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Bill Steinman: The death knell tolls for hiding beneficial owners

It’s a scenario that FCPA practitioners see all too regularly. A due diligence report regarding an intermediary reveals that it’s organized not in its home jurisdiction, but in Cyprus. Or Guernsey. Or Panama.

Moreover, the individuals responsible for the day-to-day operation of the intermediary are nowhere to be found among its shareholders. Instead, the legal owners are attorneys at a Cypriot law firm. Or a Guernsey trust company. Or a Panamanian law firm.

Obviously, we practitioners say, we’ve got to look beyond the legal ownership of said intermediary, and identify its beneficial owners.

What frequently follows is a tempest of complaints from the business folks (“Why don’t we trust our business partners?” and “Why is this taking so long?”) and protests from the intermediary (“That information is personal!” and (“We’ve already identified our shareholders. When can we get on with finding you business?”). The bifurcation of legal and beneficial ownership has raised its ugly head, hampered the due diligence process and left discontent in its wake.

Over the years, I’ve helped clients overcome these concerns. Until recently, I’ve done so by pointing out the obvious -- due diligence is woefully incomplete if an intermediary’s true owners remain unknown. After all, how can a company know whether a foreign official directly benefits from the relationship if it doesn’t look beyond legal ownership?

If that failed to convince, I trotted out some of the nifty little nuggets that the SEC has given us about beneficial ownership in FCPA enforcement actions. To wit, in the SEC’s complaint against Alcatel-Lucent, the agency criticized the telecom giant’s due diligence process, because it “never identified [an intermediary’s] registered shareholders and ultimate beneficial owner.”

The SEC revisited this issue in its compliant against Eli Lilly. The SEC was dissatisfied with Eli Lilly’s due diligence process because it “did not identify the beneficial owners of [its] third-parties.”

For the most part, I found that quoting the SEC carried the day, and overcame resistance to delving into beneficial ownership. However, from time to time, doubters persisted. Business folks dug in their heels.  Intermediaries stonewalled.

But now I believe those days have definitively come to an end. In the wake of the Panama Papers, the U.S. Treasury Department announced draft legislation requiring “companies formed within the United States … to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply.” Treasury’s announcement came on the same day it issued a final rule requiring U.S. financial institutions to “identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened.” 

The U.S. move follows the announcement of an initiative among European Union and other governments to share information about beneficial ownership, and the coming into force of new rules in Great Britain that require British companies to disclose beneficial owners in their annual returns submitted to Companies House. Australia has announced that it will adopt similar measures. At last week’s London Anti-Corruption Summit, France, the Netherlands, Afghanistan and Nigeria pledged to do the same. More countries will undoubtedly follow suit in the coming days and weeks.

In light of these developments, let’s put aside lingering reluctance to obtain information about beneficial owners once and for all. If companies need a peg to hang their hat on, they need only point to this growing international tide of legislation and regulation.

I have no doubt that beneficial ownership will continue to play a role in financial, tax and corporate planning for some. But the death knell for hiding this information in due diligence reviews has rung out loud and clear.


Bill Steinman is the senior partner at Steinman & Rodgers LLP, a boutique law firm in Washington, D.C. specializing in international anti-corruption compliance and investigations. He'll be a speaker at the FCPA Blog NYC Conference 2016.

Reader Comments (1)

Well put, Mr. Steinman.

On the west coast of the U.S.; in California, we real estate agents witness rampant occurrences of a similar sort.

Our typical scenario occurs when a seemingly innocent appearing buyer offers to purchase a home with all cash funds.

Immediately prior to closing escrow, that buyer establishes a brand new state issued LLC, and also a fictitious loan debt "repayment / payoff" document to a loan company overseas, hosting that document name in a foreign language; (and which the local escrow officers can not interpret).

That loan, is in all actuality, many times held in the buyer's own name, paid off, escrow closes, capital gains taxes are skirted, and then the next step ensues:

"rinse and repeat"

...and another 'shill' buyer appears in California, bringing in all cash funds in order to purchase an even more expensive property than the previous one.

The typical culprit are Chinese buyers with strong links to relatives, friends and criminals in mainland China.
May 17, 2016 | Unregistered CommenterJeanette Cook
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