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Paradise Papers: What new offshore leak reveals about UBO challenge

Phil Cotter
Phil Cotter
Group Head, Customer & Third Party Risk Solutions, Data & Analytics, Refinitiv

The Paradise Papers once again highlight the extent to which offshore corporate structures permeate financial services, making the task of identifying Ultimate Beneficial Owners (UBO) even more onerous.

Eighteen months since the Panama Papers sparked worldwide controversy around the use of offshore companies, another major leak of documents has lifted the lid on the methods used to keep wealth hidden behind a veil of secrecy.

Through the Paradise Papers, which contain more than 1,400GB of data and about 13.4 million documents, it is possible to see into the complex structures of trusts, foundations and shell companies going back seven decades.

In doing so, these secretive arrangements again highlight the increasingly onerous task facing compliance officers and financial crime practitioners in the identification of Ultimate Beneficial Owners.

This latest release of documents will inevitably raise questions about whether transparency has increased since the Panama Papers leak in April 2016 and whether it is now any easier for compliance officers to identify UBOs.

Transparency survey

Immediately after the Panama Papers, we undertook an informal survey of company registries and tax offices in more than 230 jurisdictions where companies can be incorporated to assess the level of transparency regarding shareholders and directors.

The results were overwhelmingly disappointing, with only 58% of all jurisdictions having registries with an online searchable function where company details could be retrieved.

An additional 20% of all jurisdictions offered registry searches “offline”, i.e. either in-person, in writing, or via authorized agents.

One year later, we revisited the survey to analyze what improvements, if any, had emerged given the enormous international pressure on transparency.

The survey of registry availability indicated some superficial improvement in transparency, but mainly around the availability of online verification, not shareholding data:

  • Jurisdictions with some sort of online registry verification increased to 83% from 78%.
  • Jurisdictions with availability of shareholding information via an online registry verification increased to 39% from 36%.
  • Jurisdictions with availability of directors or managers via an online registry verification increased to 48% from 45%.

Regulatory obligations

The increasingly stringent regulatory environment certainly seems to “assume” the task of obtaining ownership information and unwrapping corporate structures should be relatively simple, as this due diligence component is progressively becoming a requirement.

Regulated financial services firms, particularly in Europe, have traditionally included the identification of UBOs in their customer due diligence process. In the United States, the practice has applied more generally to foreign entities and individuals seeking to establish banking relationships in the country.

While ownership documentation is often required as part of the onboarding process, the task of continuously monitoring ownership changes and verifying client-provided details can present serious challenges due to the lack of transparency, especially for privately-held companies.

Risk-based approach

Other institutions, including non-regulated corporations, may take a risk-based approach to determine which customers, or third parties, present a greater financial crime risk.

Often, more in-depth due diligence is applied proportionate to the risk identified, including UBO identification and corporate unwrapping.

The identification of shareholders is gradually becoming a more common component of third party screening conducted by multinational organizations concerned with anti-bribery and corruption legislation, as governed by the US Foreign Corrupt Practices Act and the UK Bribery Act.

While guidance from international organizations such as the OECD or regulators enforcing anti-bribery legislation tend to be less prescriptive than banking regulations, developments such as the Ukraine-related sectoral sanctions have compelled many organizations to expand due diligence practices to include the identification of shareholders as any entities owned 50 percent or more by a sanctioned individual are liable under the regime.

Identifying the UBO

So where do we stand in terms of transparency of ownership information across the world?

Due diligence practitioners will know that many jurisdictions provide only limited information in terms of performing proper due diligence. In many instances, the provided ownership information includes corporate shareholders which in turn require additional research to be conducted in an attempt to identify the UBO.

Mixed progress

Progress toward increasing transparency though publicly-available corporate registries has been mixed. Organizations such as the World Bank and the IFC are supporting transparent disclosure of corporate data to facilitate due diligence, mostly in emerging markets.

In emerging markets (where many organizations apply more in-depth due diligence proportionate to the perceived risk), transparency is generally better in Eastern Europe, South America, and parts of Asia. Central America, the Caribbean, Africa, and the Middle East may offer less transparency.

The lack of transparent databases with useful ownership information is a significant barrier for organizations striving to conduct levels of due diligence aligned with regulatory expectations.

The Panama Papers and now the Paradise Papers demonstrate the extent to which offshore corporate structures permeate financial services.

The ramifications from these papers are likely to be far-reaching with even greater scrutiny by organizations such as the Financial Action Task Force and the OECD to increase transparency to facilitate the due diligence process.

How we can help

We offer Risk Management Solutions that enable our customers to implement effective risk mitigation programs from the initial screening and due diligence stage through to onboarding and training their employees and third parties. Our solutions can help you get transparency into who you are really doing business with and find the UBO.

Enhanced Due Diligence Reports: A structured and highly bespoke approach to identification and checking UBO of important third parties. Ensures up-to-date and auditable compliance for organizations in any jurisdiction.

KYC as a Service: KYC as a Service offers end-to-end client identity, verification, screening and monitoring for accelerated client onboarding, remediation and refresh built on an interactive platform that streamlines the distribution of due diligence documentation

World-Check: Screen for heightened risk individuals and entities globally to help uncover hidden risks in business relationships and human networks.

Client Onboarding: Client Onboarding automates the onboarding of new clients and ongoing refresh cycles.