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24 July 2017

Panellist blog: answers to 14 more questions from our beneficial ownership webinar

Bill Hauserman

In late June Keith Furst and I were panellists on Bureau van Dijk's webinar, Beneficial ownership – have you got it right?

As Keith said in a guest blog post following the event, we discussed smarter ways to integrate beneficial ownership information into our viewers' compliance processes, so they could start focusing on higher-level decision-making and spend less time on data discovery, and the webinar is now free to watch on-demand.

During the broadcast we received dozens of open-ended questions from our worldwide audience of compliance professionals. Of those that we feel equipped to deal with, Keith addressed 15 of the unanswered questions in his piece; I'm bringing up the rear with the remaining 14 here in my own blog post.

So here goes! As with Keith, these are my personal views.

More of your questions answered

1. "When do you expect AML/KYC regulations to hit buyside firms (private equity/hedge funds)? How could such firms prepare for this move?"

Private equity has been under renewed regulatory scrutiny for the last 18 months along two dimensions.

First, the source of investment funds and especially funding from governments, PEPs, and related corporate structures controlled by governments and PEPs. Obviously laundered investment monies and monies controlled by sanctioned entities and individuals is of particular interest to regulators.

Secondly, the actual PE acquisitions are being scrutinised for traditional regulatory expectations as regards their third-party partners, including clients, distributors, suppliers, vendors and agents.

Because of the PE influence across an entire portfolio of companies, there is concern that lax compliance policies and programmes at the top will proliferate throughout the portfolio. In our experience, we are seeing a renewed effort by PE firms to ensure the portfolio companies are fully compliant. This means applying due diligence seriously across all partner relationships, including the AML/KYC, anti-bribery, and trade compliance due diligence programmes.

PE firms, just like corporations, have to assume that the regulations on financial institutions will eventually land on them wherever there is a flow of money. It is inevitable.

The good news is that operationalising the due diligence programme, as described in the webinar, is now far more efficiently accomplished.

2. "What do you mean by "registered"? Do you mean a "legal incorporation"?"

Yes, a registered legal entity is typically the target of any due diligence process. While the beneficial owner persons have the control, the legal entities are the vehicle for funds transfer and sources of individual wealth. Having the correct registered name, address and legal IDs of a legal entity who is a client or other business partner is the key to efficient due diligence.

3. "What do you think about the quality of ownership information provided from companies in Mexico and Latin America?"

The current due diligence standard that tends to gain best regulatory acceptance is "trust, but verify".

While actual regulations today allow for just the "trust" portion of due diligence by utilising self-disclosed information from third-parties, the trend is toward verifying the self-disclosed information. An example is the new EU AML 4 Directive, which extends KYC ownership expectations to the verification standard and adds non-owner "control" to senior management.

In practice, self-disclosures from Mexico and LATAM are not that different from most countries. There will always be doubt that self-disclosed information is entirely complete and accurate. This is why an unbiased commercial source of company and owner information, such as Orbis, is so valuable to increase due diligence decision-making certainty.

4. "The issue with the UK [beneficial ownership] registry is that it only provides the immediate shareholder. If you have an owning company that's also UK-registered, you can follow the ownership structure. But if the ownership goes offshore, you have to rely on the next jurisdiction's registry to find ownership info. What's your take on this?"

This question illustrates the value and limitations of country-specific registries. If all entities of a target corporate structure are in one country that requires reporting, then the full corporate ownership structure to the required minimum (25% in UK for instance) is discoverable.

But in reality the global nature of business means corporate structure entities are typically found in dozens of countries.

Only a global database like Orbis can link these entities sufficiently. By analysing over 220 million unique legal entities, linking any related owners and managers and updating this information regularly, a clearer picture of corporate structures is available than ever before.

5. "Is there a tool or application that better fits beneficial ownership identification over another?"

Orbis from Bureau van Dijk is accepted as a standard for ownership discovery by thousands of banks and corporations. A complementary tool called Compliance Catalyst is integrated with Orbis data to provide pre-determined risk modelling, including owners, directors and managers screened by sanctions, PEPs, and adverse media, as required by an organisation's due diligence policies. Automated, pre-determined and consistent risk modelling as just described, when embedded at the beginning of any due diligence process, will create significant efficiency. And create better risk decisions.

6. "Is it an issue that company registers only show new shareholders in their next annual return, which could be too late for FIs to take action?"

The regulatory expectations for monitoring ownership are increasing globally. And the fact registries are by nature up to months old is a problem that Orbis can solve. One of the biggest drawbacks to national registries is they are out of date shortly after the typically annual filing requirement is fulfilled. This leaves significant unknown risk of exposure to sanctions and PEP regulations at a minimum.

7. "In the UK, Companies House is the data source surrounding beneficial ownership structures. We all know that this a public database and left to entities to populate at the moment, so the accuracy of the data is questionable. How can we use automated data to trigger ownership changes (without manual intervention) if the source isn't being updated?"

The source drives the ability and accuracy of automated monitoring for changes. This is why only a living, constantly updated database like Orbis can possibly provide automated monitoring of ownership changes.

Orbis has on average over 5 million ownership changes a month. Many of them are control changes. The only realistic way of monitoring ownership is through automation, and Orbis, in conjunction with Compliance Catalyst, provides a good solution for this.

8. "Please elaborate on your previous chart and your comment that the entity E (cascade effect) is sanctioned. I found OFAC FAQ 398, which seems to suggest differently."

Ofac 50 rule

Cascade is an interpretation from 2015 that if A is sanctioned and owns 50% of B then B is sanctioned by the 50% rule.

