One of the most iconic scenes in the Godfather movie is the commission meeting between the dons of the five New York boroughs.
Most of us have seen the movie and know what happens after the bosses agree to broker the peace in the the escalating mafia war. With the large painting of a steam locomotive representing the capitalism of the great industrial revolution and the early 20th century United States. Some might even recall that Vito’s first legitimate business was called "Genco Pura Olive Oil Company", which was only the start to Corleone family’s vast legitimate and illegitimate business empire. The question we ask at NorthRow, is how do we as compliance professionals and business executives identify clients with suspicious links to organised crime and money laundering?
It is not surprising that complex company structures appear impenetrable to those outside of it; they are, by their very nature, complex. What this term essentially means is a company that does not have clear internal hierarchies, which can make it difficult for an external person to see who has ownership and/or control.
How do complex structures make it hard to identify money laundering?
Complex structures can occur purposefully from its origin or evolve organically as a company grows in size; encompassing more corporate officers and shareholders. The later type of organisation can make it difficult to identify the beneficial owner without any malice intended. Combined with the fact that some companies have overseas companies as shareholders, it can become very difficult even for a legitimate company to be transparent.
This is particularly worrying for shareholders or potential investors. Mossack Fonseca, at one time the world’s fourth largest provider of offshore financial services, came into the spot light in 2016 after the Panama Papers were published. These papers were leaked documents from Mossack Fonseca which exposed personal financial information about wealthy individuals and public officials.
Some of the services offered by Mossack Fonseca included incorporating and operating ‘shell companies’ with complex structures in particular jurisdictions for the purposes of tax avoidance. Now, this was a legal practice but demonstrates how company structures can be used to avoid financial burdens. If it is possible to create structures to conceal legal practice, then it is equally possible to do so for criminal practices (such as money laundering).
How to identify Beneficial Owners in a complex company ownership structure?
Fundamental to ensuring that company structures are transparent is being able to easily identify the beneficial owners of a company. The Financial Action Task Force (FATF) defines the beneficial owner as: 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 persons who exercise ultimate effective control over a legal person or arrangement; this can be done by a chain of command rather than necessarily direct control.
The Panama Papers exposed an issue that many were aware of; that companies with complex structures are set up in offshore tax havens to purposefully make it difficult to work out who beneficial owners of the company were so as to avoid tax. It is important to know who the beneficial owners of a company are for two key reasons: firstly, a legitimate organisation has no reason to conceal who the beneficiaries are; and secondly, having transparent company structures allows more certainty in investment. Transparency in this space ensures that funds or property are not being hidden fraudulently via the corporation.
How to identify Directors of a Company in a complex company ownership structure?
The statute does not give a conclusive definition of a director but the term is used to describe a person who is responsible for the management of a company. Different companies refer to the role differently and regardless of the official title, the person acting as director will be treated as such under legislation and regulation.
Knowing who the directors in a company are is fundamental to ensuring accountability and transparency. Without clear decision-making structures, it is difficult for clients to see how and why particular decisions are being made. It is possible for the public to access databases that list all company directors, although it is not the easiest to access for some countries than others.
How does the Fifth Money Laundering Directive affect Company Director checks?
The Financial Action Task Force (FATF), an international body that sets out the standards relating to tackling money-laundering and counter-terrorist financing, created guidance and recommendations on how to properly assess beneficial ownership of companies. The FATF sets out measures that state governments should undertake to ensure that complex company structures are not being used for criminal purposes. This means that information collection about the company is easily accessible by external auditors, regulators and other persons.
There have been four previous iterations of this guidance. The most recent, 5MLD (Fifth Money Laundering Directive), proposes a series of changes following terrorist incidents in Paris and Brussels, as well as the Panama Papers. Some of the changes are:
That anonymous safe-deposit boxes will no longer be permitted
There will be greater provisions for national bank account registers which will enable the necessary authorities to be able to access information about company accounts
There will be stricter due-diligence measures for business transactions with ‘high risk’ countries
There will be greater access between member states’ central register of beneficial ownership of corporations. This means members of the public, with a legitimate interest, in the information will be able to access it
Virtual currency exchange platforms will now fall into the scope of 5MLD. Electronic identification will also be used for customer due diligence.
The changes set out by 5MLD must be implemented by 10th January 2020. To learn more how the 5th Money Laundering Directive Affect Beneficial Owner Monitoring read our blog here.
Can you obtain the whole complex company picture of ownership structure?
Using NorthRow you can undertake checks on companies, including their directors, shareholders, investors and beneficial owners from which you can asses how complex is the company structure and interlinking relationships. The easily-integrated API is able to collate all of the information for the user so that a single holistic picture is formed.
NorthRow data providers use a range of open source, commercial, and legal sources alongside a proprietary risk scoring system. It is set up to provide services to accelerate the capabilities of regulated organisations by digitally transforming the process of client onboarding and monitoring processes for complex clients. These checks help to reduce the risk of fraud significantly, as well as ensuring compliance with money laundering regulations. NorthRow also check onboarded individual and legal entity data with an international database to undertake due-diligence checks. By providing services that make people and companies transparent, firms can make informed decisions about with whom they conduct their business. This means firms can spend more time investing in their business, assured that the businesses that they are dealing with are legitimate.