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    Complex Structure and Money Laundering

    Money laundering is often done by using methods, which are difficult to identify. Money launderers often try to hide not just the origin of the money but also work to ensure that the true owners of the laundered money are not identified. Regulators across the world have been working to ensure that true ownership of money can be identified so that the menace of money laundering can be stopped. Regulatory guidelines specify broad aspects related to identification of beneficial owners in those accounts which can potentially have complex ownerships. While it is easy to identify real owners in case of individual accounts, it is difficult to do the same in case of companies, partnership firms and unincorporated entities.

    The State Bank / Central Bank guidelines on anti-money laundering (AML) specify that where the client is a person other than an individual or trust, the banking company and financial institution, as the case may be, shall identify the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest. To clarify identification of beneficial owner further, Central Bank guidelines specify that controlling ownership interest means:

    • Ownership of/ entitlement to more than 25% of shares or capital or profits of the juridical person, where the juridical person is a company;
    • Ownership of/ entitlement to more than 15% of the capital or profits of the juridical person where the juridical person is a partnership; or,
    • Ownership of/ entitlement to more than 15% of the property or capital or profits of the juridical person where the juridical person is an unincorporated association or body of individuals

    While the guidelines above talk more about the threshold limits, the other aspects of the guidelines prescribe that identity of the natural person exercising control over the juridical person through other means also needs to be identified. Control through other means include, voting rights, agreements and arrangements. Further, there is a need to identify senior managing officials to establish who the beneficial owners are as per the regulation.

    While the threshold limits prescribed are fine, it may not always be possible to identify ownership of companies as structures are really complex. Here is an example of a relatively less complex structure, which shows that while Mr X’ ownership of the company is indirectly more than 25%, but as per the regulation there will be no need to check the details of beneficial ownership of the company in this particular case as no owner has more than 25% of ownership.

    Since regulators do not specify the extent to which ownership needs to be identified, it becomes difficult to carry out checks. Equally challenging is the fact that ownership can be hidden through multiple complex layers. As a result of this, the decision making becomes very subjective and it is left up to the respective banks and financial institutions to dig deep into the structure of beneficial ownership.

    Not just in India, but across the world regulators are not very specific about how to identify the complexity of these structures and beneficial ownership. In some cases, guidelines are little extensive. For instance, Hong Kong Monetary Authority (HKMA), with respect to ownership structure, expects the following from financial institutions, “For companies with multiple layers in their ownership structures, an FI should ensure that it has an understanding of the ownership and control structure of the company. The intermediate layers of the company should be fully identified. The manner in which this information is collected should be determined by the FI, for example by obtaining a director’s declaration incorporating or annexing an ownership chart describing the intermediate layers (the information to be included should be determined on a risk sensitive basis but at a minimum should include company name and place of incorporation, and where applicable, the rationale behind the particular structure employed)”.

    Another challenge arises in the fact that there are many companies in which ownership controls are very apparent but since the ownership with an individual is very small, it becomes difficult to identify the effective control. Effective control has lots of subjectivity though some attempts have been made to quantity or specify this. Broad indicators of effective controls are:

    • those individuals with the ability to control the customer and/ or dismiss or appoint those in senior management positions
    • those individuals holding more than 25 percent of the customer’s voting rights
    • those individuals (for example, the CEO) who hold senior management positions

    While in case of companies there are various challenges in identifying complex structures, this problem is equally grave in case of trusts and company service providers and other business forms. In spite of various guidelines being formulated across the world, the complex structures are still hard nut to crack. Money laundering risks stay with these complex structures.

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