Verifying the beneficial owner of companies. Why and how.

Armen Ustyan is a 34-year-old Armenian. He lives in a simple house in Vanadzor, Armenia, and works seasonally in the construction sector in Russia. He is also the beneficial owner of a Panamanian company involved in million-dollar transactions, according to records the company held with Ūkio bankas in Lithuania. Ustyan found out about the company and the account through journalists investigating a massive anti-money laundering scheme, the Troika Laundromat. He had never heard of the company before and never benefitted one cent from all this money.

Ustyan is just one of many individuals who have allegedly been used as proxies by companies involved in the Troika Laundromat. The Organized Crime and Corruption Reporting Project (OCCRP) had already uncovered a similar approach by companies in the Azerbaijani Laundromat. Maharram Ahmadov, a working class driver living in a simple house in the outskirts of Baku, was also the beneficial owner of two accounts held by two British shell companies with Danske Bank Estonia. The accounts were used to transfer more than US$1.7 billion, some of it reportedly used to pay bribes and launder Azerbaijan’s reputation.

These examples highlight the critical importance of beneficial ownership registers — databases holding information on who controls and benefits from companies — and the dangers of relying only on data collected by corporate service providers or financial institutions themselves.

In recent years, the debate around transparency of companies has progressed significantly. In particular, the Fifth EU Anti-Money Laundering Directive is an important step, requiring all EU Member States to establish public beneficial ownership registers by 2020. However, one should not forget that a beneficial ownership register is only as useful as the data it collects.

While existing rules emphasise the need for accurate, reliable and up-to-date beneficial ownership information, verification of information provided by companies is often minimal, when it happens at all. A 2018 study published by Transparency International assesses how well G20 and guest countries are implementing the G20 High Level Principles on Beneficial Ownership. It shows that no governments that collect beneficial ownership information verify it.

Some countries, such as Spain, have relied on notaries to collect and verify the information that is then submitted to the register; others have given registering authorities anti-money laundering obligations, such as Brazil, meaning they have to conduct due diligence, including reviewing beneficial ownership information. However, there is no indication that in these cases notaries and authorities independently verify the information provided by companies.

In the United Kingdom, for example, the registering authority does not have the mandate to investigate the accuracy of the information submitted by companies. At the same time, an analysis of the UK Company Register undertaken by Global Witness in 2018 revealed that thousands of companies are filing suspicious entries or not complying with the rules. Global Witness found that more than 9,000 companies are controlled by beneficial owners who control over 100 companies, an indication that the beneficial ownership information of these registered companies could be false. Additionally, more than 10,000 companies declare a foreign company as their beneficial owner, which is unlikely to meet government requirements. Of these, 73 per cent are linked to secrecy jurisdictions.

Verification of beneficial ownership remains one of the biggest challenges to dealing with corruption, money laundering and tax evasion.

In a recent paper, the Tax Justice Network (TJN) proposed a way of checking the validity of data provided: an information technology system combined with advanced analytics to identify red flags.

The verification process involves ensuring that people in the official register are who they say they are (authentication), that those persons have agreed to be involved in a legal entity (authorisation), and that all the registered data is valid (for example, the address exists and the purpose of the company is accurate). It also involves checks after the legal entity is set up to ensure information is up-to-date and to identify potential red flags.

The proposed verification process should be a fully automated information technology system with human supervision. The system will have access to relevant data, held by national and foreign authorities for cross-checking and advanced analysis.

The process could be managed by the beneficial ownership or company register, or another public body that has experience with data analytics, such as financial intelligence units or tax authorities. The responsible body needs to be adequately resourced and empowered to conduct such checks.

Technology can be an ally in the fight against corruption, optimising time and resources and even enabling analysis that wouldn’t be possible otherwise. However, appropriate safeguards need to be in place to ensure the system is not open to abuse, including a robust legislative and regulatory framework to establish transparent and accountable management of data by relevant authorities.

These should include parameters related to the type of information that is accessible for cross-checking and advanced analytics — based on the information state agencies already collect or hold. Clear security and confidentiality provisions about each type of information and the possibility to exchange information within state agencies should be established. There should be an oversight mechanism to detect and sanction any abuses.

In a world where the criminal and corrupt are already exploiting the power of technology, we must harness it ourselves to make it much more difficult for them to hide behind nominees and proxies.

As knowledge partners at this year’s OECD Global Anti-Corruption and Integrity Forum, Transparency International invites government officials, the private sector, media and other civil society organisations to discuss what needs to be done to ensure available beneficial ownership information is accurate and reliable.