Where next for transparency?

Those working in cross‑border information exchange have become used to operating in an environment where obligations around reporting and transparency are subject to frequent change. Governments and global authorities regularly introduce new regulatory regimes in response to market conditions.

It seems the COVID‑19 pandemic will prove to be a different trigger event, where cash‑strapped governments will want to be sure they are collecting every tax dollar they can, and that criminal activity is rooted out.

In recent years, approaches to capturing, managing and sharing ultimate beneficial ownership (UBO) information have very much been in the spotlight as a critical area in the fight against financial crime.

Now, it seems that UBO transparency will move centre stage once again. Recent remarks emanating from the Financial Action Task Force (FATF) suggests a further significant change in international standards could be on the horizon.

At the G20 Finance Ministers meeting in February 2021, FATF President Dr Marcus Pleyer commented that ensuring transparency of beneficial ownership is ‘critical for everything from a fair tax system to stopping money laundering’, highlighting the FATF’s position as ‘the global standard‑setter on this issue’. Dr Pleyer confirmed that the FATF is now ‘reviewing the standard to consider how it can be strengthened further’.

At a FATF private sector engagement meeting attended by STEP in March 2021, delegates discussed several potential amendments to FATF Recommendation 24 and its implementation, including a significant review of the system for capturing, recording and sharing UBO information. Consistency with Recommendation 25 is also under consideration.

So, how did we get here and where next for UBO information?

The transparency journey

The history of information exchange is complicated, with a wide variety of measures, such as tax information exchange agreements (TIEAs), the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS) and UBO registers, introduced or augmented over the past two decades, often in response to prominent examples of criminal abuse of the financial system.

Information exchange on request emerged via the OECD’s Global Forum Working Group on Effective Information Exchange, with nations launching throughout the early 2000s into signing rafts of TIEAs. The first such agreement was between Antigua and Barbuda and the US in December 2000. Since then, hundreds more have been signed based on the principle of supplying information on request, where an overseas authority has a legitimate reason for considering an individual to be a financial crime risk.

TIEAs have had a mixed press. They were often subject to ‘fishing expeditions’ by curious governments and responses could be slow. At the same time, the transparency agenda was becoming increasingly sophisticated, with a gradual movement towards the automatic exchange of information (AEOI) and central registers.

The fight against financial crime received fresh impetus during the 2008/2009 financial crisis, with all G20 nations keen to plug widening deficits. The London Summit saw an unprecedented calling out of non‑cooperative jurisdictions and the exchange of information as a concept rapidly accelerated over the ensuing years. A recurring feature was the debate over the accuracy, timeliness and quality of beneficial ownership information and the misuse of shell companies and other financial and legal instruments to disguise actual ownership, source of funds and source of wealth.

In 2011, the World Bank published the masterly and authoritative report The Puppet Masters,[1] which starkly exposed the breathtaking scale and sophistication of cross‑border crime and the role of professional enablers.

The introduction of FATCA by the US in 2010 and the development in 2014 of the OECD’s CRS were significant initiatives to encourage swifter, more open AEOI between financial services firms and the relevant authorities.

Questions remained about the accuracy of the data shared and who could access it, highlighting the importance of having a twin dynamic of:

• verifying and proactively updating accurate information; and
• demonstrating an ability to exchange information quickly.

Meanwhile, the 2013 G8 Summit saw public registers firmly on the agenda, resulting in G8 countries endorsing core principles on UBO consistent with the FATF standards and publishing action plans setting out the steps intended to enhance transparency.

High‑profile campaigns from non‑governmental organisations (NGOs) and most recently from some Members of Parliament in the UK House of Commons have trumpeted the catch‑all panacea of public registers. They suggest parties that fail to introduce public registers advocate secrecy and encourage the laundering of dirty money through the financial system.

The UK government has championed open‑source information by introducing a publicly accessible company register, advocating its importance in tackling financial crime. Others have observed that the information shared is frequently out of date or inaccurate due to a reliance on self‑reporting.

Some commentators contend that since the UK introduced a public register, it has set the gold standard and all must follow its example. Opponents argue this takes little account of the checks and balances contained within supervisory and compliance rules or legitimate concerns around privacy and data protection.

The FATF Recommendations require countries to ensure that adequate, accurate and timely information on the beneficial ownership of corporate vehicles is available and readily accessible by competent authorities in a timely fashion. They have not been prescriptive to date about the means to achieve this goal, leaving countries to design systems that best suit their resources and the nature of the risks they face. Nevertheless, the movement towards public registers has never been far from the agenda.

More recently, the EU has made commitments, through the Fifth Anti‑Money Laundering Directive (5AMLD), to work towards public registers, while a number of the Crown Dependencies and British Overseas Territories have also made similar commitments. Indeed, some of those international financial centres have had effective central registers in place for many years.

The decisive argument has always been that jurisdictions should move in line with international standards to avoid gaps in global defences and ensure a level playing field.

All of this has, perhaps counter‑intuitively, led to something of a mixed bag in terms of application worldwide. Most countries have responded positively, strengthening UBO systems and procedures they already had or introducing new strategies to meet the current standards.

Elsewhere though, the picture is mixed, with some countries on a journey towards fully public registers, some placing more emphasis on collecting verified data to share with authorities, and some reluctant or unable to pursue either option. For instance, although the EU (which has tended to be very vocal about the importance of UBO transparency) has introduced new UBO measures through 5AMLD, the reality is that implementation is patchy at best.

Similarly, in the US, there is a federal register, but it is not public. Some countries in Asia are starting from scratch, fully conscious that the mountain they face in building a workable regime is both steep and costly.

Future direction

Overall, so far, the case for public registers as the global standard has not been universally accepted. However, recent spectacular failures, such as the EUR200 billion Danske Bank scandal and persistent NGO lobbying around effectiveness, have seen recent announcements from the FATF signalling that further change to UBO information exchange and access could be on the horizon.

Issues on the table include how UBO information is verified, and by whom, and how the process of accurately identifying UBOs can be improved, with public registers commonly offered as a solution.

With the FATF confirming that it plans to consult on these issues by the end of 2021, those firms with an interest or obligation for reporting and policymakers whose remit includes international cooperation should pay close attention to this issue as it develops.

The FATF looking to review its approach and Recommendations 24 and 25 is a big move and reflects that policy in this space rarely stands still. It is also an indication of the intense focus on financial crime and efforts to combat it strategically.

Change is seemingly afoot and should the result be a shift in global standards, so far as UBO is concerned, then many jurisdictions will have to work hard to keep up. Consequently, many wealthy individuals and their advisors may face the scrutiny of a primarily self‑regulated media for the first time.