The new FATF Guidance on Beneficial Ownership | New AML measures approved in the EU | The collapse of Credit Suisse and SVB and more

Welcome to the April 2023 edition of the newsletter AML News and Updates.

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Plenty of interesting financial crime stories this month. In this newsletter we will discuss:

1. Discussion of the month:

• The New FATF Guidance on Beneficial Ownership: Safeguarding Legal persons against misuse.

2. Regulatory developments:

• The new AML measures were voted by the Members of the European Parliament 
• Countering Ransomware Financing and Risk indicators FATF reports

3. Other news:

• The collapse of Credit Suisse – a series of scandals
• The collapse of Silicon Valley Bank – why?
• Wells Fargo to pay $97 mln for sanctions compliance failures
• Vietnamese Operator of ChipMixer Charged with Laundering Money
• OCC Issues Prohibition Order, Fines Former Wells Fargo Executive $17 Million in Settlement

Let's start....

New FATF Guidance on Beneficial Ownership: Safeguarding Legal Persons Against Misuse

Corporate vehicles play an essential role in the global economy. Companies, trusts, foundations, and partnerships conduct a wide variety of commercial activities. However, these vehicles are often exploited by criminals to launder illegally derived funds.

How?

Criminals are using corporate vehicles to disguise:

• The identity of the criminals
• The real purpose of an account held
• The source of funds or property that belongs to a corporate vehicle.

To achieve that, criminals often use:

• Shell companies
• Complex ownership and control structures
• Unrestricted use of legal persons as directors as directors
• Formal nominee shareholders and directors
• Informal nominee shareholders and directors (i.e., close associates or family members)
• Others

The response of the FATF

The Financial Action Task Force (FATF) plays a crucial role in setting international standards to combat money laundering (ML), terrorist financing (TF), and the proliferation of weapons of mass destruction (PF).

One of its key initiatives is the development and updating of standards that enable authorities to trace illicit financial flows by "following the money" during investigations. This is particularly important in combating the misuse of legal persons, which can facilitate the concealment of illicit activities. By establishing these standards, the FATF is working towards creating a global system that promotes transparency and accountability in financial transactions.

As part of its efforts to prevent the misuse of legal persons, the FATF requires countries to:

• Hold adequate, accurate and up-to-date beneficial ownership information
• Prohibit the issuance of new bearer shares or bearer share warrants
• Take measures to prevent the misuse of existing bearer shares and bearer share warrants
• Take effective measures to ensure that nominee shareholders and directors are not misused for ML/TF.

Risk Assessment

To effectively prevent the misuse of legal persons, the FATF mandates that countries conduct a thorough risk assessment of all forms of legal entities, taking into account the specific threats and vulnerabilities they may pose. This assessment can be achieved by following a set of steps, which may include, but are not limited to:

• Collect and analyze registration statistics for legal persons created under national laws
• Review and analyze suspicious transaction reports
• Identify typologies of abuse of legal persons, either domestic or foreign.
• Investigating advertising practices by Trust and Company Service Providers (TCSPs) promoting a jurisdiction as an international center for incorporation/entity formation to non-residents.
• Conduct expert consultation with external experts from the private sector, civil society, and academia.

To reduce the risks posed by legal persons, countries are advised to take preventive measures such as:

•  Apply disclosure requirements to legal persons operating in the country
• Investigate violations of beneficial ownership reporting rules with specialized expertise
• Increase investigative and enforcement capacities of relevant public bodies
• Require legal persons to have at least one resident director for traceability and potential sanctions
• Set appropriate beneficial ownership threshold
• Implement sector-specific arrangements to prevent risks

 The Companies’ registry

Countries are obligated to have effective regulatory systems in place to prevent the misuse of legal persons for ML/TF/PF which include:

• a company’s registry containing basic information about the company (proof of incorporation, legal form, status, address of registered office, list of directors and shareholders, etc.) The registry must be publicly available.
• a registry or an alternative mechanism that contains adequate, accurate, and up-to-date information about the beneficial ownership of legal persons.
• A registry or an alternative mechanism that contains information about beneficial ownership of trusts and other legal arrangements.

The beneficial owner

The FATF places emphasis on identifying, not only the legal owners of an entity but also the individuals that ultimately control an entity, either through an ownership interest or other means.

