In carrying out their due diligence obligations, subject persons are continuously faced with the obligation to identify and verify the ultimate beneficial owner/s of their customer.
Beneficial ownership came under the spotlight following the low score Malta obtained in that area in Moneyval’s 2019 Mutual Evaluation Review. The issue of beneficial ownership continued to persist and resulted in one of the published reasons for Malta being greylisted by the FATF.
One of the subsequent action points agreed upon refers to the requirement that Malta continues to demonstrate that beneficial ownership information is accurate, and that appropriate sanctions are applied to legal persons and gatekeepers who do not comply with their obligations in relation to beneficial ownership information.
Anonymity enables illegal activities to take place, hidden away from governments and law enforcement authorities. Criminals make use of complex organisational structures designed to obscure their ownership and control of illicitly obtained assets.
Therefore, when establishing a business relationship or carrying out an occasional transaction, it is critical for subject persons to correctly identify the beneficial owner of legal entities to prevent their illicit misuse.
The requirement to identify beneficial ownership stems from ‘Recommendation 24: Transparency and beneficial ownership of legal persons’, one of the FATF’s 40 recommendations. Locally, this requirement is set within the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) and the Implementing Procedures (IPs).
The PMLFTR defines a beneficial owner as “any natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted”.
This can occur through direct or indirect ownership. Ownership and control is measured by applying a threshold of 25 per cent+1 of shares, voting rights, or ownership interest. If no owner can be identified through these means, the beneficial owner may be a person who exercises control via other means.
This can include the exerting of dominant control through shareholder agreements or rights attached to shares; through a group of individuals who collectively own more than 25 per cent and have an arrangement to exercise their rights collectively in the same manner; or by having the right to appoint or remove board members or the CEO.
If no beneficial owner can be identified after going through the above processes, those holding the position of senior managing officials are deemed to be the beneficial owners.
Shell companies are attractive to criminals due to the ease with which they can be set up- Alicia Vella and Rebekah Barthet
Criminals generally use a combination of methods to conceal their beneficial ownership in legal entities. This can take place through layering, direct ownership chains, as well as professional intermediaries and third parties exercising control on their behalf.
Beneficial ownership information may be obscured using a combination of legal arrangements and financial instruments. The most common is the use of shell companies, i.e. inactive companies which typically have a postbox address and no employees. Shell companies are attractive to criminals due to the ease with which they can be set up.
On the other hand, shelf companies are entities which have already been incorporated, and which may have been active in the past, but which are generally left dormant until needed. Shelf companies have the appearance of having corporate longevity, thus boosting investor or consumer confidence.
Other means of obscuring ownership is the use of front companies. These are legitimate businesses which are used by criminals to integrate illegitimate funds with legitimate income. This involves company taxes being paid on illegitimate income to ‘clean’ the wealth.
Trustees is another type of arrangement used to control assets in a trust. The settlor and protector of the trust may exert control or influence over it, leading to complexities when determining who the beneficial owner of the trust is.
Additionally, financial instruments may be used, such as bearer shares. These assign ownership of an entity to the person who physically possesses the bearer share certificate. Given that the ownership cannot be determined through a central registry, it is very difficult to determine the beneficial ownership of legal persons controlled by bearer shares.
Informal nominee shareholders and directors, also known as strawmen or frontmen, perform the same function as formal nominee service providers, i.e. to protect or conceal the identity of the beneficial owner of a company or asset.
However, their connection with the true shareholder or beneficial owner is often of a personal, rather than a professional nature, and may include spouses, children, extended family, business associates and other personal acquaintances.
Lastly, the services of professional intermediaries, including accountants, lawyers, trusts and corporate service providers, may be used by criminals in order to obtain advice on complex corporate structures used to obscure ownership or source of assets.
Malta has established a beneficial ownership register by virtue of the Companies Act (Register of Beneficial Owners) Regulations. This was done to increase transparency and to make beneficial ownership information easily available to authorities, regulators, subject persons, and the general public.
Moreover, all companies and other commercial partnerships registered in Malta are required to set up an internal register of beneficial owners, and have to comply with their reporting obligations to the Malta Business Registry (MBR).
Alicia Vella is advisory senior manager at Mazars in Malta, while Rebekah Barthet occupies the role of forensic investigation senior manager at the same firm.