StAR’s new report “Signatures for Sale” focuses on how nominee arrangements can be abused to obscure the identity of those who really control shell companies. Some of the correspondence from corporate service providers to researchers who were posing as prospective clients was remarkably candid in the descriptions of nominee services on offer:
“Nominee service is basically renting another person’s name to protect the identity of the real beneficial owner.”
“We have set up our shelf companies with nominee director and nominee shareholder and set up each bank account with nominee signatory, so the bank won't see you as the beneficiary owner of the account, the bank can see the nominee beneficiary owner, so you will be full anonym.”
Source: Nielson and Sharman. 2022. Signatures for Sale: How Nominee Services for Shell Companies are Abused to Conceal Beneficial Owners. Washington, DC: World Bank.
New evidence presented in our report shows that the misuse of nominees is an underappreciated point of vulnerability in the global agenda to increase transparency of ultimate beneficial owners of companies. Despite significant advances in beneficial ownership in many countries over the past few years, the need to close loopholes such as misuse of nominees is fully apparent, especially in the current context of the sanctions against Russian oligarchs with assets abroad following the Russian invasion of Ukraine.
To address these loopholes, the report suggests that strengthening the regulation of nominee arrangements and stepping up enforcement of regulation of the providers offering such services can enhance the transparency of shell companies and help reduce financial crime.
These recommendations are timely: in early March, the Financial Action Task Force (FATF) adopted changes to its rule on beneficial ownership of legal persons, Recommendation 24. Requiring more robust transparency rules for nominees is just one of a number of important changes to the FATF’s international standard on beneficial ownership.
How and why were these changes adopted?
In early 2020, the FATF set up a project team to review and revise Rec.24 in response to what was described as “persistent and ongoing weaknesses in the rules of transparency and beneficial ownership and their implementation” in a report that laid out the rationale for the revision. A number of major leaks had exposed large-scale, systematic abuses of legal persons for hiding funds of questionable origin, evading sanctions, evading tax, and shielding assets from law enforcement. FATF mutual evaluations had shown acceptable levels of technical compliance with the recommendation on beneficial ownership transparency, yet consistently poor levels of effectiveness (IO.5) in actually preventing misuse of legal persons, suggesting that something was amiss. Also, since the last time that the FATF rules on beneficial ownership rule were revised in 2012, many more countries had gained experience with setting up beneficial ownership registries.
The FATF’s consensus mechanism means that countries proposing more radical measures and countries that are opposed have to meet somewhere in the middle. Resulting compromises usually fall short of the demands of those calling for sweeping changes, while at the same time they are criticized as regulatory overreach by those advocating for retaining the status quo.
After two years of intense discussions between FATF member countries with different approaches to corporate transparency, the FATF plenary adopted a number of significant changes to strengthen its standard on beneficial ownership in early March 2022. The fact that this was adopted at all was the result of concerted efforts to find common ground on the most controversial aspects of the revision, including language on beneficial ownership registries and public access.
What has changed under the revised Rec.24?
Important changes include:
Changes to the FATF Rules on Nominees under Rec.24
The new rules on nominees are more prescriptive than the 2012 rules, focusing on strengthening transparency measures for nominee directors and shareholders. Under the old rules, countries had a wide margin of discretion by adopting unspecified other mechanisms to stop abuse and were thus afforded considerable latitude in dealing with nominees, ultimately resulting in this issue not receiving enough attention in FATF mutual evaluation discussions.
What contributed to widespread confusion over the FATF rules on nominees in the past was that nominee arrangements often exist in practice even in countries where they are not codified in law. Yet, the old recommendation 24 stated that “countries which allow nominee shareholders or directors” must address risks, even though nominees can pose money laundering risks also in countries that do not have any specific legal provisions on nominees, as well as in countries that formally do not allow them.
Nominee arrangements can be the product of a formal legal agreement with a TCSP, notary, lawyer or tax advisor, or they can also exist informally, without any form of (written) legal contract, e.g. based on coercion or other forms of control, for example where the behavior or conduct of a person makes them a nominee director in the eyes of the law.
Under the 2022 rules, countries must apply at least one of three options to enhance controls: a) require nominees to disclose their status and their nominator to company and any relevant registry (company registry and/or BO registry) - information on nominee status needs to be public; b) require nominees to be licensed, disclose status and nominator to the authority collecting BO information; or c) enforce a prohibition of nominee directors/nominee shareholders.
Under option a), the rationale behind disclosing the status of a nominee publicly, for example in the corporate registry, is to provide a lead for law enforcement or other investigating the company that the registered director or registered shareholder is performing these functions, or holding shares, on behalf of another individual, and that they need to look further to find the actual controller of the entity.
The changes to FATF’s rule on beneficial ownership also, for the first time, explicitly spell out what beneficial owner identification means in situations where a nominee director or nominee shareholder controls a legal entity; stating that it “requires establishing the identity of the natural person on whose behalf the nominee is ultimately, directly or indirectly, acting”. This makes it unambiguously clear that dubious service offers of “nominee beneficial owners” as seen in our “Signatures for Sale” report, violate FATF rules and likely also violate national laws.
A final important element of the revision is also the introduction of new definitions of nominee director, nominee shareholder, and nominator to the glossary of the FATF Recommendations for the first time. These state explicitly that a nominee can, by definition, never qualify as a beneficial owner.
The unsolicited offers of nominee services described in “Signatures for Sale” show that more transparency of nominee arrangements and better practical enforcement of regulation of the providers offering such services is closely tied to achieving the aims of beneficial ownership transparency reforms. In theory, customer due diligence conducted by a financial institution or verification conducted by a beneficial ownership registry should “look through” a nominee to the real beneficial owner. However, it is clear that there is still a huge gap between rules on paper about beneficial ownership identification and what happens in practice.
The new FATF rules on nominees are a step in the right direction. To assist implementation, FATF plans to update and develop its guidance on beneficial ownership to clarify concepts and set out technical details of the new provisions. One can hope that they will result in greater attention paid to the loopholes created by abuse of nominee relationships to hide beneficial owners. How well they will work remains to be seen, and depends in large part on how they are implemented at the country level.