crime practitioners face — the identification of Ultimate Beneficial Owners (UBO).

Regulatory obligations

The increasingly stringent regulatory environment certainly seems to “assume” the task of obtaining ownership information and unwrapping corporate structures should be relatively simple, as this due diligence component is progressively becoming a requirement.

Regulated financial services firms, particularly in Europe, have traditionally included the identification of UBOs in their customer due diligence process. In the United States, the practice has applied more generally to foreign entities and individuals seeking to establish banking relationships in the country.

While ownership documentation is often required as part of the onboarding process, the task of continuously monitoring ownership changes and verifying client-provided details can present serious challenges due to the lack of transparency, especially for privately-held companies.

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Risk-based approach

Other institutions, including non-regulated corporations, may take a risk-based approach to determine which customers, or third parties, present a greater financial crime risk.

Often, more in-depth due diligence is applied proportionate to the risk identified, including UBO identification and corporate unwrapping. The identification of shareholders is gradually becoming a more common component of third party screening conducted by multinational organizations concerned with anti-bribery and corruption legislation, as governed by the US Foreign Corrupt Practices Act and the UK Bribery Act.

While guidance from international organizations such as the Organization for Economic Co-operation and Development (OECD) or regulators enforcing anti-bribery legislation tend to be less prescriptive than banking regulations, recent developments such as the Ukraine-related sectoral sanctions have compelled many organizations to expand due diligence practices to include the identification of shareholders as any entities owned 50 percent or more by a sanctioned individual are liable under the regime.

Identifying the UBO

Download the expert talk — Finding the needle in the haystack

So where do we stand in terms of transparency of ownership information across the world? There are an estimated 235 countries, territories or jurisdictions where companies can be incorporated; roughly 58 percent of these jurisdictions have online corporate registries where some basic form of company verification can be performed.

Extending this definition to include corporate registries which provide information offline, either in-person, via fax/post, or via a lawyer, we see an increase to 78 percent of jurisdictions providing some basic registry information.

However, due diligence practitioners will know that many of these jurisdictions provide limited information in terms of performing proper due diligence.

Further, only 45 percent of all jurisdictions provide director information online, while only 36 percent disclose shareholders. In many instances, the provided ownership information includes corporate shareholders which in turn require additional research to be conducted in an attempt to identify the UBO.

Panama itself, for example, has an online search facility through the Public Registry of Panama (Registro Público de Panamá).

A search of “Mossack Fonseca & Co, S.A.” reveals only limited information on the entity: basic registry details, historical filings, and a listing of directors and key executives including increasingly well-known names from the Panama Papers such as Ramon Fonseca and Jurgen Mossack.

The British Virgin Islands, where the majority of Mossack Fonseca’s offshore companies were incorporated, provides even less detail on corporations. Once a request is faxed to the Registrar of Corporate Affairs in Tortola, a two-page registry confirmation including registration number, transaction history, and status is provided with no details on shareholders or directors.

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Mixed progress

Progress toward increasing transparency though publicly-available corporate registries has been mixed. Organizations such as the World Bank and the IFC are supporting transparent disclosure of corporate data to facilitate due diligence, mostly in emerging markets.

For example, Lesotho and Kuwait recently launched online retrieval portals including shareholders and directors.

In emerging markets (where many organizations apply more in-depth due diligence proportionate to the perceived risk), transparency is generally better in Eastern Europe, South America, and parts of Asia. Central America, the Caribbean, Africa, and the Middle East may offer less transparency.

The lack of transparent databases with useful ownership information is a significant barrier for organizations striving to conduct levels of due diligence aligned with regulatory expectations.

The Panama Papers demonstrate the extent to which offshore corporate structures permeate financial services.

The ramifications from the papers are likely to be far-reaching with banks already being asked to check if they have links to Mossack Fonseca. Jurisdictions —  like Panama, BVI, and others — will inevitably be scrutinized by organizations such as the Financial Action Task Force and the OECD to increase transparency to facilitate the due diligence process.

How Thomson Reuters can help

Thomson Reuters offers Risk Management Solutions that enable our customers to implement effective risk mitigation programs’ from the initial screening and due diligence stage through to onboarding and training their employees and third parties. Our solutions can help you get transparency into who you are really doing business with and find the UBO.

Thomson Reuters Enhanced Due Diligence Reports: A structured and highly bespoke approach to identification and checking UBO of important third parties. Ensures up-to-date and auditable compliance for organizations in any jurisdiction.

Thomson Reuters KYC Managed Service: Collect, verify and monitor a client’s identity, producing a real-time client record that unearths UBO, in accordance with a global KYC policy.

Thomson Reuters World-Check: Screen for heightened risk individuals and entities globally to help uncover hidden risks in business relationships and human networks.

Thomson Reuters Client Onboarding: Thomson Reuters Client Onboarding automates the onboarding of new clients and ongoing refresh cycles.

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