In the fight against money laundering, terrorist financing, corruption, human trafficking, sanctions and tax evasion and other financial crimes, shell companies are a key instrument for beneficial owners in providing anonymity.
However, a report by Transparency International revealed 11 members of the G20 falling short of having a “Strong framework” on their beneficial ownership legal framework despite adopting the G20 Beneficial Ownership Principles more than three years ago.
Glaringly, the framework for Canada and South Korea were found to be “Weak”.
Exposing Shell Companies
Recent leaks from the Panama Papers and the Russian Laundromat scandal have revealed dodgy business practices happening right under our noses. Illicit funds are known to channelled through these shell companies without detection, making law enforcement a challenge. To increase transparency in shell companies, the G20 then pledged to implement the Beneficial Ownership Principles during the 2014 Brisbane G20 Summit.
Fast forward to the present, the G20 countries have been disappointingly slow in moving forward with the necessary legislation to adopt a more public and central beneficial ownership register.
At present, Australia, Canada, South Korea, and the United States, have no legislative requirement for Designated non-financial Businesses and Professions (DNFBPs) to identify beneficial owners of their clients.
Furthermore, due to inadequate beneficial ownership frameworks, the majority of the G20 countries remain clueless on the ownership of the companies operating in their jurisdiction.
Such is the case in the state of Delaware, US, where information on shareholders is not required at all.
The report went on to identify the gatekeepers of shell companies which includes, lawyers, accountants, real estate agents, and trust and company service providers and recommends that legislation should prevent the gatekeepers from proceeding a transaction if they are not able to identify the beneficial owners.
Current State of Transparency
The United Kingdom is currently the sole country in maintaining a central register that is free and publicly available. According to our list of company registers, the majority of countries lacks transparency and information.
The current predicament is counter-productive to FATF‘s Recommendation 10 and 22 of the 40 Recommendations, which requires Financial Institutions (FIs) and (DNFBPs) to conduct customer due diligence (CDD), including identifying beneficial ownership when establishing business relations.
Naturally, this has proven difficult for FIs and DNFBPs in the CDD process, mainly when an uncooperative client is found to have shareholders incorporated in countries with opaque company registers.
Delia Ferreira Rubio, chair of Transparency International, said:
“The leaders of the G20 nations need to pick up the pace. Time and again, we’ve seen how it is anonymous shell companies that make the world of corruption go round. Simply making it possible to find out who ultimately owns a legal entity should be an obvious step towards preventing abuse of the financial system by the corrupt and other criminals. Are the G20 leading the pack, or are they happy to keep lagging behind?”
The alignment to the Beneficial Ownership Principles remains to be seen on whether the G20 countries will walk the talk and provide the world with a more transparent financial system.