Understanding the urgency

Financial crimes pose a substantial threat to the stability and integrity of global economies. Money laundering has emerged as a pervasive issue, with criminals exploiting complex corporate structures to conceal the true beneficiaries of funds. Recognizing the urgency to address these challenges, governments are turning to legislation that mandates the disclosure of ultimate beneficial ownership.

Corporate Transparency Act in the U.S.

The CTA, signed into law in January 2021, represents a landmark development in the U.S. effort to combat money laundering and illicit financial activities. The legislation introduces a robust framework for collecting, maintaining, and accessing beneficial ownership information. Under the CTA, certain corporations and limited liability companies are required to report beneficial ownership information to the Financial Crimes Enforcement Network. The disclosed information includes the names, addresses, and other identifying details of individuals who directly or indirectly own a substantial interest in the reporting entity.

This legislation not only empowers law enforcement agencies and regulatory bodies but also significantly enhances the capabilities of compliance professionals. By having access to comprehensive UBO data, these professionals can more effectively screen for potential money laundering activities and mitigate potential risks.

Economic Crime and Corporate Transparency Bill in the U.K.

Across the Atlantic, the U.K. has been actively pursuing legislative measures to strengthen its defenses against economic crimes. The Economic Crime and Corporate Transparency Bill, introduced in September 2020, aims to enhance transparency in corporate structures and combat money laundering and other financial crimes, transforming the U.K. government database, Companies House, from being a passive recipient of information to a more active gatekeeper over the creation of companies and disclosure of ownership.

Like the CTA, the U.K. bill mandates the disclosure of beneficial ownership information. It proposes the creation of a publicly accessible register of beneficial ownership for companies registered in the U.K. This register would include details of individuals who exercise significant control over a company, offering greater transparency to the public and facilitating due diligence processes for compliance professionals.

Data security and privacy concerns

Collecting and storing sensitive beneficial ownership information raises legitimate concerns about data security and privacy. As compliance professionals and regulatory bodies gain access to vast amounts of personal data, ensuring the confidentiality and protection of this information becomes paramount. Striking the right balance between transparency and privacy remains a complex challenge for legislators and stakeholders.

Potential loopholes in reporting requirements

The effectiveness of these transparency initiatives depends on the accuracy and completeness of the information provided. There is a risk that individuals seeking to conceal their involvement in illicit activities may exploit potential loopholes or provide misleading information. Regulators and law enforcement agencies must establish robust mechanisms to verify the authenticity of disclosed data and address any attempts at circumvention.

Maintaining up-to-date and accurate registries

The success of UBO disclosure legislation hinges on maintaining accurate and up-to-date registries. Corporate structures can change rapidly through mergers, acquisitions, and reorganizations, making real-time tracking of ownership changes challenging. Continuous efforts are required to ensure compliance professionals have access to the most current and relevant information.

Global impact and collaborative efforts

The introduction of federal transparent legislation in the U.S. and the U.K. reflects a broader international trend toward strengthening compliance efforts and enhancing corporate transparency. The global impact of these initiatives is significant, prompting other jurisdictions like Canada to evaluate and improve their regulatory frameworks.

Transparent legislation serves as a catalyst for global compliance efforts. When major economies adopt stringent UBO disclosure requirements, businesses operating internationally are compelled to align with these standards to mitigate risks and maintain their reputation. This harmonization of compliance expectations fosters a more level playing field and reduces opportunities for regulatory arbitrage.

Extending transparency measures to manufacturing and supply chains

One noteworthy aspect of the transparent legislation wave is its applicability to industries beyond traditional financial institutions. Complex supply chains—a hallmark of the manufacturing sector—are now under increased scrutiny. Governments recognize that money laundering and illicit financial activities can be facilitated through intricate webs of suppliers and subsidiaries.

Manufacturing companies must now disclose beneficial ownership information, acknowledging the need for transparency throughout the supply chain. This extension of regulations beyond the financial sector reflects a comprehensive approach to combating financial crimes and promoting accountability across diverse industries.

Practical guidance for implementation

Establish a screening process:

• Develop a systematic process to vet new parties entering into agreements with your organization.

• Include procedures for periodically reviewing and assessing existing parties, including vendors, suppliers, and consultants.

Verify UBO:

• Before formalizing any agreement, verify the UBO of the entities involved.

• Use reputable technology for UBO verification to ensure accuracy and reliability.

• Watch for deep fakes through separate verification, and possibly consider references or even interviews on a case-by-case basis.

Use government databases:

• Use robust government databases to confirm the UBO information.

• Create a list of government databases for reference.

Address individual verification challenges:

• Be transparent with the other party during the identification verification process, explaining the reasons for the checks.

Use secure platforms:

• Exchange data through secure platforms to protect sensitive information.

• Implement measures to ensure the confidentiality and integrity of exchanged data.

Clearly communicate data security measures:

• Clearly communicate to the involved parties the measures taken to secure their data.

• Specify how the data will be secured, the duration for which it will be stored, and any precautions in place to prevent unauthorized access.

Compliance with privacy and data laws:

• Ensure compliance with domestic privacy and data laws applicable to your organization and geography.

• Stay informed about any updates or changes in relevant legislation.

Document the verification process:

• Document the entire verification process, including the steps taken, technologies used, and results obtained.

Regularly update procedures:

• Periodically review and update your vetting and verification procedures to adapt to changes in regulations, technologies, or business practices.

Training and awareness:

• Provide training to employees involved in the vetting process and set expectations.

Conclusion

The wave of transparent legislation—exemplified by the U.S. CTA and the Economic Crime and Corporate Transparency Bill in the U.K.—marks a crucial step forward in the global fight against corruption. By requiring the disclosure of ultimate beneficial ownership, these initiatives empower compliance professionals to screen for money laundering and adverse media risks more precisely.

Extending these measures to industries beyond financial institutions, such as manufacturing with complex supply chains, reflects a comprehensive understanding of the evolving tactics financial criminals use. However, as the global community collaborates on standardizing disclosure requirements and leveraging technology to streamline compliance processes, addressing challenges such as data security, potential loopholes, and the need for continuously updated registries is essential.

By staying ahead of the evolving tactics of financial criminals, governments, regulatory bodies, and large enterprises can collectively build a more resilient and accountable global compliance system. As industries adapt to these new transparency measures, the vision of a more transparent and secure business landscape extends to supply chains, ensuring accountability is upheld across diverse sectors of the global economy.

Takeaways

• Governments globally adopt transparent legislation to combat financial crimes.

• The Corporate Transparency Act provides ultimate beneficial owner data, empowering compliance against financial threats.

• Ultimate beneficial owner data raises concerns, specifically when balancing transparency and privacy.

• Risks of loopholes in disclosure will require regulators to verify authenticity.

• Transparent legislation extends to manufacturing, reducing global regulatory arbitrage opportunities.