bank notes in a panama hat

Lessons from Panama One Year On

It’s been more than a year since the Panama Papers incident, the leak of more than 11 million documents pointing to a lack of corporate transparency around shell structures. As a result, the global regulatory landscape has undergone significant reform in order to heighten beneficial ownership requirements. Laura Glynn, Fenergo’s Director of Regulatory Compliance, examines the changes in detail.

Over 12 months have passed since the release of the Panama Papers, an unprecedented data leak of 11.5 million documents that detailed the financial and attorney-client information for more than 214,488 offshore entities. What this leak of information ultimately highlighted was the issue of ultimate beneficial ownership (UBO) and the lack of corporate transparency surrounding shell structures.

The records revealed the myriad of ways that multiple legal structures and corporate vehicles can be used to obscure the ownership of a legal entity for tax avoidance purposes or to conceal other illegal activities, including terrorism financing and arms trafficking.

In light of this, the global regulatory landscape has undergone significant reform over the past year intended to strengthen and enhance existing beneficial ownership requirements over several regulatory frameworks, which we will examine in detail.

Company Ownership and Control

The transparency of company ownership and control has always been a focal point under anti-money laundering (AML) and counter-terrorist financing (CTF) legislation. These regulations require financial institutions to identify the real ownership of all assets by providing names of beneficial owners who ultimately own or control the legal entity, either directly or indirectly.

In many jurisdictions, however, it is hugely challenging for financial institutions to accurately identify shareholders and ultimate beneficial owners, as the information is often not readily available on corporate filings. Moreover, the use of proxy or nominee shareholders, as evidenced in tax havens like Panama, can confuse matters even more.

UBO & AML – International Approaches

The Panama Papers has spawned a wave of regulatory adoption in an effort to enhance corporate tax transparency and improve client due diligence requirements. These initiatives span the regulatory and data spectrum from the imposition of stricter AML rules, the implementation of Common Reporting Standards (CRS) and the introduction of national beneficial ownership registries. However, this has led to a distinct lack of uniformity, with different jurisdictions adopting varying regulatory approaches in the hope of achieving the same goal. Some of these approaches are outlined below:

U.S. FinCEN – Lifting the Corporate Veil

On May 11, 2018, the Financial Crimes Enforcement Network (FinCEN) will implement its fifth and final AML rule, adding to the original four pillars of the AML program under the Patriot Act. Although this legislation has been in the works since 2012, there has been a definite push to issue a final rule concerning beneficial ownership following the Panama data leak.

Up until now, there have been no set federal rules in place regarding ongoing identification of beneficial ownership in the U.S.; it has been applied on a best practice approach. FinCEN is now officially enacting the de facto global standard around identification of beneficial ownership of entities, recommended by the Financial Action Task Force (FATF) five years ago. Starting next year, a beneficial owner will be defined as an individual who – directly or indirectly – owns 25 percent or more of the equity interests of the legal entity customer. Furthermore, covered institutions must identify and verify the identity of beneficial owners of all legal entity customers for each new account. This applies even if the institution has already identified and verified the customer’s beneficial owners at the time of them opening a previous account.

As FinCEN is a federal rule, it will be interesting to see how states like Delaware adapt to this new AML regime. Delaware is frequently accused of being the epicenter of corporate secrecy in the U.S., due to the fact that anonymous holding companies can be incorporated there legally.

Europe – Fourth (and Fifth) EU Anti-Money Laundering Directive(s)

In Europe, the 4th EU Anti-Money Laundering Directive (4 MLD), effective from June 26, 2017, has introduced a requirement for central UBO registers for each EU member state. This means that information on individuals who ultimately own or control more than 25 percent and one share of a company will need to be obtained and held by the company and provided to the central register. It is up to each member state to decide whether to make the data available to the public.

As it stands, the 4 MLD states that the information must always be accessible to the competent authorities and FIUs. It should be made available to “obliged entities” (including investment funds and banks) when carrying out client due diligence procedures, and those who can demonstrate a legitimate business interest in the entity, in accordance with data protection rules. Last year, the U.K. set up the first publicly searchable register (the PSC Register); other member states may opt to make the information available only to the parties specified in the directive.

Financial institutions are anticipating further regulatory change in the form of the 5th Anti-Money Laundering Directive (5 MLD). Current proposals by the European Commission seek to lower the threshold to 10 percent with respect to certain limited types of entities that present a higher risk of being used for money laundering and tax evasion. These beneficial owners would also be included in each member state’s central register.

