A panel of experts recently explored “Is ‘power and control’ the new beneficial ownership?” The webinar, which 2,900 people registered for, is now available on demand for free.
Michael Volkov, principal at The Volkov Law Group and former federal prosecutor; Bill Hauserman, senior director of compliance solutions at Bureau van Dijk; and Ted Datta, director, GRC solutions at Bureau van Dijk have answered the top 10 questions submitted to their panel.
1 - How do we determine that the beneficial owner has power and control?
Bill Hauserman: Taking data from Orbis and our partners’ algorithms, we use a mathematical basis to look at who has control. For example, if you account for all the ways that corporate actions can be voted within an organization, you may find that someone who has .75% of total shareholdings could have as much voting power as another with 49.5%.
It’s all about alliances and what could be going on behind the scenes. For example, a $10 million loan from one shareholder to another provides control leverage that could be invisible but demonstrates the power one shareholder has in influencing or flipping a corporate decision.
2 - How do we evaluate the relationship between shareholders to determine whether they can side together to flip a decision?
Ted Datta: There are two elements to this. The first is quantitative and the second contextual. On the quantitative side, it is purely about the mathematical implications of combining the relevant shareholders ownership percentages across various scenarios to understand whether this creates a majority (more than 50%). If available to you, the voting rights attributed to the various shareholdings should then also be factored—you may need to request this from the client.
The second test should be based on context, using your understanding gleaned through the KYC process about the relationship, and resulting influence, between shareholders. Obvious examples included family ties, and less so those linked by financial obligations. Future solutions for determining power and control will be able to bring more context by surfacing information from unstructured datasets, such as news articles.
3 - What is OFAC’s position on screening prospects?
Michael Volkov: This depends on how you define prospects. If these are potential business opportunities that require a sizeable dedication of resources, I would recommend screening in advance. If you’re only required to provide basic information on the prospect, I would not screen. The more time you need to invest in the prospect, the more of a need there is for screening.
4 - Will OFAC’s increased focus on power and control impact smaller companies in the same way as larger companies?
Michael Volkov: Smaller companies will definitely feel the impact. However, because of their size, they are likely to have lower number of vendors, suppliers and customers that they will need to focus on.
5 - Can you name the case on the FCPA side where there was less than 50% ownership, but effective control was the key [discussed in the webinar]?
Michael Volkov: There have been two specific situations. The first was Och-Ziff, where the company had less than a 50% equity interest in a joint venture but exercised managerial control. The second was a settlement where Alcatel-Lucent had less than 50% ownership interest but was considered to have the trappings of management control, which connected the company to an international bribery case.
6 - What are some red flags that indicate a minority shareholder is "controlling" or exerting power over the other shareholders that have greater numerical interests in the target company?
Ted Datta: Control leverage of a minority shareholder over a larger shareholder is typically based on family, personal relationships or hard-to-detect financial factors such as loans or other business deals.This leverage is intended to be invisible to everyone except for the parties involved.
Powerful artificial intelligence engines can, however, analyze vast amounts of unstructured media and other information to detect leverage. This does not prove collusion, but it does provide investigators and analysts a focused area to review.
7 - How do you overcome limitations related to the fact that ownership information in compliance databases may not be available, outdated, incomplete or incorrect?
Ted Datta: Start with Orbis. Layer on third-party disclosures, and correlate results with unstructured data analysis. Then bring in analyst research. It requires effort, but short of doing this, your organization cannot meet regulatory expectations and may become exposed to reputational harm.
8 - Do you see the due diligence process as a project with an end point? I mean, after screening all the risky third parties in the company, is it over?
Ted Datta: It’s a continuous cycle. We see 6-8 million material changes in Orbis’ ownership information every month. And companies fail or change constantly. This requires due diligence programs to monitor these changes—at least daily—to remain compliant.
The good news is the data and technology have improved greatly in the last few years to make this task more sustainable and affordable in line with the risks.
9 - Regulators have been openly hostile to artificial intelligence (AI) and machine learning (ML). Why should financial institutions invest in these technologies if the regulators look at them negatively for engaging in innovation?
Ted Datta: I would expect this trend to change, as we have already seen in the UK with the Financial Conduct Authority (FCA) engaging closer with the tech community to understand more about the implications and potential of AI and ML solutions.
The focus here should be carving out certain use cases with the FI which serve to benefit from AI and ML technologies, without creating an over-reliance, or single point of failure across the entire process. You will also need to understand the logic driving the AI or ML solution to be able to calibrate this effectively for your risk appetite.
10 - For companies that are not required by the regulators to have an AML program, would you recommend them to have some screening software?
Bill Hauserman: Most global organizations are obligated to perform due diligence to prevent working with sanctioned entities. But many organizations don’t enact due diligence to uncover truly hidden risks.
It has become apparent that identifying hidden shareholder control is at the heart of being able to determine who is really calling the shots. Who is invisible but controls an organization?
I would recommend that businesses, even those not required to have an AML program, use KYC and other due diligence tools to mitigate hidden risks to their reputation or to avoid fines. And in general, with more companies performing KYC screening, it makes it harder for bad actors to hide and puts a dent in the money laundering that's occurring at the rate of nearly $2 trillion every year.
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