Transforming Beneficial Ownership

People rarely get excited about beneficial ownership. In fact, there will be a fair bit of moaning and groaning when this topic is raised. For the financial sector and more recently non-financial sector such as corporate services providers, accountants, lawyers and so on, the pain can be rather excruciating.

For me, a couple of recent and relevant news kind of got me excited with the possibility of seeing some light to the end of the long tunnel. Here's why.

 Background

In layman's terms, ownership is ownership. Why do we need to bother about beneficial ownership? Who cares?

When a legal entity is formed, you have the concept of shareholders holding shares in the entity and typically, these people are termed as legal owners of the entity formed - they can be individuals, a trust or a corporate. They are the immediate legal owners and often appear on national company registries. 

However, as with all legitimate legal structures, it is highly susceptible to abuse by crooks trying to hide their real identities in order to launder money, evade tax, finance terrorism and carry out other terrible crimes.

Therefore, the concept of beneficial ownership becomes highly relevant as it is now necessary to identify who ultimately owns and controls the legal entity that an intermediary provides services to despite it having a "frontal" legal ownership recorded in the national company registries. i.e. the need to look beyond with a threshold of 25% is generally practised. 

Historically and even up till the current moment, banks, financial institutions and designated non-financial businesses and professions (DNFBPs) face tremendous issue digging into clients' ultimate beneficial ownership trying to comply with FATF standards. 

It is a combination of not wanting to irritate clients, inability to independently obtain such information, or simply clients unwilling to provide. Whatever the case may be, it creates a stuck-between-a-rock-and-a-hard-place situation for intermediaries. 

What Got Me Excited?

1. Commitment by G20 

Firstly, on 7 October, FATF published a Report to G20 setting out how the FATF is helping to improve transparency and prevent the misuse of companies, trusts and other corporate vehicles. This includes the availability and exchange of beneficial ownership information. 

The results of FATF MERs in respect of beneficial ownership transparency, in particular recommendations 24 and 25 have been rather appalling. Some pertinent issues include:

• insufficient accuracy and accessibility of basic information
• less rigorous implementation of CDD measures for gatekeepers (lawyers, accountants and CSPs) - recommendations 22 and 23
• lack of sanction for failure to update national company registries or to maintain accurate records
• obstacles to information sharing resulting from data protection and privacy laws

Well, these results are rather bad and embarrassing. A quick review of the FATF MERs on its member countries suggest that a large number of them are hovering between non-compliance and partially-compliance in respect of effectively implementing recommendations 24 and 25. 

The silver lining is of course the commitment by G20 to address these deficiencies in its 2017-2018 Anti-Corruption Action Plan. Having G20 taking the lead to drive beneficial ownership transparency amongst its member countries and eventually influencing the rest of the world sounds like a good idea. 

Would have thought that the critical issue on beneficial ownership transparency does not immediate lies on the 20-odd G20 member countries themselves. It is the many offshore jurisdictions (which often are also tax havens) where the company registries are not readily or easily available. 

For example, a CSP in Singapore trying to incorporate a private limited company for a client where there may be multiple interposing holding companies incorporated in other jurisdictions will often hit a brick wall when it comes to a Cayman Island and BVI entity. 

Nonetheless, I think this is a right step forward in a globally coordinated effort, led by FATF, to drive beneficial ownership transparency. Question is when and how effective it will be.  

2. The Emergence of GovTech

The second thing that got me excited recently is the launch of GovTech in Singapore. As part of the launch, it was noted that the Singapore Government will work with the banking sector to streamline tedious form filling and customer ID verification process tapping on MyInfo, a government-backed digital vault of citizens' personal data. 

I think this is a fantastic idea but don't just stop with the banks. All other non-bank financial institutions as well as non-FIs (accountants, lawyers, CSPs) face the same regulatory requirements in identifying their customers. There is no reason why the benefit of this initiative cannot go beyond banks.

Currently, there is a lot of pain (and duplication) for banks, financial institutions, DNFBPs, telcos, medical and even pharmaceutical sectors needing to collect copies of clients' ID to prove that they have verified their customers' identities. Think about the tonnes of paper wasted as well as the man-hours spent doing the same thing across various industries. 

As the single source of truth, it makes a lot of sense for the government to take the lead in this matter and allow its data to be tapped subject to proper consent being received. API is probably key in this initiative.

In fact, some aspects of this link-up is already in practice. For example, if you apply for a credit card in Singapore, you can give consent for proof of income document to be retrieved by the bank directly from CPF Board. 

There are also various initiatives within the private sector attempting to create utility models for KYC. In my view, this is akin to creating shadow databases which is both redundant, duplicative and near impossible to maintain. Where the government holds the single source of truth in relation to the residents' data, that's where the work should really start and not for commercial database providers to make a quick buck out of.   

3. Blockchain for KYC

Blockchain has been around for several years now but has garnered a lot of support and interest from all over the world only recently. There is also a fair bit of hope that it will solve most problems the financial sector faces today.

Conceptually, its benefits in respect of its function as a distributed ledger of truth and the immutability of the blocks contained within the chain are amongst many other plus points legacy systems fail to have. 

However, where KYC i.e. customer identification documentation is concerned, for reasons that I suggested above, I would have thought that a centralised approach makes better sense rather than to rely on a distributed ledger of computers participating in the chain to verify identities. 

That said, if GovTech adopts the blockchain technology and writes everyones' personal data accordingly into blocks, would it revolutionise the way intermediaries validate these profiles in the future? 

Whilst my understanding of blockchain is very limited, I feel that it can do so much more but it needs to be done in a more coordinated manner. For example, we shouldn't have small groups of participants within private sector eg. several banks in a country, developing a private blockchain of customer profile data that they will share with each other only. This does not benefit the larger market where such information is still required to be collected by other intermediaries. 

Undoubtedly, it will also create an "exclusivity" in the initial batch of participants and future participants will have to be "admitted" and thus creating a commercial barrier to entry which is undesirable. 

Conclusion

It is a pretty powerful combination when you put these 3 things above together: (1) Commitment by G20 on beneficial ownership transparency; (2) Emergence of GovTech; and (3) Blockchain. I hope you can share my excitement that there is indeed light to the end of the long tunnel and beneficial ownership transparency can be transformed. 

I'm not excited because this may enable banks or financial institutions to become more efficient in their cumbersome KYC process so that they can report better earnings, it is more about the eventual transparency of beneficial ownership making it harder for criminals to hide their real identities and ill-gotten wealth thus making this world a better place to live in.