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The Financial Action Task Force (FATF), in recommendation 24, established the first international standards regarding beneficial ownership transparency in 2003. Earlier this week, the FATF strengthened Recommendation 24 to prevent and discourage money laundering and terrorist financing via legal entities and corporate vehicles by April 26, 2023.
A corporation, trust, foundation, partnership or any other form of legal entity can be exploited for illegal and suspicious activities like illicit financial transactions, money laundering, and terrorist financing (ML/TF) by obfuscating criminal identities or obscuring the intent of accounts and assets held by a corporation. Earlier this week, the FATF revised Recommendation 24 to address this issue.
According to revised Recommendation 24, countries should collect beneficial ownership information using a “multi-pronged approach”. The competent authorities must ensure access to ‘accurate, current, and adequate information’ regarding legal persons’ beneficial ownership.
Recommendation 24 suggested that using a ‘multi-pronged approach to beneficial ownership information’ prevents misuse of legal persons for ML/TF and is more effective than using one method alone due to the complementarity of the different approaches resulting in a more accurate data set.
Beneficial ownership information is gathered in multiple ways, including:
- Incorporated companies.
- An alternative mechanism or registry.
- Additional information source.
To maintain accurate and up-to-date beneficial ownership information, it is essential that clear responsibilities are established between the various parties.
In the Interpretive Note to Recommendation 24, it is recommended that countries establish mechanisms that ensure the availability of ‘adequate information on essential information and beneficial ownership’.
The term “adequate information” describes the information that facilitates identifying the beneficial owner(s) and the means and mechanisms for establishing ownership, control, and other tools.
It is essential to ‘substantiate information’ once beneficial owners are ascertained. Several prongs to the multipronged approach require verification, and implementing each may require professional expertise.
Based on the Interpretive Note to Recommendation 24, nations are encouraged to establish mechanisms to ensure that ‘primary and beneficial ownership information is updated as soon as possible’ and that any changes or outdated information are corrected and reported within a reasonable timeframe.
As a precaution, some countries may impose periodic checks on companies’ beneficial ownership information by a risk-based approach, using methods such as reviews or verifications of company records.