‘Beneficial Owner’

“Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement”—FATF Guidance Transparency and Beneficial Ownership

A bitter reality is that owing to weak controls, resources meant to change the lives of the underprivileged are getting dried up because of corruption, tax evasion, money laundering, human trafficking, drug tracking and other financial crimes.

The interim report published by the High-Level Panel on International Financial Accountability, Transparency, and Integrity (FACTI) estimates that each year, governments lose $500 billion from profit-shifting enterprises, US$7 trillion in private wealth is hidden due to offshore havens which is equal to 10% of the global GDP, while the total volume of money laundering is around US$1.6 trillion per year or 2.7% of global GDP.

The legal framework of countries housing offshore/tax havens not only offer protection against all types of disclosure but also promise secrecy of financial affairs. The International Consortium of Investigative Journalists (ICIJ) through Pandora Papers, Paradise Papers, Bahamas Leaks, Panama Papers, has disclosed information of over 810,000 offshore companies.

Major offshore havens have a mixed kind of legislation where some jurisdictions have strict rules regarding disclosure of information related to beneficial ownership while some are flexible in terms of disclosing information but zealously maintain secrecy of banking transactions. For example, the Republic of Panama maintains confidentiality of accounting records, correspondence, and other commercial documents and their disclosure is subject to the court’s order under article 89 of the Commercial Code. On the contrary, Hong Kong laws do not cater to secrecy regarding disclosures but provide for banking secrecy.

Laws of these jurisdictions, however, always create hurdles in tracing real owners of assets under investigation. Therefore, Financial Action Task Force (FATF) is forcing the global community to adhere to its guidance regarding beneficial ownership and ensuring transparency. It is a well-known fact that corporate vehicles like companies, trusts, foundations, partnerships, and other structures work as a gateway for a wide variety of commercial and entrepreneurial activities.

The World Bank and United Nations Office of Drugs and Crimes’ (UNODC’s) Stolen Asset Recovery Initiative (StAR) has probed cases of corporate vehicles being used for illicit purposes, including money laundering (ML) and terrorist financing (TF). Lack of adequate, accurate, and timely beneficial ownership information facilitates ML and TF activities by disguising the identity of known or suspected criminals, true purpose of an account or property held by a corporate vehicle and/or source or use of funds or property associated with a corporate vehicle.

Criminals use corporate vehicles to hide their ill-gotten wealth to avoid legal action against them. They take full advantage of tax havens by exploiting loopholes in their laws by establishing various types of ownership structures in shell companies. Those who accumulate wealth through illegal means such as corruption, trade-based money laundering, drug trafficking, and human trafficking use complex structures of ownership by creating multiple layers of shares (mostly bearer shares or bearer share warrants) registered under different entities or individuals. They engage legal persons as directors, formal and informal nominee shareholders and invoke other legal arrangements which include trusts, partnerships, or use third parties to hide their own identity.

Keeping these methods in mind, FATF is demanding all member states to implement measures ensuring transparency and beneficial ownership of legal persons as well as transparency and beneficial ownership of legal arrangements as envisaged in FATF recommendations 24 and 25. FATF is stressing upon G20 members along with the global community to reaffirm their support for implementing beneficial ownership-related measures by 2024. In response, in September 2022, the United States of America issued its Final Rule implementing requirements of the Corporate Transparency Act (CTA) of 2019 to report beneficial ownership information.

The same regulation will be applicable from January 01, 2024. The newly drafted corporate transparency Act authorizes the Financial Crimes Enforcement Network (FinCEN) to collect details of beneficial ownership and disclose to relevant government agencies and financial institutions subject to effective controls. It is expected that the implementation of a beneficial ownership rule will grant access to law enforcement agencies, and national security agencies to important information about criminals to prevent ML and TF, proliferation, and corrupt oligarchs from hiding illicit money, and property in the United States as highlighted in the FinCEN guidelines.

The new beneficial ownership rule expressly highlights the reporting companies, beneficial owners, provision of specific information, and time limitations.

Similarly, the Directive (EU) 2015/849 (4th Anti-Money Laundering Directive, 4AMLD) requires the identification of customers especially beneficial owners of companies. It further requires centralization of beneficial ownership information by each member state to be placed in centralized registers.

The recent consolidated assessment report released by FATF states that Pakistan is largely compliant with recommendations 24 and 25 dealing with transparency and beneficial ownership of legal persons and legal arrangements respectively. Section 123A of the Companies Act, 2017 also requires companies to maintain information about their ultimate beneficial owners as prescribed by the law.

The ultimate beneficial owner would be a person who owns or controls a company through direct or indirect means and holds at least 25% shares or voting rights or exercise effective control in that company. Although the Securities and Exchange Commission of Pakistan (SECP) as the main corporate regulator is trying to ensure implementation of beneficial ownership taking penal action for non-compliance with these requirements but it appears that Pakistan still has some shortcomings in the existing framework as highlighted in the Mutual Evaluation Report 2019.

Likewise, Pakistan needs to improve its ostensible ownership laws, registration of immovable property trusts, and trust deeds. Reporting requirements for different types of companies should be specifically laid down. Mere issuance of generic regulations does not meet international best practices.

The requirement of owning 25% shares or voting rights followed by various jurisdictions, appears to be on the higher side that should be lowered to 5-10% for due diligence purposes. Pakistan’s informal economy size is estimated to be 35.6% which is equal to US$397 billion at gross domestic product based on purchasing power parity (GDP PPP) levels and its ranking on the Corruption Perception Index is 140th.

The volume of tax evasion by the corporate sector is around US$735 million and by private individuals is approximately US$24 million. Keeping in view these facts, Pakistan should document its economy and improve its reporting regime related to financial crimes.

Though the SECP collects beneficial ownership information, at the same the companies should identify and report the basic information about beneficial ownership to the Financial Monitoring Unit (FMU) such as name, birthplace, address, and computerized identification number issued by the government of Pakistan and in case of foreigners, passport number. The only way forward for us to ensure transparency is the implementation of beneficial ownership guidelines issued by the FATF; it will help us to trace the real owners of the property or other assets.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2022