The guidance also differentiates between legal ownership and beneficial ownership. In many cases, the legal owner (shareholder) is the beneficial owner – the person who also controls an entity. However, in some other cases, the legal shareholder of an entity may not be the person who ultimately controls an entity.

Countries and regulated entities are required to identify one or more individuals who exercise ultimate control over a legal person even if they are not the legal owner.

According to the Guidance “Only a natural person can be the ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person or arrangement”.

In some cases, however, a legal entity may have many shareholders with no single person holding enough shares to control the entity. For example, if a jurisdiction sets a 25% ownership threshold (based on risk assessment), a company with as few as five shareholders may have none of them holding shares above the minimum threshold. This would result in none of the shareholders falling under the reporting requirements solely based on the ownership threshold.

However, shareholders may have control over a company by owning enough shares in collaboration with other shareholders. They can use various methods such as contracts, relationships, intermediaries, or tiered entities to increase their control. Nominee shareholders may also be used for this purpose.

When the ownership and control of a legal entity or arrangement are not clear, it can make it difficult for authorities to identify the individuals who are really in charge. By making these arrangements more transparent, it becomes easier for authorities to figure out who is really in control.

Countries must ensure that beneficial ownership information is adequate, accurate, and up-to-date.

The use of a multi-pronged approach to beneficial ownership

The new updated recommendation 24 requires countries to “follow a multi-pronged approach to ensure that the beneficial ownership of the company can be determined in a timely manner by a Competent Authority”.

This means that countries must use a combination of mechanisms to verify that the information contained in the beneficial ownership registry or alternative mechanism is adequate, accurate, and up-to-date such as:

1. a company approach (information held by the company)
2. a registry or alternative mechanism (information held in a beneficial ownership registry or alternative mechanism)
3. any other supplementary sources. This can include but not limited to the following information:

• held by financial institutions or Designated Non-Financial Businesses and Professions – DNFBPs
• stock exchanges
• other regulators.

The beneficial ownership registry

Countries must ensure that a designated public authority or body holds information about beneficial owners of legal persons. The creation of a beneficial ownership information register is considered by the FATF an effective mechanism because it allows competent authorities to access this information timely and efficiently.

The beneficial ownership registry for trusts

The beneficial ownership registry for express trusts must contain information about:

1. The settlor(s)
2. The trustee(s)
3. The protectors (if any)
4. Each beneficiary or class of beneficiaries
5. Other natural persons exercise control over the trust.

For other types of legal arrangements, the registry must contain information for persons holding equivalent positions.

Access to registry information

The basic information contained in the Companies' registry should be accessible to the public. However, countries may also choose to grant financial institutions and DNFBPs access to the beneficial ownership registry. This can help them meet their customer due diligence (CDD) obligations and report any discrepancies.

Additionally, countries may consider making beneficial ownership information publicly available to promote transparency and combat financial crime. Data protection laws must be considered when deciding the parties to have access to this information.

Bearer shares

Bearer shares are like physical certificate that shows who owns something, but they can be passed from person to person without any record. This type of share doesn't include immobilized or registered certificates that enable the identification of the owner.

Bearer shares and bearer share warrants allow untraceable ownership and as a result, carry a higher ML/TF risk since it allows the concealment of real beneficial ownership.

For this purpose, the FATF prohibits legal persons from issuing new bearer shares or bearer shares warrants. Any existing should be converted into a registered form or be immobilized.

Nominee shareholders and directors

Although some types of nominee arrangements are established for legitimate purposes and have low ML/TF risks, some other types are created to deliberately evade beneficial ownership transparency rules and as a result, are abused for ML/TF crimes.

New Definitions (from the FATF Guidance on Beneficial Ownership)

Countries are required to apply the following mechanisms in terms of nominees:

1. Transparency requirements: disclosing their nominee status and the identity of the nominator.
2. Licensing requirements for those acting as nominees
3. Prohibition of nominee arrangements.

Countries must apply sanctions for false declaration of beneficial ownership, including nominee arrangements.

International cooperation to prevent financial crime

International cooperation is essential to prevent financial crime. Countries should make basic information from company registries accessible to foreign authorities, exchange shareholder information, and use their power to obtain beneficial ownership information for foreign counterparts.

The new standards of the FATF aim to enhance transparency of legal persons preventing their misuse for money laundering, resulting to a safer financial system.

