Why beneficial ownership is crucial in supporting current sanctions

Restrictions imposed by the United Kingdom, European Union, and United States are having a major impact on the Russian economy. Already the squeeze is being felt, as Russians are denied the ability to transact in foreign currencies, and the assets of several Russian banks are frozen.

Essentially, if your money is in Russia, you cannot transfer it abroad, nor can you get it out of your bank. There is nowhere to invest. In response, Russia has raised interest rates, which only adds to the stringent measures imposed on ordinary Russians.

But is this enough?

To ensure Russian money is controlled, and for sanctions to work, it is imperative the beneficial owners of sanctioned firms are identified.

Many will know this is a key element of customer due diligence; most will also be aware identifying beneficial owners and unwrapping complex structures can be very difficult.

But with what’s at stake, there has never been so much riding on getting it right.

What is beneficial ownership?

A beneficial owner is someone who ultimately owns or controls more than 25 percent of a company’s shares or voting rights or who otherwise exercises control over the company or its management. In many jurisdictions, anyone fulfilling this level of ownership or control must be identified.

Disguising this position of influence is most often associated with criminals, who deliberately use the complex nature of corporate entities to hide their identity and avoid the reach of law enforcement.

The Financial Action Task Force (FATF), an international body that sets standards for anti-money laundering and countering the financing of terrorism, has long issued beneficial ownership guidance for countries and financial institutions on implementing a risk-based approach when handling customers.

The FATF’s recommendations provide measures that address the transparency and beneficial ownership of legal persons, which can be used to prevent misuse for criminal purposes and protect the integrity of sanctions that have been put in place. These recommendations include:

• Assessing the risks associated with legal persons and legal arrangements;
• Making legal persons and legal arrangements sufficiently transparent; and
• Ensuring accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion.

Add to these the recent EU Money Laundering Directives, which made beneficial ownership a key provision of concern to organizations around the world, and you see the new urgency that surrounds transparency.

The introduction of public registers on the ultimate beneficial ownership of companies and other entities, something adopted by many countries globally, further underlines this novel, collaborative desire to stamp out the issue.

But following Russia’s invasion of Ukraine, these measures have been given a new impetus.

All attention is now on beneficial owners with links to Russia, to ensure any transactions being made are not in violation of the new sanctions packages being rolled out across the globe.

A huge amount of work is put in to identifying these individuals and entities, and the beneficial ownership information made available through these registers is crucial in providing the necessary evidence that reveals a link to the Russian state.

What are the challenges?

Determining beneficial owners is not always straightforward. Many jurisdictions do not have a publicly available registry of company ownership, and some that do will have inaccurate records.

Other challenges include entities whose shareholders are not “natural persons.” In this instance, further examination of corporate structures is required until a natural person is identified whose influence or control exceeds the thresholds in place in that jurisdiction.

Of course, there’s going to be a lot of activity behind the scenes, with Russian money and assets being moved or transferred into jurisdictions whose records and controls are less accurate than others.

Equally, money and assets will be moved across to new ownership, in the hope these won’t be picked up by the sanctions already in place. No doubt the financial institutions managing these customers and transactions will be alert to such behavior and will be able to block them before too much damage is done.

The war in Ukraine demonstrates why the levels of beneficial ownership transparency we currently enjoy are so important. It’s crucial that financial institutions around the world pay extra attention to their processes for identifying ownership. In doing so, they could prove to be key in helping bring the ongoing crisis to an end.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.