We were delighted to be joined by Federica Taccogna, Managing Director and Co-Head of Financial Crime Practice at Interpath Advisory on the latest instalment of our webinar series, Wired-In. In a thought-provoking session, Federica discussed the latest avalanche of sanctions while uncovering how poor beneficial ownership of data and challenges determining indirect control contribute to the ineffectiveness of certain sanctions
Chris Bourne, Head of Marketing at NorthRow: Firstly, I’d like to thank everyone that has joined today. This is the 6th instalment of our Wired-In webinar series, we’ve been running it now for a number of months and we’re starting to see a lot of traction with it.
So that is a massive thank you to all of you people that join and have made it a great success. I just want to quickly introduce myself, my name is Chris Bourne. I’m the Head of Marketing at NorthRow, and I’m just going to host for today.
I’m delighted to welcome our guest speaker Federica. Federica likes to be called Fed by her friends. So I’m hoping we’re all friends here! Just a bit of an introduction into Fed. She’s a managing director and also Co-Head of the financial crime practice at Interpath Advisory. She co-leads a team of regulatory experts, she assesses and investigates regulations related to financial crime and also she is a frequent speaker and writer on financial crime topics as well.
Today, she’s going to be sharing the landscape of global sanctions in 2023. Fed’s got such an extensive background that we could actually use the whole webinar to explain that, but I think we’ll stop there and just do a really brief intro to her.
So, Fed if you can just go to the next slide on your screen please. Just so I can introduce who NorthRow are. We help you speed up your time to revenue, we help you try and save time and money on manual verification checks, we always try to ensure you’re complying with the latest AML regulations as well. If you would like to find out a bit more about NorthRow, feel free to drop me an email afterwards at firstname.lastname@example.org or after the webinar, just go to our website to request a demo and someone will get back to you really soon to talk you through what we can offer you.
And, there are a few housekeeping items I want to get out of the way. Fed, if you can go to the next slide please?
Everyone is muted regardless of whether you’ve joined via your computer audio or on the phone. You’ll see a questions section within your GoTo control panel so if you do want to ask a question, simply drop that in at any time throughout the webinar and we will get to those at the end and answer all of those questions for you.
Finally, we’ll be recording today’s webinar as well so we’ll send an email out later today or maybe tomorrow morning so you can watch it on demand, or you can forward it onto a colleague if they weren’t able to make the webinar.
I think that is enough from me, I’ll hand you over to Fed to get the webinar started. I’m going to go off camera so I don’t distract everyone!
Over to you, Fed.
Federica Taccogna, Managing Director and Co-Head of Financial Crime Practice at Interpath Advisory: Chris, thank you very much. Welcome everyone, thank you for having me here. I apologise in advance for what I foresee will be some technology challenges, amongst other things. For example, I cannot see the chat on this screen but I’m hoping you’ll be able to hear me, see my slides and the video!
Chris introduced me extremely well. I’m a Partner at a management consulting firm where I run the financial crime practice. The things I do tend to fall into three buckets: I sometimes work on the side of the financial institutions and I help financial institutions to navigate regulatory challenges, to achieve compliance, respond to regulatory challenges and scrutiny, conduct internal investigations and similar things.
I very often, though, work on the other side of the fence. I work, for example, for regulators in the UK and globally, investigating concerns on behalf of firms relating to financial crime. I’ve investigated the big Nordic cases, that ‘big bank’ that we will not mention, I’ve investigated flows relating to oligarchs and Mafia-related types of concerns. And I’ve done this in a variety of jurisdictions across the globe.
And then, the third thing that I do that is a little more unique. I work extensively with the government and I counsel and help them in the process of, for example, responding to FATF challenges or going through a mutual evaluation or responding and coming off a grey list, putting in place national AML and CTF frameworks.
I say this because I hope to convey that I come to this with a perspective of both sides of the fence, and an appreciation that no matter what topic, when it comes to financial crime, it is extremely complex. There are no easy solutions. And it’s always a matter of balance and compromise, so whatever I say today, please take it in that context.
It would be extremely easy and satisfactory to provide a simple answer that gives us all a way forward, but in reality there isn’t. And this is true in particular when it comes to the topic of the day which is sanctions.
Sanctions are something that we’ve been discussing extensively in the last few years, necessarily because of everything that is happening with Russia and Ukraine. It is a topic that is vast, it’s deep, and I cannot even start to do it justice today!