Since B is sanctioned, any entities they own at 50% are sanctioned. Thus the cascade continues until the minimum 50% at each level is broken.

This is open for debate and legal challenge, but the OFAC staff talking at conferences in 2015 and 2016 were citing the possible interpretations.

I am not aware of a challenge to this interpretation in court, but any lawyers in the crowd may have an opinion.

9. "For companies C, D, and E [in the same diagram], wouldn't that also be a perspective of the policy we have defined? If we just look at E, and we look at the corporate group, but only on the first level, we would not capture company A, right?"

If your due diligence policy is to review just one level up, then, yes, you will miss A in your example. But that does not overcome the fact that there is risk in working with E. Regulatory determinations based on changing expectations is the risk driver. Also, if you start just at the top of a corporate group and work down or at the bottom and work up, you never get to the other end of the group typically

That is why Bureau van Dijk is always working from the top down simultaneously while working from the bottom up to identify a full corporate group.

It is actually the "art" that goes with the science of building the best available dataset for due diligence. To identify and maintain a corporate group means constantly looking at every legal entity from an upward control perspective and a downward subsidiary perspective. Then the powerful data algorithms can create the ownership links as never before. And, as importantly, maintain and monitor them.

10. "I work in the resource industry. Is Bureau van Dijk considered an industry leader or best-in-class service provider for ultimate beneficial owners? Can you provide a comparison of other providers and how Bureau van Dijk is better?"

Excellent question. Bureau van Dijk is in fact the industry leader in mapping ownership and control of private companies globally.

With over 30 years of experience in private company information collection, we have no rival for this important aspect of due diligence.

The closest competitor to Bureau van Dijk has significantly fewer active ownership and control links in a structured form.

With the largest owner/control dataset being maintained daily by one of the largest M&A analyst groups in the world, Bureau van Dijk can use algorithms to link control of private companies on a truly global basis.

Like Bureau van Dijk, most other data providers publish aspects of their coverage. Just compare the true ownership and control links. Then call us for a free trial. I always insist that our prospects try the data in an existing due diligence process. If the ROI creation is not outstanding, do not buy Orbis subscription access.

11. "Canadian financial institutions are expecting a consultation paper from the Canadian government via the Department of Finance in the next few weeks. What are your thoughts on the various touchpoints (financial services, land registry, tax reporting, corporate registry, credit bureaux) and how to reconcile the records across these areas if the government only focuses on the registry?"

Almost all organisations are faced with this type of reconciliation back to their master data repositories. And then maintaining it. As it's open-source, Bureau van Dijk does use registry data in Orbis. But then has to compare that data to what is in Orbis as well as the constant feed of other sources. It is a huge task.

What I have seen to solve this problem is the use of emerging ISO standard datasets in conjunction with Orbis. As an example, the LEI (legal entity identifier) is a growing ISO standard for identifying legal entities. It is focused on the financial services industry, but the intent is to cover all legal entities that are party to a financial transaction of any type.

Projecting ahead five to 10 years, and that should be every legal entity involved in global commerce of any type. That would open up transparency like never before.

But in the interim, you need to track the best structured data, like Orbis, alongside the LEI in the master databases. This gives you the benefit of current Orbis coverage and the evolving ISO standard. Registries will just be another source. And the LEI, like registries, are updated infrequently so they don't solve the due diligence need without a living data source like Orbis.

12. "Europe has mandated creation of beneficial owner registers. Does that pose a challenge to Bureau van Dijk?"

Quite the opposite. Registries are a declaration that transparency in national business must be provided and maintained. Put together all the national registries and the increased global transparency should slow global corruption. A win, win for all.

But registries are not updated fast enough to solve the due diligence need. A CCO can't feel comfortable about their exposure to sanctions and PEP requirements when the updates come once a year. Only Orbis can solve the due diligence need.

13. "Does the beneficial ownership system referenced by the speakers have the ability to communicate with existing AML and sanctions screening programmes, such as LexisNexis, Bridger, etc.?"

Absolutely. This is a typical implementation solution. And for more targeted risk assessment, Compliance Catalyst is a platform linked to Orbis and Lexis's World Compliance for risk assessments on legal entities plus owners, directors, managers assessed against sanctions, PEPs, and adverse media based on an organisation's policies. And it monitors the target plus all six dimensions daily.

14. "Are there legal risks, due to privacy laws, when government regulators monitor ultimate beneficial owners over a longer period?"

Privacy laws are different in every country so you have to get an opinion for your situation.

UBO data is obtained from open-source information. Orbis does not maintain the details of an IDV service for person identification and verification. And Orbis concentrates on companies and then adds the people associated as owners, directors, or managers. The sanctions, PEPs and adverse media structured data from World Compliance is also from open sources.

So that's it until next time...

If your question wasn't answered or you'd like clarification on any of these answers – or anything else – you're welcome to contact me or any of my colleagues at Bureau van Dijk, and we'll get back to you as soon as we can.

Recording of last month's webinar

This is available for free to view for the next 12 months.

keith bill alistair webinar

Register to watch the webinar on demand

Bill Hauserman

Bill Hauserman, Senior Director, Compliance Solutions

Bill is the leader of Bureau van Dijk’s global practice group for compliance, having joined the company in 2016 after a stint as managing director at Easton Oxford Corporation.

Bill is the leader of Bureau van Dijk’s global practice group for compliance, having joined the company in 2016 after a stint as managing director at Easton Oxford Corporation.

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