Trusts are currently exempt from inclusion in the registries, but they will be brought into play under the 5 MLD. Information on trust beneficial owners will only be available to companies with a legitimate business interest, however, across all EU countries. It is estimated that the 5th Anti-Money Laundering Directive could be implemented by early 2018.

APAC: The Region of 40+ Regulators & Different UBO Thresholds

As one of the founding members of FATF, Australia has already committed to implementing the task force’s recommendations in relation to the 25 percent beneficial ownership threshold, and they are currently reviewing the implementation of a beneficial ownership register. Similarly, in Singapore, the Companies (Amendment) Act 2017, which came into force on March 31, 2017, stipulates that all companies incorporated in Singapore and foreign companies must maintain a register of registrable controllers.

The Panama files revealed that Hong Kong was home to 2,212 intermediaries — middlemen entities that established companies, foundations and trusts to help clients conceal their wealth. This number places Hong Kong above every other country implicated in the data leak. Hong Kong’s Financial Services and Treasury Bureau (FSTB) is, therefore, seeking to introduce a central register in 2018, requiring private companies to disclose who their true owners are. To offset this, they are scrapping their 25%:10% threshold split for medium- to high-risk businesses. Instead, the FATF-recommended 25 percent threshold will be applied across the board to all non-financial businesses by Q3 this year.

If we contrast these regulatory approaches with the Philippines, however, where the beneficial ownership threshold of 2 percent for high-risk entities is due to be removed in September (to be replaced with a risk-based approach), as outlined in Circular 950, it’s clear that there is still an uneven playing field globally. Similarly, in Dubai, documentary evidence of identity is required for any shareholders that hold more than 5 percent of the issued capital.

This lack of uniformity is equally true when we consider the international tax regulatory framework and the exchange of information regarding legal entities between jurisdictions.

UBO & Tax – Common Reporting Standard (CRS)

One of the key regulatory shortcomings that Panama highlighted was the lack of interjurisdictional cooperation regarding corporate tax transparency. The Common Reporting Standard (CRS), approved by the OECD council on July 15, 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

CRS aims to improve beneficial ownership regulations by requiring jurisdictions to put in place anti-abuse rules to prevent any practices intended to circumvent reporting and due diligence procedures. It also stipulates that enhanced client due diligence is required during the onboarding process.

Several additional jurisdictions began participating in the CRS this year. Another 50 jurisdictions, including China, Hong Kong, Russia, Singapore and, most notably, Panama, announced their plans to implement the Standard in 2018. This brings the total number of participating jurisdictions to 101.

Around 50 jurisdictions will work toward having their first information exchange by September 2017. There are certain nuances in CRS, however, that can prevent the automatic exchange of information. Two participating jurisdictions, for example, must have an activated bilateral relationship under the CRS Multilateral Competent Authority Agreement (MCAA) in order to share information on legal entities.

Interestingly, the U.S. has opted not to join the Standard yet. Although, FATCA stipulates that foreign financial institutions must provide reports to the IRS either directly or indirectly through their tax authority, the U.S. does not facilitate the sharing of information unless there is a specific Model 1 IGA reciprocal agreement with a jurisdiction.


With the recent implementation of the 4th Anti-Money Laundering Directive and FinCEN on the horizon, it’s clear that a number of regulatory initiatives are coming into fruition in the wake of the Panama papers publication. Many jurisdictions are gradually falling in line with FATF recommendations, reflecting heightened global regulatory sensitivity.

On June 29, the OECD lifted Panama’s global financial transparency ratings from “noncompliant” to “largely compliant,” reflecting the substantial progress made across the board in the global system of exchanging tax-related information. The introduction of central UBO registers should, furthermore, lift the veil on beneficial ownership and improve corporate transparency, particularly in relation to offshore entities and interjurisdictional compliance.

Laura Glynn

Laura Glynn, CAMS, is Director of Regulatory Compliance at Fenergo. As such, she is responsible for managing Fenergo’s Regulatory Roadmaps to ensure Fenergo clients are fully future-proofed from a compliance perspective. Laura and her team run regular Regulatory Forums with Fenergo’s global client base to translate key regulatory requirements into rules-based logic ahead of compliance deadlines. With over a decade’s experience working in the area of risk and compliance, across hedge, mutual and private equity products, Laura has cultivated a strong focus on AML and regulatory compliance. Laura is ACAMS certified and holds a B.Sc. degree in Government & Public Policy from University Collect Cork and a diploma in Applied Finance Law from the Law Society of Ireland.

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