Companies interact with a large number of entities in
the outside world – customers, third party intermediaries and vendors and
suppliers to name the most significant ones. These relationships are the
lifeblood of a company.
In today’s world,
companies have to know with whom they are dealing – not just the name of the
company, not just the officers of the company, but the natural person owners of
the company. They are the beneficial owners of the customer, the third party
intermediary, the vendor and the supplier.
Why do you need to know
the beneficial owners?
The short answer is to
ensure compliance with the law. Anti-corruption, sanctions, and anti-money
laundering requirements dictate that you need to collect and analyze this
information.
Starting with
anti-corruption laws, a company has to identify third party intermediaries and
vendors and suppliers that may include foreign government owners. This is a
basic requirement. A third party may include government officials as owners.
The presence of the government official is a big red flag that has to be addressed
to prevent a corrupt payment to the foreign official. Internal controls and
compliance remediation may be required to resolve the red flag.
The company has to
verify that the third party does not include a foreign official in its
ownership structure. The amount of the foreign government ownership may be
small, as low as 5 or 10 percent (or even smaller) and can cause significant
compliance headaches. As a result, companies have to drill down on the
ownership of a third party entity to verify the absence of a government owner.
Companies that fail to
do so are just asking for trouble. Companies that substitute a certification of
lack of government ownership from a third party entity may reduce the risk but
do not eliminate the risk. Certifications have turned out to be false –
government owners may hide their interests and avoid detection.
The same concern of
foreign government official ownership can create sanctions issues as well. The
Department of Treasury’s Office of Foreign Asset Control (“OFAC”) maintains
sanctions prohibitions against various countries and designated individuals –
the Specially Designated Nationals (“SDNs”).
Under existing policies, a company
owned 50 percent or more by an SDN or a combination of SDNs is a prohibited
entity under existing sanctions laws. This prohibition extends to customers,
third parties, vendors and suppliers, and all parties with which a company may
conduct a financial transaction. Given this limitation, companies have to
verify the natural person owners of the entity to confirm the absence of SDNs
or a combination of SDNs. Even if the company confirms an SDN’s ownership
interest of below 50 percent, the company has to conduct an intensive due
diligence of the other owners and implement controls to detect possible changes
in the SDN’s ownership or role in the management of the company.
Money laundering
compliance also requires the identification of beneficial owners. Financial
institutions, a broad term, that encompasses traditional banks and other
entities, have to comply with detailed customer due diligence requirements
beginning in May 2018. Financial institutions are not waiting for the deadline
and building systems before the effective date to identify beneficial owners
and mitigate money-laundering risks.
Non-financial
institutions are not subject to these detailed requirements but need to attend
to the issue as well. Two significant risks exist for non-financial companies:
First, a company may
collect third party payments from unknown companies on behalf of an existing
customer or third party. This is not uncommon and often involves unknown
entities from high-risk companies. The unknown entity may be engaging in
financial transaction to launder proceeds from illegal activities.
Second, a company may be
unwittingly completing a trade-based money-laundering scheme connected to a
foreign government official or a known criminal.
In both cases, it is
important to know with whom you are dealing and the risks that may become
apparent once you confirm the identity of the natural person owners of an
entity.
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