I will attempt to give an overview of the challenge in general without going into the deep detail of any particular aspect, although if you fancy a nerdy chat after and separately, I would live to dive deeper into any particular topic.
I will then attempt to talk in more detail around a particular challenge and that is that of the boundaries and the overlaps between sanctions-related considerations and beneficial ownership and control through other means.
And then, finally, I will give a view as to what we all can do, is there something that can be done, for us all to be better at managing sanctions.
As I said, an extremely, extremely vast topic. In the limited time, I will attempt to cover some of the headlines, I very much invite your comments and questions. I know that Chris is monitoring the chat and he will pass on to me any questions. I’ve always enjoyed discussion around this topic.
So let’s start from what I’ve not said a few times, which is that this is a challenging topic and its not an easy one for a variety of reasons. The first, and perhaps one with which we are mostly familiar, is the fact that there is a patchwork approach as a result of the way in which sanctions have been put in place. We have at least three main regimes. We have the EU, the USA and the UK as at least the three primary ones with which anyone here should be concerned.
And the three regimes are fairly similar in nature, but differ in some degree of detail. Which, as a starting point, is the basic challenge with which we all deal. Understanding what each regime requires us to do is a matter of interpretation is the first baseline challenge.
Then we have other challenges. For example, between sectoral types of challenges and financial challenges within the same regime of sanctions issued by the same jurisdiction. For example, we have circumstances where, if I am permitted to deal in certain securities under sectoral sanctions but that might not be the case when that particular entity is also subject to financial sanctions and asset freezes. Which in turn might give rise to a particular situation in which there might be security held by a financial institution unable to trade with them in neither of the primary or secondary markets – into what is effectively a frozen account. But also how that particular scenario is interpreted varies between US for example sanctions and UK sanctions.
We have other challenges. The concept of a person connected with Russia, for example even if we look within the simple regime of the UK sanctions, means different things depending on what piece of regulation we’re reading or what type of sanctions we’re dealing with. And so, that again, is another nuance that’s worth considering at every stage.
We have the concept of aggregated ownership and we will see the challenges related to ownership in a moment. But again, the concept of aggregated ownership is treated differently by, on one hand OFSI (Office of Financial Sanctions Implementation, HM Treasury) which, as a general rule does not suggest taking an aggregated approach, versus on the other hand, the EU and the US that instead support that type of approach.
At a very simple level, I hope I have given you an overview of some of the complexity that exists when dealing with this topic.
We then have the heart of the issue that I want to discuss today, which is in order to know whether or not we can proceed with a certain client relationship, whether or not we should proceed with a certain transaction or a certain type of service; we need to know whether the entity with which we are proposing to deal is subject to sanctions. And that’s easier said than done because complex ways of owning assets these days make it extremely difficult to determine who is really behind a company, a legal entity or a legal person such as a trust.
The particular challenge is one that I think has existed for many years and is not novel today. If we read various red alerts and various insights from enforcement agencies, it has become extremely apparent that persons subject to sanctions have been using this type of device more and more frequently to detach themselves from the assets that they own and to distance themself from the ownership of companies and assets in general.
So, definitely not a novel problem but something that is becoming more and more topical today. When we deal with this topic, I like to describe it in terms of increasing difficulty. We have an easy, almost dream scenario in which we have an asset or a company that is owned by an individual and that person is the legal owner, that person is the beneficial owner of that asset and everything is easy. We know who owns it, who is the person that should be considered for the purposes of ownerships and sanctions in this case.
But very rarely do we find that scenario. The majority of the time, we find ourselves with a company that is owned by another company and then that company, in turn, is owned by a human being. And that person, that human being is the beneficial owner and therefore, the person in relation to whom we should be making considerations relating to sanctions.
The reality is that we are not often faced with this scenario either. The more frequent scenario is a scenario in which the company which you see, for example, there on the slide is not in between the asset or the company which we’re interested in. The end individual is not one, but multiple companies, groups of companies, all with distributed types of ownership, and these companies are often located in jurisdictions in which obtaining information relating to the beneficial owners is not easy.
Even in the instances where we can get to the people, to the individuals, the human beings who are behind these companies, in reality, we often get to individuals who are nominee directors, who are proxies, who are connected to the company but bear no real resemblance to the person who is actually the beneficial owner of the asset with which we are concerned.
