Beneficial ownership monitoring for transparency is critical for due diligence
The corona pandemic has and will have far-reaching consequences: not just immediate ones, but also many that have yet to emerge and cannot be easily predicted. One issue that is likely to emerge and become more acute over time is opacity in legal company ownership and in beneficial ownership in supply chains. Ultimate beneficial ownership transparency is critical for due diligence, not just for anti-money laundering and terrorism financing (AML–TF) and Know Your Customer (KYC) regulations, but also for a range of other reputational and operational risks that companies can face. To give you a flavour of how governments and public bodies have responded, the UK’s Chancellor of the Exchequer was advised by the Office for Budget Responsibility that, with respect to current government support for businesses: “When the fire is large enough you just spray water and worry about it later”. Such short-termism is likely to cause problems down the line.
Supply chain risks during previous emergencies
We are already seeing that companies with global supply chains are having to quickly switch their downstream suppliers, as factories are shut down and workers quarantined. This carries a risk that companies with global supply chains will short-cut due diligence processes, thereby potentially reducing quality control and business integrity, and potentially endangering consumers. First to feel the pain will be just-in-time supply chains. These are particularly vulnerable, as they are less resilient to sudden unforeseen changes and resource shortages. Critical business processes for proper supply-chain management in the second, third and fourth-tier in the supply chain can be sidestepped, as companies add new suppliers to their roster in order to minimize their reliance on impacted jurisdictions.
In the wake of the Fukushima disaster in 2011, analysts observed that opacity still existed in supply chains and was jeopardizing resilience. This was primarily due to risk having been badly managed in the crucial secondary tier of suppliers. Rightly, some manufacturers responded to this by prioritising improved supply-chain risk management and business continuity strategies. But without dependable open company information, blind spots remain, adding unnecessary time and cost to supply chain due diligence.
Covid–19 is the first global pandemic of the twenty-first century, but regional outbreaks of disease in the recent past reveal they can have far-reaching economic consequences. The 2002–2003 Severe Acute Respiratory Syndrome (SARS) outbreak was estimated to have caused worldwide economic damage of $54bn, due to a decline in consumer demand, largely stemming from panic associated with the high level of human transmission.
Lessons from the financial crisis
As the world begins to respond and adapt, we must ensure that physical and economic recovery is well managed, sustainable and beneficial to those who have suffered the most. Indeed, as the anticipated recession that will mirror the recession caused by the financial crisis of 2007–2008, policy makers should consider the cost of past decisions made by governments that encouraged business activity at the cost of corporate transparency.
An understandable response to the economic crisis would be to take steps to remove barriers to entering a market or starting a business. In 2011, in the wake of the financial crisis, the UK government sought to encourage entrepreneurship by enabling any individual to register a company online with Companies House without having to engage a company formation agent.“The easiest place to set up a business in Europe” declared the “Britain is Great” campaign, boasting that one could incorporate in less than a day, for only £18. However, without adequate safeguards, this decision came at the cost of due diligence. Transparency International identified 766 UK companies that were found to be laundering £80bn. This demonstrates that policy changes to corporate registries in the wake of a crisis have far-reaching consequences when rolled out without openness and transparency being prioritised from the outset. In 2015 the British government responded to these criticisms by requiring UK companies to declare a ‘person of significant control’ (the actual ultimate beneficial ownership) in a register, thereby allowing for public scrutiny of the database.
Beneficial Ownership Monitoring
Monitoring ultimate beneficial ownership information is an immense challenge for regulated companies as the financial crisis and Panama Papers leak showed. There is no simple solution. Many registries around the world simply do not publish beneficial owner information, or else the information is partial and incomplete.
Whilst an obligation for all newly formed entities to self-publish this information on national registers will help in time, currently, there is no process to independently check and verify this information, making it difficult to rely upon for compliance purposes.
Often organisation structures are complex and obscure. As a result, unpacking ownership structures and identifying beneficial owners is a specialist skill requiring experienced and highly trained staff. NorthRow’s Know Your Business solution offers clients instant access to a world of international corporate entity and personal data to help facilitate more efficient client onboarding and monitoring. NorthRow validates businesses in real-time, in over 100 countries. We can access company shareholder information, financial data, and company structure information whilst also performing in-depth AML verification and electronic identity verification checks on company directors and ultimate beneficial owners.
The main lesson here is that ownership disclosure and other transparency measures should be implemented from the beginning. Improving oversight and scrutiny is the best defence we have against a poorly-distributed and ineffective economic recovery. Creating open systems for accurate company data and disclosure is critical for any economic recovery: such systems enable companies to shift suppliers fluidly and strengthen their supply chains – a fundamental need in a time of indefinite global crisis.
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