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FATF : Preventing the use of legal persons for money laundering and financing terrorism

Updated: Apr 25, 2023

Corporate vehicles are essential to the world economy. Different commercial endeavors are carried out by companies, trusts, foundations, and partnerships. However, criminals frequently use these methods to conceal the origin of their income. Criminals utilize corporate vehicles to conceal their identity, the true purpose of an account they have, and the origin of any money or property they own. The Financial Action Task Force (FATF) has created and revised rules enabling investigators to "follow the money" in order to address this issue.

FATF : Preventing the use of legal persons for money laundering and financing terrorism

What are the updated FATF guidelines?

The FATF is a global organization that establishes standards for preventing the proliferation of weapons of mass destruction (PF), terrorism financing (TF), and money laundering (ML). It has created and revised guidelines that would enable investigators to "follow the money" in order to combat the misuse of legal persons.

The revised Recommendation 24 demands that countries make sure that beneficial ownership information is sufficient, accurate, and up-to-date forbid the issuing of new bearer shares or bearer share warrants, and take steps to prevent the misuse of already-issued bearer shares and bearer share warrants.

The new FATF Guidance on Beneficial Ownership, which was released in March 2023, breaks down the FATF standards into the following categories:

Information on beneficial ownership: Countries are required to provide sufficient, accurate, and up-to-date data on beneficial ownership. Beneficial ownership describes the people who, by ownership stakes or other ways, ultimately control an entity. The FATF places a strong emphasis on identifying an entity's ultimate controllers as well as its legal owners.

Warrants and bearer shares: A bearer share is an unregistered share that belongs to the person who is in possession of the actual share certificate. The right to later acquire ownership of a legal corporation is represented by bearer share warrants. They don't need to be entered into any official registries in order to be transferred. They are a well-liked method for financing terrorism and money laundering due to their anonymity. The issuance of new bearer shares or bearer share warrants must be prohibited, and steps must be taken to prevent the abuse of already-issued bearer shares and bearer share warrants. The existing bearer shares and bearer share warrants must either be dematerialized and held with a custodian who is adequately supervised, or they must be converted to registered shares.

Nominee shareholders and directors: Countries must take concrete steps to prevent the abuse of nominee shareholders and directors for money laundering and terrorist financing. Nominee shareholders and directors are people who are chosen to represent a company, trust, or other legal body as its legal owner or director but who have no actual authority over it. These people are frequently used by criminals to hide their identity and maintain control over the entity. The disclosure of the nominator, licensing requirements for persons serving as nominees, or total prohibitions on nominee arrangements are all examples of transparency requirements that countries must apply on nominee arrangements.

Risk assessment: All categories of legal entities, as well as the threats and vulnerabilities they pose, must be thoroughly analyzed in terms of risk by all counties. The risk assessment can be carried out through the collection and analysis of registration statistics for legal persons established in accordance with national laws, the review and analysis of suspicious transaction reports, the identification of typologies of abuse of legal persons, and the investigation of trust and company service providers' (TCSPs) advertising practices that promote a jurisdiction as an international hub for incorporation/entity formation to non-residents.

Preventive measures: It is advised that countries implement a number of preventive measures, such as imposing disclosure requirements on legal entities operating within the country, increasing the investigative and enforcement capacities of pertinent public bodies, requiring legal entities to have at least one resident director for traceability and potential sanctions, and establishing an appropriate beneficial ownership reporting threshold.

Multi-pronged approach: For a Competent Authority to be able to ascertain beneficial ownership in a timely manner, countries must adopt a multi-pronged strategy. This entails utilizing a number of mechanisms for verifying information stored in the beneficial ownership register or alternative mechanism. These mechanisms may consist of a corporate strategy, a registry or other mechanism, and any additional resources. Information held by financial institutions or DNFBPs, stock exchanges, and other regulators are examples of supplemental sources.

Virtual Asset Service Providers (VASPs): It is required that countries ensure beneficial ownership information is available and prohibit criminals from holding controlling interests or management roles in VASPs. On their end, VASPs must handle the risks posed by technologies that increase anonymity, collect client identification and beneficial ownership data, and perform due diligence on clients as well as prospective correspondent relationships. To reduce the risks connected with bearer shares, countries must also identify and sanction unregistered VASPs and take into account how current legislation apply to digital assets.

Trust and Company Service Providers (TCSPs): In order to conduct CDD on clients for corporate vehicles, TCSPs are essential. Even though TCSPs must comply with AML/CFT regulations, there are still shortcomings in the implementation of CDD duties. Countries should impose CDD requirements on TCSPs and all legal professions. Legal professional privilege can really interfere with AML/CFT requirements, hence it is important for responsible authorities and professional bodies to collaborate in order to guarantee that the boundaries of professional privilege and confidentiality are understood.

International cooperation: In order to prevent financial crimes, nations should require CDD of all lawyers and TCSPs, give foreign competent authorities access to basic information held by company registries, exchange shareholder information, and use their authority to obtain beneficial ownership information for the benefit of foreign counterparts as well as for their own investigations. To effectively tackle financial crimes, international collaboration is essential.

An important problem in the global struggle against money laundering, the financing of terrorism, and proliferation of weapons of mass destruction is the improper use of legal entities. Prioritizing the FATF criteria on beneficial ownership information can deter criminals from using corporate vehicles to launder illegally obtained funds and increase economic transparency on a global scale.



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