And that is the scenario that we face more and more often. I said something earlier which is very often we are faced with the challenge of the fact that the companies, the layers, the corporate structures that are put in between the asset and the beneficial owner tend to be located in jurisdictions where it’s difficult to obtain information relating to the beneficial owner. In reality, if we look in our home jurisdiction here in the UK, we find ourselves with similar challenges. Despite the fact that, at a first glance, we could think the UK is a transparent jurisdiction.
In reality, we know extremely well that the UK Companies House has no statutory powers to conduct verification of the information that is sent to it. Therefore, we can all often find information in the beneficial ownership register that is actually of little use to us.
And I give you, as an example, this particular company here which is taken from Companies House, as you might be familiar with the layout. Hopefully still there and if you look it up you’ll find that it has a very unique address which seems to have a UK postcode but in reality is not a UK address. But perhaps even more interestingly, if we look at the people who own this company, we see that one of its directors is Elon Musk, YouTube and McJesus. All types of information that tell us that probably the information that we’re seeing in relation to this company is not information on which we should be relying.
I don’t, by way of disclaimer, I don’t think there is necessarily anything wrong with this company, I’m not suggesting that it is criminal or malicious in any way. I just want to give you a view of the fact that we very easily think if a company is set up in the BVI to give you an example, it might be very difficult to get to who actually owns it. But in reality even in UK companies, this is extremely easy and actually some of the cases of investigations in which I have been involved, contained and were centred around primarily UK companies, in particular Limited Liability Partnerships and some other forms of companies but still, in general terms, it is not true that we need to go into exotic jurisdictions to find the challenges of getting to the real beneficial owner.
I want to talk about an even more frequent challenge that I encounter when it comes to determining who actually owns a company. You might be familiar with this diagram or something similar to this. The diagram here illustrates how the use of a trust can very simply distance Mr X, who is the owner of Company Z from that company. Let’s assume that Mr X for reasons such as sanctions, wants to make sure that he’s not seen as being the owner of Company Z. He’s the owner of those shares, he transfers them into a trust, the trust actually appoints the company itself as a trustee, so we have this interesting construct where the trust and the company are all owned by the other.
He then, through the trust, administers property, sets up another company which, in the image there is Company Y, to which he will charge invoices, so he will get an income out of that company. And so, in a very simple move, he has detached himself from that particular company. If we create a discretionary trust in which the beneficiaries are not known and determined, in certain jurisdictions also getting to the deeds of a particular trust can be extremely challenging, we have a very simple solution for Mr X to distance himself from the ownership of an asset.
This is all very theoretical and I wanted to bring it to life a little bit more deeply. In particular relation to ownership of aircraft. Something that is very close to home because I’m a pilot, amongst other things!
But also because aircraft and yachts and similar large assets are one of the types of property that we are seeing being hidden and sheltered from sanctions more and more.
Imagine I own an aircraft. I’m subject to sanctions. I need to distance myself from this aircraft in order to continue to enjoy it. I put ownership of this aircraft in a trust, using Jersey as an example but it could be a variety of other jurisdictions. The trust in itself is owned by a company, let’s call it a UK LLP, and that, in turn, is owned by a company in the BVI. You see the challenge here already of obtaining beneficial information from the BVI might be a challenge. But even if, whilst doing due diligence on this company we manage to get to the point of identifying an individual behind that company, that individual is very unlikely to be the beneficial owner, that is more likely to be an individual from a corporate service provider, providing nominee directorship.
And, me, as the person who once owned that aircraft continues to retain control over that aircraft by way of debt. Having a debt in place to the trust, I then repay not through money but through enjoyment and use of the aircraft. Once again, seeing through this, through this construct and identifying when an asset, when that aircraft comes to one of us, to a financial institution as actually belonging to someone subject to sanctions, is already challenging.
I want to propose to you a wider, and perhaps even more challenging, scenario also related to the aircraft.
On the left hand side, here you see that the image of the ownership that I have already described to you is a discretionary trust set up and I insist on a discretionary one because in a discretionary trust, we don’t know who the beneficiaries are until the point at which the beneficial owners are identified by the trustees. But in reality, in this construct, they never are identified.
The fact that then the asset from the discretionary trust is transferred to a company in Guernsey qualifies the asset, in this case, the aircraft, for being registered as an aircraft in that jurisdiction. So the Russian licences of the crew that are used to fly the aircraft can also be converted by the 2-REG in Guernsey to then become Guernsey licences. The maintenance scheme of the aircraft can also be endorsed.
Why do I say all of these things?
