Why is beneficial ownership important for current sanctions?

Economic sanctions against Russian entities were one of the first and most significant responses to Russia's invasion of Ukraine by countries and organizations around the world.

The Russian economy is being severely harmed by restrictions imposed by the United Kingdom, the European Union, and the United States. Russians have already been denied the ability to transact in foreign currencies, and the assets of several Russian banks have been frozen.

In essence, if your money is in Russia, you are unable to transfer it abroad or withdraw it from your bank. There is no place to put money. Russia has responded by raising interest rates, adding to the already harsh measures imposed on ordinary Russians.

Is this, however, sufficient?

It is critical to identify the beneficial owners of sanctioned firms in order to ensure that Russian money is controlled and sanctions are effective.

Many people are aware that this is an important part of customer due diligence; however, identifying beneficial owners and unraveling complex structures can be difficult.

But, given the stakes, getting it right has never been more important.

What is the definition of beneficial ownership?

A beneficial owner is someone who owns or controls more than 25% of a company's shares or voting rights, or has other control over the company's management. Many jurisdictions require that anyone with this level of ownership or control be identified.

Criminals who deliberately use the complex nature of corporate entities to hide their identity and avoid law enforcement are most often associated with disguising this position of influence.

The Financial Action Task Force (FATF), an international organization that sets standards for anti-money laundering and counter-terrorist financing, has long issued beneficial ownership guidance for countries and financial institutions to use when dealing with customers.

The FATF's recommendations include measures to address legal person transparency and beneficial ownership, which can be used to prevent misuse for criminal purposes and protect the integrity of sanctions in place. Among the suggestions are:

- Assessing the risks associated with legal persons and legal arrangements; 

- Increasing the transparency of legal persons and legal arrangements; and 

- Ensuring that competent authorities have access to accurate and up-to-date basic and beneficial ownership information in a timely manner.

When you consider the recent EU Money Laundering Directives, which made beneficial ownership a key provision of concern to organizations all over the world, you can see why transparency has become so important.

The introduction of public registers of ultimate beneficial ownership of companies and other entities, which has been adopted by many countries around the world, highlights this novel, collaborative desire to eradicate the problem.

Following Russia's invasion of Ukraine, however, these measures have gained new momentum.

The focus is now on beneficial owners with ties to Russia, to ensure that any transactions are not in violation of the new sanctions being implemented around the world.

The beneficial ownership information made available through these registers is crucial in providing the necessary evidence that reveals a link to the Russian state, and a lot of effort goes into identifying these individuals and entities.

What are the difficulties?

It is not always easy to identify beneficial owners. Many jurisdictions lack a publicly accessible registry of company ownership, and those that do will contain inaccurate information.

Other issues include corporations with shareholders who are not "natural persons." Further examination of corporate structures is required in this case until a natural person whose influence or control exceeds the thresholds in place in that jurisdiction is identified.

Of course, there will be a lot of behind-the-scenes activity, with Russian money and assets being moved or transferred to jurisdictions with less accurate records and controls than others.

Money and assets will also be transferred to new owners in the hopes of avoiding detection by the sanctions already in place. Without a doubt, the financial institutions in charge of these customers and transactions will be aware of such behavior and will be able to stop it before it causes too much damage.

The conflict in Ukraine demonstrates the importance of the current levels of beneficial ownership transparency. Financial institutions all over the world must pay close attention to their processes for determining ownership. As a result, they may be instrumental in bringing the ongoing crisis to a close.

By fLEXI tEAM