US/Canada regulators move toward EU-style beneficial ownership rules

By Anu Sood | 5 August 2019

Canada and the US are moving toward greater transparency for corporate ownership, but they still fall short of some countries in Europe in making beneficial ownership data readily available to law enforcement, financial institutions and the public.

“Canada and the US both still have a ways to go behind the UK and Ukraine with their publicly accessible registries - More countries are coming on to publicly accessible registries especially the EU with AMLD5,” said James Cohen, executive director of Transparency International Canada. “But it is still up to each jurisdiction how they are going to implement it as there is no standard.”

AMLD5 applies to EU countries and contains a number of amendments to the fourth directive, but it will bring a number of improvements to beneficial ownership requirements by next year.

Canada revises corporations act

The latest move to improve money-laundering regulations in Canada came in June, as new rules under the Canada Business Corporations Act (CBCA) now require private federal corporations to create and maintain a new and separate register showing “individuals with significant control” (ISC).

The Act says the ISC register is to provide greater transparency over who owns and controls a corporation, and to help law enforcement agencies expose activities like money laundering and tax evasion. Law enforcement and tax agencies have to request to see the information.

An ISC is an individual who owns, controls or directs a significant number of shares or who has significant influence over the corporation - 25 percent of the voting shares, or 25 percent of all the shares based on their fair market value.

An individual can also be an ISC if they own or control a significant number of shares with one or more other individuals.

New regs require basic information

The new Canadian regulations require the following information about each individual with significant control:

  • name
  • date of birth
  • last known address
  • jurisdiction for tax purposes
  • date on which the individual acquired significant ownership or control
  • date on which the individual ceased to have significant ownership or control
  • description of how the individual meets the definition of significant control

Despite passing the new rules, Canada will still not have a federal Beneficial Ownership repository for use by law enforcement and financial institutions – that is being discussed by the federal government and the provinces.

“Participating provinces and territories will initiate open consultations towards a beneficial ownership public registry,” federal and provincial ministers said in a communique following a June 14 meeting in Vancouver. “These consultations will examine the benefits to a public registry in combatting financial crimes, and will prioritize businesses' competitiveness, individuals' privacy and respect of jurisdictional responsibility.”

Ottawa has said it is committed to the idea, but only British Columbia (BC) has introduced legislation to create a beneficial ownership directory for private provincial corporations.

That province has not said when the legislation will take effect, but it will require private companies incorporated in BC to disclose information about certain shareholders in a “transparency register.” Failure to do so could result in significant financial penalties the company, directors, officers and even shareholders.

Across Canada, if a federal corporation, its directors, officers or shareholders, fail to meet the obligations for the new ISC Register, they could be subject to penalties, including fines and imprisonment. Directors and even shareholders can be fined up to $200,000 and face six months in prison.

Legislation now before U.S. Congress

The US has taken significant steps toward a national beneficial ownership repository for law enforcement and financial institutions. There are proposed similar bipartisan bills from both the Senate and Congress that would form a national registry to combat the anonymity of shell corporations.

The legislation would enhance the Beneficial Ownership Requirement of FinCEN’s Customer Due Diligence (CDD) Rule, which requires financial institutions to gather ownership information when onboarding customers. A national registry would make it easier for institutions to verify ownership data but there is no word when it could be in place.

Kenneth Blanco, FinCEN’s director, told the senate hearing the lack of information means the US has fallen behind in the fight against money laundering through shell corporations. The CDD Rule “is but one critical step toward closing this national security gap,” Blanco said.  “The second critical step in closing this national security gap is collecting beneficial ownership information at the corporate formation stage.”

He warns that a failure to take action will make the US vulnerable. “As more and more of our allies begin to collect beneficial ownership information at the incorporation stage in their countries and make it accessible to law enforcement, the U.S. risks becoming a safe haven for bad actors looking to hide their assets,” he said.

Legislators have been collecting public input on the current bill, but it is still a long way from passing into law.

EU has country-specific registers

In Europe, the Ultimate Beneficial Ownership (UBO) directive came into effect in 2017 and is a country-specific central register listing beneficial owners of corporations and other legal entities. For corporations, the beneficial owner is the person who ultimately owns or controls more than 25 percent of the shares or voting rights. Control may be either direct or indirect.

Each country decides who can have access to the information, but all allow the following:

  • Law enforcement and EU financial intelligence units
  • Financial institutions or professionals conducting client due-diligence services
  • Organizations that demonstrate a legitimate interest

The EU acknowledges there are some areas where they fall short of having seamless communication among jurisdictions.

“Different options could also be considered to ensure high quality and consistent anti-money laundering supervision, seamless information exchange and optimal cooperation between all relevant authorities in the Union. This may require conferring specific anti-money laundering supervisory tasks to a Union body,” The EU said in a fact sheet released July 24, 2019.

Despite these requirements, Risk and Compliance Consultant Hansi Latifi believes there is more that can be done by unifying the registries.

“In my opinion, a unified collection of data generated through the whole financial industry providers, will lead to a more accurate and effective process. I think that the banking and financial service industry can deliver more data quality than a self-declaratory information system,” Latifi stated. “This will generate more confidence in the register as a useful tool for transparency.”

“The next logical step would be to promote the same unified system of information on every member state so that information can be exchanged much more effectively and efficiently,” he said, pointing to a section of AMLD5:

“Once the interconnection of Member States’ beneficial ownership registers is in place, both national and cross-border access to each Member State’s register should be granted based on the definition of legitimate interest of the Member State where the information relating to the beneficial ownership of the trust or similar legal arrangement has been registered in accordance with the provisions of this Directive, by virtue of a decision taken by the relevant authorities of that Member State. In relation to Member States’ beneficial ownership registers, it should also be possible for Member States to establish appeal mechanisms against decisions which grant or deny access to beneficial ownership information.”

Currently, Failure to comply with UBO requirements varies from country to country with some carrying minimal fines up to a fine and jail term in France, while Spain is among those at the top of the penalty list with up to a €10m fine.

Despite its shortcomings, Cohen believes that the EU system is still significantly more advanced than the proposed solution for US and Canada and the two countries could be doing more.

“It is easier to open a company than get a library card in about every jurisdiction,” said Cohen. “We have this perception that money laundering is something that happens in far off tropical islands and Switzerland, but we’re vulnerable to it. As much as people might want to think Canada is a good international player, we leave the door open for kleptocrats and crooks to hide their dirty money here.”

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