Commentary

Know Your Client processes can provide warning bells to help FATF AML compliance

In his latest blog on Know Your Client processes, our AML expert looks at the Financial Act Task Force  guidance clarifying tranparency and beneficial ownership: it's not a war on corporate vehicles, he says.

The FATF (Financial Act Task Force) has, over its time, issued several recommendations in its mission to develop and promote policies to protect the financial system against money laundering and terrorist financing. 

Its latest, issued in October this year, provides guidance on transparency and beneficial ownership, aiming to provide assistance to countries with the implementation of two very important recommendations:

  • Recommendation 24, or transparency and beneficial ownership of the legal person, and
  • Recommendation 25, or transparency and beneficial ownership of the legal arrangements

The FATF guidance stresses the need for countries to reduce the “misuse for illicit purposes” of corporate vehicles (such as companies, trust, foundations partnership and other types of legal person or arrangements). It cites examples of critical situations such as shell companies with ownership spread across foreign jurisdictions, use of legal persons as directors, trust and other legal arrangements aimed at separate legal and beneficial owner. 

This is not a war against such corporate vehicles - they often have, it says, “an essential and legitimate role under certain conditions” - but it is more a strong call to maintain adequate levels of defence against actions clearly conductive to money laundering. Countries are requested to introduce instruments that allow an easier identification of the ultimate beneficial ownership. 

Looking through the guidance we see many sections that are included both for legal persons and for legal arrangements. It is clear the maintenance of accurate and timely sets of information on ownership are considered fundamental to permit a prompt analysis of any less clear situations. 

If all of the above has a perspective more related to the public framework, it’s worth evaluating the implication on the entities that are required to implement procedures on AML - such as, but not only, financial intermediaries. It is clear that such an emphatic request to countries participating in the FATF will influence all intermediaries affected by AML law; the indications are that all should collect the information and maintain accurate and updated databases.

In such perspectives Know Your Client (KYC) must be intended, not only as a database, but as a process which includes warning signals and it is ready for an escalation of the investigation on a jurisdictional level.