New AML measures voted by the Members of the European Parliament

The Members of the European Parliament (MEPs) have approved new measures to prevent money laundering and terrorism financing in the European Union (EU).

The measures consist of three pieces of draft legislation:

1. The EU “single rulebook”
2. The 6th Anti-Money Laundering (AML) directive

• The regulation establishing the European Anti-Money Laundering Authority (AMLA)

Banks, asset managers, crypto asset managers, real and virtual estate agents, and high-level professional football clubs will be required to verify their customers’ identities, what they own, and who controls the company.

MEPs have set a limit of €7000 for cash payments and €1000 for crypto asset transfers where the customer cannot be identified.

They also want to ban “golden” passports and impose strong AML controls on “golden” visas.

In terms of beneficial ownership

Beneficial ownership means having a 15% plus one share or voting rights or other direct or indirect ownership interest, or a 5% plus one share in the extractive industry or a company exposed to a higher risk for ML/TF.

Beneficial ownership registers must be available digitally and include current and historical information for a defined period.

Persons with legitimate interests, such as journalists, reporters, civil society organizations, and higher education institutions should be able to access the register, including interconnected central registers.

Read more below.

Countering Ransomware Financing and Risk indicators reports

The FATF issued a report that analyses the methods that criminals use to carry out ransomware attacks and how payments are made and laundered.

Criminals are almost exclusively using crypto or virtual assets. jurisdictions with weak or non-existent anti-money laundering and countering financing of terrorism (AML/CFT) controls are of concern.

The report proposes a number of actions that countries need to take to disrupt ransomware-related money laundering. The report also finalized a list of potential risk indicators that can help public and private sector entities identify suspicious activities related to ransomware.

Both reports can be downloaded below

The collapse of Credit Suisse - a series of scandals

In March 2023, the Swiss bank UBS Group AG bought Credit Suisse Group AGf or 3 billion Swiss francs (about US$3.3 billion).

Credit Suisse is one of Switzerland's largest banks and a globally systemically important financial institution.

Credit Suisse faced numerous scandals in recent years and losses due to risky exposures. Additionally, in March 2023, "material weaknesses" were found in its financial reporting processes for 2021 and 2022.

This caused a bank run that led to the collapse of the bank even if the Swiss National Bank announced a $50 billion rescue package in the form of a loan.

Read more below

The collapse of Silicon Valley Bank - why?

The Silicon Valley Bank, following an increase in the interest rates by the US Federal Reserve to combat inflation.

Its customers, mostly start-ups and other tech companies were not able to get funding due to the increase and had to withdraw their existing funds. The Bank had to start selling its own assets to meet customer withdrawal requests.

The Bank started selling safe bonds at a loss until it became insolvent.

Read more on what caused the collapse of Silicon Valley

Wells Fargo to pay $97 mln for sanctions compliance failures

March 30 (Reuters) - Wells Fargo & Co (WFC.N) will pay fines of about $97.8 million for inadequate oversight of its compliance risks, enabling the apparent violation of U.S. sanctions against Iran, Syria and Sudan.

This is due to the bank's deficient oversight that enabled it to violate US sanctions by providing a trade finance platform to a foregn bank that used it to process $532 million in prohibited transactions.

Read more below

Vietnamese Operator of ChipMixer Charged with Laundering Money

The Justice Department announced a coordinated international takedown of ChipMixer, a darknet cryptocurrency “mixing” service responsible for laundering more than $3 billion worth of cryptocurrency, between 2017 and the present, in furtherance of among other activities, ransomware, darknet market, fraud, cryptocurrency heists, and other hacking schemes.

Read more below.

Eastern District of Pennsylvania | Justice Department Investigation Leads to Takedown of Darknet Cryptocurrency Mixer that Processed Over $3 Billion of Unlawful Transactions | United States Department of Justice

OCC Issues Prohibition Order, Fines Former Wells Fargo Executive $17 Million in Settlement

The Office of the Comptroller of the Currency (OCC) announced the issuance of a prohibition order and a $17 million civil money penalty by consent against Carrie Tolstedt, former head of Wells Fargo Bank, N.A.’s Community Bank, for her role in systemic sales practices misconduct.

Read more below.

That's all for this month!

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Anna

Founder

AML Cube Consulting and Education