The Financial Action Task Force (FATF) leads the global action on tackling money laundering, terrorist and proliferation financing. FATF research how money is laundered and terrorism is funded, promote global standards to mitigate the risks, and assess whether countries are taking effective action. Here are our main takeaways from the FATF report on the misuse of corporate vehicles.
Corporate entities like corporations, trusts, foundations and partnerships with limited liability characteristics usually perform important and legitimate roles in the global economy. However, they can also be used for illicit purposes such as money laundering, bribery and corruption, improper insider dealings, tax fraud, financing of terrorist activities and other forms of illegal activities.
In 2000, the FATF reviewed practices which impair the effectiveness of money laundering prevention and detection and found that shell corporations and nominees are used by a vast number of money launderers. The misuse of corporate vehicles are geared towards one objective – hiding true beneficial ownership. To combat this, the ability for authorities to obtain accurate information regarding companies and their beneficial owners are essential to efforts preventing money laundering.
Outlined below are four typical ways to hide beneficial ownership information:
Multi-jurisdictional structures of corporate entities and trusts
A popular method of hiding identity and carrying out a fraud scheme is using a structure consisting of a series of corporate entities and trusts created in different jurisdictions. A complex structure makes the corporate entity appear like it has legitimate purpose, which is a tool used to easily attract investment from third parties. Victims of fraud schemes will find it impossible to see behind the structure of these corporate entities to find out who is liable for their loss so it will be easier to get away with fraud. The complex structure also makes it easier to divert money flow and hide payments.
Specialized financial intermediaries / professionals
A specialized financial intermediary or professional is often involved in facilitating the formation of an entity and exploiting the opportunities presented by foreign jurisdictions to employ various arrangements which can be used for legitimate purposes. However, the real reason is more likely to be that it conceals true beneficial ownership like corporate shareholders, corporate directors and bearer shares. Some will unknowingly facilitate illicit activities while others will be complicit.
The usage of nominees can also conceal the identity of the beneficial owners in the form of nominee bank account, nominee shareholders and nominee directors.
Using shell companies is the “textbook” example for misuse of corporate vehicles. Shell companies can be set up by a third party, often a lawyer or accountant, to further obscure beneficial ownership as well as have any number of subsidiary shell companies under it, making it easy to set up and difficult to trace.
When more of these ways are employed to hide one’s identity, the greater the likelihood and risk that the identity will remain unknown, so it is essential for authorities to be able to determine the ultimate beneficial owners of a company as well as its trustees, settlers and beneficiaries.
At Gatenox, we build our platforms to automatically represent the shareholding structure in a graphical format so that it is easy to see if there are gaps or anomalies in beneficial ownership information.