The 2016 release of the Panama Papers cast a spotlight on an issue that financial institutions and real estate firms had been wrestling with for years: the need to step up their processes for verifying beneficial ownership. Even before the Panama Papers, government regulators around the world were moving to strengthen anti-money laundering efforts by requiring financial companies to more strictly verify the real beneficial owners behind the parties attempting to open new accounts or purchase properties. 

These regulatory efforts are reflected in FinCEN’s new Customer Due Diligence Final Rule, announced in 2015 and scheduled to take effect in May 2018. Under the enhanced diligence requirements, financial institutions and real estate firms contracting with an entity can no longer simply run checks on its first tier of ownership. Instead, compliance teams must investigate the individuals behind every layer of ownership connected to the applicant. In some cases, that could mean looking into just a handful of individuals; in others, it could involve trying to uncover who’s behind multiple corporations and trusts within complicated ownership structures.

Peeling back this onion can be time-consuming and frustrating, in part because it’s impossible to know how deep you’ll need to dig until you examine the first tier of beneficial owners. But companies that miss potential ties to criminal activity or Politically Exposed Persons (PEPs) face the risk of increased regulatory audits and steep fines, so doing things the old way is no longer an option.

Applying a form of predictive risk analysis to every search can help you adapt your beneficial ownership verification process to the new landscape. This process looks for specific indicators that signal higher risk, helping you determine where to dedicate additional resources before signing off on a transaction. Although there are many risk indicators worth taking into account, in my experience performing risk management diligence for more than two decades, three key areas stand out as worthy of special consideration:

1. Geography

The first important line of inquiry is to determine where the company in question is domiciled. In general, companies based in western countries with strong transparency rules present lower risk — but not always. For example, U.S. companies based in Delaware and Nevada are not required to reveal personal details about their principal owners, and may require additional diligence.

Higher-risk transactions would involve companies based in countries with a history of corruption or transparency problems, such as China, Nigeria and Indonesia, as well as companies domiciled in known offshore havens like Cyprus. For these locations, compliance teams should plan to perform further investigation to determine whether a beneficial owner of any entity has ties to a PEP or links to countries on sanctions lists, such as Syria, North Korea or Iran.

Automated corporate registration searches can help quickly identify geographic risk indicators. But automation can tell you only when it’s time to step up your diligence efforts — it can’t do the additional research for you.

2. Number of owners

A company with two or three owners obviously is easier to review and verify a firm one with dozens of owners. But while a larger number of owners may present logistical challenges, it isn’t necessarily a red flag. For example, we often see families creating investment vehicles and listing multiple members as beneficial owners. That said, it’s wise to go beyond basic PEP database searches on all individual owners — for example, by conducting targeted media research to spot potential links between individuals and PEPs, or potential criminal associations.

A large number of corporate owners also may represent higher risk, particularly when ownership is divided among multiple affiliates around the world. These situations raise questions that should warrant additional diligence, not the least of which revolves around why a company would bother to develop such a complicated ownership structure.

3. Opacity of ownership

Anonymously held corporations are a fact of life in beneficial ownership verification. But the harder it is to determine the individuals behind a corporate entity, the greater the risk and need for additional investigation.

If you have at least one named individual among beneficial owners in these higher-risk applicants, start by asking that person for more details on anonymously held companies listed as owners. You might get names you can check through established databases, or you may need to move to more old-fashioned investigation techniques. For example, if you trace an entity back to an address that’s used for thousands of corporate headquarters, you may have found a registered agent that specializes in representing shell corporations. You also might need to use people on the ground, who can work in local channels to uncover potential connections between anonymous corporations and PEPs or risky individuals.

With just over one year to go before FinCEN’s enhanced diligence requirements take effect, it’s essential that compliance teams begin adapting their beneficial ownership verification process to meet these strict new standards. In our experience, using some type of predictive risk analysis can help address those regulatory requirements, while better identifying who is truly investing or buying through your organization. That way, you’ll be more confident that your process strongly protects against transactions with ties to money laundering or other criminal activity.