Who’s in Control? Unmasking the beneficial owners of companies

By Noah Arshinoff April 6, 20176 April 2017

Who’s in Control? Unmasking the beneficial owners of companies


They’ve been called the “puppet masters” by the World Bank. Indeed, the Panama Papers shed light on how beneficial owners, or the real people who own/control companies, sometimes go to great lengths to keep their identities hidden. And according to Transparency International, Canada’s opaque laws on beneficial ownership make it an ideal breeding ground for tax evaders and money launderers.

Canadian law permits the use of nominees—essentially custodians—for directors and shareholders, thereby masking the beneficial owners of a company. For in-house counsel, navigating this environment can be complex, especially within a company’s due diligence program.

Why it matters

According to the World Bank, anonymous companies are the most common way US$1-$2 trillion are lost to money laundering each year. They are also used to finance terrorist activities and line the pockets of drug traffickers and corrupt politicians. While no company means to aid those with illicit intentions, the absence of any sort of national registry of beneficial ownership can make it very difficult to determine who you are actually doing business with.

For in-house counsel, knowing who you are transacting with is not just a legal exercise. As Paul Saguil, Associate Vice President, Anti-Money Laundering, Canadian Banking at TD, says, “In-house counsel are also the guardians of broader reputational risk as well as specialized legal risk. The onus is sometimes on them to advise their managers and Board of the steps taken to identify and advise on the appropriateness of contracting with such entities.” As such, in-house counsel must weigh the risks involved in transacting with a particular entity, whether it’s an acquisition target or an everyday supplier, and advise on how to vet them.

For companies with cross-border operations, the issue of beneficial ownership requires you to know who your suppliers, agents and intermediaries are. Many companies address cross-border due diligence through jurisdiction-based risk assessments. The less stable the jurisdiction, the more risky it is to do business there. However, “risk assessments shouldn’t always be jurisdiction based,” says Isabelle Pierre, Deputy General Counsel at General Dynamics Land Systems. Given the state of the law on beneficial ownership in Canada and how easy it is to create an anonymous company, this approach can be “very misleading.” She suggests that robust due diligence sometimes requires physical checks—meeting the people involved and identifying them face to face.

According to one in-house counsel interviewed, “The challenge is owners who don’t want to be identified can hide very easily. When dealing across jurisdictions with multiple corporate levels, it is easy to hit road blocks in your due diligence.” Good faith can be a difficult thing for many to put their trust in, especially when company reputation is on the line.

The regulatory state of affairs

In Canada at the federal level and in every province except Alberta and Quebec, all you need to set up a company is a bit of cash, an address and the name of a director. However, you can list other people (nominees) as the directors and shareholders. The identity of the beneficial owners can therefore remain anonymous, such as revealed in a recent CBC-Toronto Star exposé, “Signatures for Sale,” where two women were legally listed as the heads of hundreds of companies while knowing nothing about the beneficial owners or the business itself.

Transparency in beneficial ownership is a constitutional issue, as each province maintains its own corporate registry. Increasing transparency would require cooperation among federal and provincial governments to establish a centralized searchable database. However, our constitutional history does not lend itself to optimism on this front.

While some statutes require certain entities to identify the beneficial owners of those they transact with, the requirements pose some vexing problems. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act obliges financial entities to obtain and take reasonable measures to confirm the beneficial ownership information of clients seeking to open an account. But what constitutes “reasonable measures”? The Financial Transactions and Reports Analysis Centre of Canada has the ability to inspect records of financial entities, putting counsel in the precarious position of guessing how much due diligence is enough. At the very least, in-house counsel should keep accurate records and be able to provide a trail of their due diligence actions.

Outside of Canada, the U.K. became the first country to publish a fully open register of beneficial ownership in 2016. The European Commission’s 2015 directive compels all EU countries to establish their own open registers by June 2017. The World Bank’s procurement arm requires companies it transacts with to list their beneficial owners. Canada, though having made commitments at the G20 in 2014, has yet to take much action to increase transparency.

Where do we go from here?

Whether you are advising clients on an anti-money laundering issue, an acquisition target or supplier engagement, without greater transparency in beneficial ownership, you will eventually run into a wall in your due diligence. Providing an attestation clause in contracts requiring the identification or signature of any beneficial owners may provide some comfort, but this relies on the good faith of the other company. In the current voluntary disclosure environment, those with legitimate interests can usually be relied upon to transact honestly, but those with illicit intentions will continue to remain hidden.

In-house counsel need to know the limits of their due diligence and take appropriate steps to make sure they’ve gone as far as they can. Weighing the legal and reputational risk is crucial—if hindered, it could throw into question who the puppet masters are.

Noah Arshinoff is a member of Transparency International – Canada's Legal Committee, formerly managed the CBA’s Anti-Corruption Team and currently works in financial regulation at the Canada Deposit Insurance Corporation.

This article was initially published in the Spring 2017 issue of CCCA Magazine. Photo licensed under Creative Commons by Sabbian Paine

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Pat 12/21/2017 7:49:57 AM

With Canada and the UK unmasking, it's indecent for the U.S. Not to do the same.
How can money laundering, and other crimes be explored without it? These are mechanics of government, and very much a security issue for America to keep the democracy authorized by Constitutional mandate. Unmasking is the new trend in Government in economics, just as in sexual harassment cases in Congress. How to prevent criminal conspiracy otherwise?

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