Because I’m a nerd when it comes to aircrafts but it’s also because, in reality, this shows how this asset, this aircraft, can then present itself to a financial institution or to a variety of other institutions and completely, on the surface, appear as a Guernsey aircraft without raising any suspicion that behind it there might be Russian and potentially sanctioned entities.
For that reason, the due diligence that needs to be applied, and how we go about due diligence is the heart of the matter here. The other thing is that, whilst with sanctions when there is an ownership change, no matter how obscure the jurisdiction is, we can find ways of getting to that ownership. But the moment the control is exercised no longer through ownership but through other means, by essentially influencing proxies or individuals who are not connected family members and others, it’s at that point proving that link of ownership becomes really challenging.
If we want to be entirely honest, that is the challenge relating to sanctions. That is how individuals subject to sanctions escape them. There are a variety of other considerations which I will not be able to make today, there is the consideration of the different thresholds relating to sanctions and the sanctions will often have the threshold of 50% but when it comes to beneficial ownership (which is a completely different topic) sometimes this is 25%, sometimes can be far less than that depending on the identification of control. And so we have the typical dilemma where someone is identified as being a beneficial owner but not meeting the threshold to fall under sanctions and therefore, a firm has to make that decision.
I promised I would not just talk to you about the challenges but also a variety of things that could be done and how we can, as firms, protect ourselves, but also generally be better at enforcing and making sure that we identify who the real owners of companies or assets are.
Before I go onto that topic, I will stress that this is becoming increasingly important. If we look at the trend of regulation, it is one that is increasing rather than decreasing. We’re already starting to see on the horizon the possibility of China being included in this already complex landscape of sanctions. Particularly if we’re talking about China, we’ll also start making considerations of forced labour in sanctions, that will appear in that area which will make these considerations much more complicated.
We’re also seeing regulators becoming more and more creative in this space. We have seen, for example, in the UK, the introduction of the strict liability offence relating to sanctions which removes the element of knowledge and suspicion in order to determine whether someone has or has not breached a sanction.
We had, for example, in the US, breaches or alleged breaches of sanctions on the part of financial institutions being subject to monitorships in the way that we’re seeing other areas of the control framework being subject. We are seeing, certainly, an increase in regulatory action in this space.
Therefore, it is impossible for a firm not to consider what they might do in this space.
The second aspect I want to highlight is also in relation to senior managers. Again, we talked about complexity, now the complexity is that individuals, senior managers, have an obligation to comply with home sanctions, no matter the jurisdictions in which they are. That again might give rise to complexity when it comes to accepting a client or conducting a transaction.
Whenever I speak to firms, I ask: “What are you doing in relation to sanctions?”, the first answer is: “We’re fine, we’ve reviewed our screening systems and I think we’re doing okay, it’s complex but we’re doing okay.”
It is true that the challenge relating to screening is a big one, relating to sanctions. You need to make sure that you have the right lists, that the lists are updated, gives you the right types of alerts, that you don’t have too many false positives, but also that you don’t miss anything. And that’s all well and good, but to me, that’s just the starting point.
Other things are perhaps much more important. One of them is reviewing your client base, reviewing your back book, because what we now understand more deeply around sanctions might give rise to different considerations and different decisions relating to past transactions or past clients.
The other big area that is often forgotten is that of governance. By governance, we mean a variety of things. But to me, it starts from having a policy and a risk appetite relating to sanctions and actually ensuring that the daily practices align to that policy and that risk appetite. But it also means taking minutes of decisions, having contemporaneous records of discussions and decisions reached relating to particular clients, and I repeated that in sanctions, in any area of compliance, that consistency of approach, that robustness of reasoning relating to a particular alert or a particular client is what can make the difference between being able to defend a particular course of action.
It’s also key to consider the risks. Because it is very easy to think of sanctions as being within a silo. But in reality, the context in which sanctions happen is one of a more volatile market and, therefore, might give rise to increased market abuse risk, for example. Very often, I see clients focusing on a particular aspect, forgetting the ramifications in others.
The single most important thing, the crucial thing when it comes to complying with sanctions, is the ability to conduct due diligence properly. And the stress here is on the word properly. Conducting due diligence is easy, conducting it well is not.
It requires, as we’ve seen, the ability to see through complex corporate structures, understanding how a trust operates, having the ability to read the trust’s deeds, but sometimes also having to face the unknown scenario where we have reached a conclusion that we cannot determine who the owner is and what do we do in this circumstance? It’s not easy. I see firms fail in relation to due diligence and in the identification of beneficial ownership in general, even without considering the angle of sanctions.
