For many years international bodies such as the Financial Action Task Force (FATF) have drawn attention to the need for greater transparency of Beneficial Ownership for the prevention of money laundering and other financial crimes, and the recent invasion of Ukraine has accelerated the anticipated introduction of a register of foreign owners of UK property. Today, Financial Crime Manager Terry Greenhow provides some insight into the latest changes to Beneficial Ownership and what that means for the business community.
What is the Financial Action Task Force and why is it so important?
The FATF was established in 1989 by the G-7 summit and is the inter-governmental body setting the international standards for regions, countries, and governments in enacting and implementing their laws, policies, and procedures for the prevention of money laundering, terrorist financing and other related financial crimes and the resultant harm this has on society. Within the UK, this included the enactment and implementation of the Money Laundering Regulations (MLR) 1993 – 2007 which has now been superseded by the MLR of 2017 in compliance with the FATF recommendations.
The legislation places an increased emphasis on companies and their need to identify, record and update their Beneficial Owners at Companies House for transparency of ownership for those who have reason to access the details. This includes investors, law enforcement, and financial institutions, such as Ultimate Finance, who are legally required to access and verify this information as part of their client due diligence (CDD) procedures.
In 2019, and again more recently in 2022, the MLR were themselves updated so that not only do financial institutions have to access and check this information against what a client has provided, but they must now also report any discrepancies they find back to Companies House.
What is Beneficial Ownership?
In simple terms, Beneficial Ownership refers to the person(s) who ultimately owns or controls an asset (e.g., a company, land, property etc.). Moreover, whilst the owner of a company might be another company in either the UK or overseas, the ultimate Beneficial Owner will be those persons who, through the company ownership chain, beneficially own more than 25% shares and or voting rights in the company or who exercise or have the right to exercise significant influence or control over it.
Why is such increasing emphasis being placed on companies and financial institutions to establish and record Beneficial Owners?
The reason organisations such as the FATF, EU Directives and domestic governments are calling for an emphasis of Beneficial Ownership understanding is that, whilst a Beneficial Owner will ordinarily own a company and its operations for entirely lawful means, occasionally they may also own a company for entirely nefarious reasons. This includes money laundering ill-gotten funds channelled through the business obtained from any crime – including fraud, tax evasion and corruption. It can also involve the investment of the proceeds of crime in other assets such as land and property connected to an entity. Therefore, just as there is an increasing emphasis on financial institutions to identify, verify and record Beneficial Owners, likewise, the same applies to the source of funds to be used in the facility and how they achieved their wealth where relevant.
What was the UK’s response to this?
In April 2016, the Persons of Significant Control (PSC) register came into effect in the UK. This was for the purpose of registering Beneficial Owners or PSCs at Companies House to further provide for that need for transparency. The definition of a PSC, whilst wider nevertheless includes Beneficial Owners. All UK companies and limited liability partnerships are required to identify and record certain legal entities (companies) involved in their ownership chain as well as their PSCs and file this information at Companies House. However, there still existed deficiencies in transparency and the recording of overseas entities involved in the ownership chain. Other regions, such as the EU and individual countries have introduced similar measures or plan to do so, including British Overseas Territories and Crown dependencies by the end of 2023 as a result of further legislation enacted.
Why is the war in Ukraine highlighting this?
Whilst in the UK it was already intended to address gaps in the legislation, the crisis in Ukraine saw that intention accelerated because certain Russian entities and individuals were subject to new UK Government sanctions and asset freezing, and many were known to have invested or be involved in companies or high-end property purchases in which the Beneficial Ownership was not always transparent and thereby difficult to effectively target. This resulted in the enactment of the Economic Crime (Transparency and Enforcement) Act in March 2022. The effect of the bill, amongst other things, includes extending the PSC register at Companies House to include a public register of Beneficial Owners of non-UK entities (overseas entities) that own or buy land in the UK with some limited exceptions. Subject to a 6-month transitional period, any overseas entity wishing to own UK land needs to identify their Beneficial Owners or PSCs and register them as well as keep this information up to date.
Failure to comply with the provisions may amount to criminal offences for the company, its officers as well as the financial institutions in their client due diligence and reporting obligations. Therefore, from the above, we know what friction and effect this already has on companies; however, the change also impacts on financial institutions such Ultimate Finance in terms of our existing CDD procedures.
So what is Ultimate Finance’s approach to the new requirements?
We embrace not only the requirements of these acts, but the spirit and purpose of their enactment to prevent crime and harm to society. To that end, whilst the acts deliberately create friction in terms of mandating increased procedures and reporting obligations on companies, their officers, and financial institutions where discrepancies are identified, we aim to minimise that friction for our clients and Introducers. We achieve this through effective communication from our sales team at the point of enquiry, to onboarding and the ongoing relationship management of our facilities. We continually raise awareness of our CDD procedures, so everyone knows what we require and why we require it.
We also encourage our clients to rectify, and update known discrepancies so that they are not in breach of the new requirements and prevent any unnecessary risks for them or their business. This is because the spirit of the act is to provide transparency and as the funding partner of choice, we believe in playing our part for the benefit of businesses and the wider society as originally intended by the various acts.