Money-laundering: too important to leave to the experts alone

Starting tomorrow a group of government officials and experts belonging to the world’s leading anti-money laundering organisation – the Financial Action Task Force (FATF) – will be meeting in Paris. On the agenda is the adoption of a document on an issue that has major implications for the fight against crime, corruption and tax evasion around the world.

It’s a shame nobody outside of this small circle of experts from governments and international organisations has had a chance to see the document before it comes out.

According to the FATF website, at its upcoming plenary meeting the organisation will adopt guidance on beneficial ownership and company transparency.

Beneficial ownership is the term used to describe who actually benefits from the assets and profits of a company. At the moment many countries allow the formation of shell companies with proxy directors which obscure the real (beneficial) owner. When people are allowed to hide their identity behind a shell company in this way, there is a risk of this advantage being used to hide illicit money.

The FATF guidance matters because it “will assist countries to design and implement measures that will deter and prevent the misuse of corporate vehicles, such as companies, trusts and other types of legal persons and arrangements – for money laundering, terrorist financing and other illicit purposes.”

Corporate transparency of beneficial ownership is an essential measure to stop the abuse of shell companies by hidden owners. There is large and growing evidence to show that anonymous shell companies play a role in most major corruption and crime cases. Just last week, for example, it was reported that 19 UK shell companies had been used to allegedly launder US$20 billion in illicit funds.

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Although it is not the most well-known of international organisations, the FATF is a powerful inter-governmental body which sets global standards for the prevention of money-laundering and the financing of terrorism. Since its creation in 1989, the FATF has been highly successful in getting countries to sign up to its recommendations, with over 180 countries already having done so.

The FATF not only sets standards; it also evaluates how well countries are complying with them and can place laggards on “blacklists” and “greylists” if they are not up to scratch.

To what extent it has been successful in getting countries to comply with its recommendations, however, is less clear. The Organisation for Economic Cooperation and Development found in December 2013 that none of its 34 members is fully compliant. Other independent studies have questioned the effectiveness of the global anti-money-laundering system.

Despite these criticisms, the fact remains that the FATF is the go-to organisation when it comes to money-laundering, with impressive leverage over national governments. It has also updated and strengthened its methodology, which starting in 2014 will measure the effectiveness of countries’ regulatory frameworks.

Given that hidden corporate ownership is one of the key loopholes which is used to launder dirty money, it is a missed opportunity not to have shared the beneficial ownership guidance in draft form with the public and asked for comments: the FATF would have been surprised at the quantity and quality of responses.

The Financial Transparency Coalition, for example, brings together over 150 civil society organisations, as well as governments and thematic experts, and its members have developed significant expertise on the problem of hidden company ownership and its consequences. A strong consensus has emerged that the best way to tackle abuses is to create central public registries of beneficial ownership, which would allow authorities to easily identify the real owners of companies, greatly increasing the chances of criminals being caught.

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At the recent annual conference of the Coalition, held last week in Lima, transparency in beneficial ownership was discussed on panel after panel, linked to issues as diverse as human rights, extractive industries and climate change.

The FATF has already taken significant steps to increase its transparency by publishing its reports and other guidance documents in full on its website. However, it only publishes after documents have been approved in final form.

The organisation should take its transparency a step further, making greater efforts to allow citizens to participate and comment during the process leading up to publication.

Citizens are the primary victims of the crimes which result in illicit money being laundered. They should be given the chance to contribute solutions to something that affects them directly.

Read this blog in Spanish here.

Carousel image: Flickr, Andy

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Max Heywood

About Max Heywood

Max Heywood is Regional Coordinator, Network, Chapters & Programmes Transparency International.

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2 Responses to Money-laundering: too important to leave to the experts alone

  1. Chris 22 October 2014 at 11:00 am #

    Hi Max

    Interesting article, the only flaw with having a beneficial owners register is that criminals, at least smart ones, do not open companies themselves, they use Patsy’s – small time thugs or even remote family members to sit on the board and hold shares on the criminals behalf.

    This register will not solve anything, it will drive the criminals further underground and make the disconnect larger. Stricter AML/CFT laws rigorously upheld by the regulators is the only way to improve this situation – make life difficult for the criminals!

    In the UK and certain States in the US you can pick a company up online with minimal CDD – yet the international pressure is focused offshore?! Makes no sense – in well governed offshore jurisdictions it is becoming increasingly difficult to incorporate a company without jumping through hoops.

    And yes I work offshore in the industry and yes in compliance!

    Chris

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