If there is a single area that firms should strengthen is that of due diligence.
I’ll make a final consideration relating to regulators and supervisors. This entire environment, this complexity adds challenges to regulators themselves. Supervising firms is not easy in normal times. In times of added complexity, it becomes more and more challenging because as a regulator, you’re asked to go to a firm, and determine whether their controls are robust enough and it’s very easy to say “Yes, the firm has in place a screening system”, “Yes, the firm has in place due diligence” but is it robust? Is it effective? Is it really doing what it should be doing? That is the question.
So, I’ll leave you with this: the scenario and the environment relating to sanctions is only going to get more complex over the next few months so getting this side of things right is a priority and should be a priority for firms.
I hope I have managed to do the topic justice and I very much welcome any questions now.
Chris B: Thanks, Fed. That was great, sharing all your insight into the difficulties of identifying those beneficial owners and I also want to point out that I’m so glad you’re an aircraft nerd, because I’m a massive motorbike nerd so I’m not alone!
Like you said, we’ll go onto the questions now. So if anyone has got a question, feel free to pop it into the questions section on your control panel and we’ll go through those in the order they come in.
Just while you do that, we have had one come in earlier: “Do you think the same issues exist for registered non-profit organisations or do they differ at all? Does Companies House have more stringent verification or controls on non-profits?”
Federica T: Thank you. The challenges exist relating to those as well. The way in which they are regulated varies from jurisdiction to jurisdiction. Historically, I know I’m not saying anything new, they’ve been used and abused much more for terrorist financing than sanction evasion however we have seen an increase in the use of foundations for sanction evasion purposes as well.
Again, to me it doesn’t matter what the company type is, the moment there is potential for lack of disclosure or ownership, or placing a property of one of the owners, then that is the weakness in the construct.
Chris B: Okay, thanks. Onto the next question: “Why are companies owned by sanctioned individuals not directly included in sanctions lists?”
Federica T:It’s a good question. We would like to include all of them but the issue is that we don’t know what those companies are. That is the point of conducting due diligence. You should think of due diligence and the identification of those companies as a pseudo-list. Part of the discovery is to identify this or identify that. The simple answer is that they’re not on the list because we don’t know what those companies are until we get to the point of doing due diligence on them.
Chris B: Thank you for that one. Another question here: “One challenge with verifying the ownership structure of entities is the lack of reliable data. While countries are creating or updating their beneficial ownership registries, the reliability of information in the existing registries remains a challenge. How can firms go about mitigating this risk?”
Federica T: It is a challenge. Two considerations in relation to that. The first is that information in beneficial ownership registers should always be used as a way of validating other information and not as the sole source. Even in absence of that data, you should be seeking to obtain that information from your client, and not from the register itself.
The other aspect is that firms need to be prepared to not do business, to reject clients or to offboard clients if they cannot satisfy themselves as to who these companies are. It’s a tough answer to give. But don’t do business and, if needed, raise a SAR relating to it as well. That is the reality that we need to embrace a little more, when we cannot determine who that person is, we must decline to do business with them.
Chris B: Thanks for that one. Just in the interest of time, I think I’ll do a final question. “When identifying citizenships and residency of beneficial owners, how do you recommend dealing with multiple citizenships that may not have been declared?”
Federica T: It is a matter of risk. It is always possible that a person has a second passport that they’ve not disclosed. What is the risk relating to that client and transaction? Is the second passport or second nationality going to tell me something more about this person? I have a UK and an Italian passport, neither of those tells you anything particularly risky about me.
Finding out that piece of information is probably not going to add anything to my due diligence. The due diligence is not to find the absolute truth around me, but to understand the risks relating to the relationship with me.
I don’t necessarily recommend having to go full inspection and full police investigation on every one, every time that you do due diligence.
Chris B: We just had one more question come in, so this will be the final one! “When an entity is in a unique country sanction list, but not on OFAC, would you establish a business relationship?”
Federica T: As a risk-based approach, you should have your own risk appetite and you should determine what you’re prepared to accept as a risk and what you’re not prepared to accept. There are countries in Europe that don’t recognise OFAC lists, and I work with organisations in that country who decide not to apply OFAC lists.
It’s a question of risk appetite and also being sure that you understand that in taking certain steps, you incur the risk of certain consequences.