Intralinks : Regulatory Risk Exposures of New Beneficial Ownership Rules

Your job of reducing regulatory risk isn't getting any easier as regulatory requirements on banks just continue to increase. Now there are new Know Your Customer (KYC) regulations around the world that are forcing banks to collect extensive information on the beneficial ownership (BO) of accounts. This is a significant development that will put new pressures on your already overworked risk management team for some time to come.

In the financial services sector, beneficial ownership is coming under strict scrutiny around the world. Masking beneficial ownership of legal entities is a popular means of advancing the causes of tax evaders, drug traffickers, terrorist organizations, embezzlers, arms dealers, human smugglers and a raft of other nefarious individuals and organizations. National supervisors around the world believe that requiring financial institutions to collect information pertaining to BO will help restrict bad actors from abusing the global financial system.

The problem of masked beneficial ownership really came to light in April of 2016 when 11.5 million documents - 'the Panama Papers' - from law firm Mossack Fonseca were publicly leaked. Many of those documents showed evidence that beneficial owners used legal entities for illegal purposes such as tax evasion and money laundering. Global regulators are now conducting investigations to determine what role, if any, financial institutions might have played in helping to illegally conceal assets. In fact, Taiwan's Mega International Commercial Bank has already been fined US$180 million for anti-money laundering failures linked to Mossack Fonseca.

As further proof of the scope of BO issues worldwide, French economist Gabriel Zucman conservatively estimates that US$7.6 trillion - eight percent of the world's wealth - is stashed in tax havens. The real owners of such accounts are hidden from public view, allowing them to avoid the tax consequences of financial ownership.

Regulators are now shining a global spotlight on beneficial ownership by changing laws and advancing new requirements for financial services firms to collect information on BO of legal entities. This global trend has gained momentum since the international standard setter, the Financial Action Task Force (FATF), issued the first international standards on BO in 2003. More recently, the FATF issued the 'FATF Report to the G20 on Beneficial Ownership ' in September of 2016; and members of the G20 Anti-Corruption Working Group (ACWG) have pledged to work with the FATF to support the implementation of the relevant recommendations on beneficial ownership transparency in line with the recent guidance.

The European Union, the United States and Singapore are among the first jurisdictions to codify the FATF guidelines into law - each with their own local nuances. They are setting deadlines in the near future for financial institutions to have appropriate measures in place:

• The European Union Fourth Anti-Money Laundering Directive was enacted on 25 June 2015 and has a two-year window for implementation. All EU member states must comply with the new mandates by June 26, 2017.
• In the United States, the Financial Crimes Enforcement Network (FinCEN) recently issued its final rule on BO with respect to customer due diligence requirements. The Customer Due Diligence Requirements for Financial Institutions went into effect 11 July 2016 and requires covered financial institutions to adopt due diligence procedures to identify and verify a legal entity customer's beneficial owner(s) at the time a new record is opened. Covered financial institutions are required to comply with the final rule byMay 11, 2018.
• The Monetary Authority of Singapore (MAS) Notice 626 Provision on Money Laundering and Countering the Financing of Terrorism - Banks framework was recently updated 24 April 2015, with an effective date of 24 May 2015.

Such laws are almost certain to increase banks' regulatory risk as compliance teams struggle to acquire a complete portfolio of the necessary documentation in a timely manner.

The clock is ticking for your organization to meet its KYC/BO obligations. For information on how Intralinks can help, please visit Intralinks for Regulatory Risk Management.

Read our white paper Beneficial Ownership? Not If You're A Bank!