Using beneficial ownership data for national security
Preventing corruption and organised crime
Both domestic and foreign corruption, as well as organised crime, can form national security threats. Domestic corruption has long been recognised as a potential threat to peace, stability, and security (for instance, by compromising human rights and eroding trust in government).[15] More recently, the focus has shifted to how corruption in one country can have national security implications for another. Whilst academics question the causality between corruption and conflict,[16] the co-occurence of corruption along with other drivers, where and when global security threats emerge, has been well documented.[17] Corruption has also been linked to transnational organised crime. Corruption can enable some economic crimes, and they share similar drivers and rely on similar mechanisms to move and launder illicit funds.[18] Transnational crime was declared a national security threat by the US Obama administration, stating that it had “dire implications for public safety, public health, democratic institutions, and economic stability”.[19] A 2020 national risk assessment in the United Kingdom (UK) said organised crime has “more impact on UK citizens than any other national security threat” by affecting public services, infrastructure, and vulnerable individuals.[20]
Even if the act of corruption or crime occurs in another country, domestic policies are relevant because those who profit from corruption or transnational crimes often move the illicit proceeds abroad through the globalised financial system. Foreign actors can use domestic institutions to hide, safeguard, invest, and spend the proceeds. Often they are attracted to and use Western financial institutions, due to the openness of their economies and the veneer of legitimacy they provide.[21] As research and multiple leaks and investigations have shown, major Western financial centres are a key conduit for the proceeds of corruption and transnational crime.[22] For instance, the 2020 UK National Risk Assessment of Money Laundering and Terrorist Financing estimated money laundering in the UK to potentially be in the hundreds of billions of pounds annually, saying that the majority of this is likely to be corrupt money from outside the UK.[23] Complex corporate structures are often set up in jurisdictions that do not have transparency requirements for company ownership. Such arrangements allow funds to enter the financial system; create distance between the perpetrators and their proceeds; and enable wealth to be acquired from the proceeds, often by integrating the funds into the formal financial system.
Countries have been trying to fight corruption both at home and abroad through extraterritorial anti-bribery legislation that criminalises paying, receiving, and handling the proceeds of corruption.[24] Corruption is also increasingly being recognised as a predicate crime for money laundering offences. AML policies seek to tackle corruption and other crimes, such as narcotics trafficking indirectly by targeting their profits. The EU’s proposed sixth Anti-Money Laundering Directive (AMLD6), for instance, defines and standardises 22 predicate offences for money laundering in all EU member states, including corruption.[25] Such policies place corruption squarely within the scope of AML legislation, the international standards of which are set by the Financial Active Task Force (FATF), the inter-governmental policy body founded in 1989 by the G7.[26] Part of the FATF Standard are recommendations for preventive measures to stop criminals from using financial institutions and certain designated non-financial businesses.
AML legislation places requirements on so-called obliged entities to carry out due diligence on clients as part of know-your-customer (KYC) requirements, and report suspicious activities and transactions to financial investigative units (FIUs). These entities are most commonly financial institutions, but in some jurisdictions also include the insurance, real estate, law, and accounting sectors – also known as designated non-financial businesses and professions (DNFBPs).
Box 1: The United States: crime, corruption, and national security
On 25 July 2011, the Obama administration released the Strategy to Combat Transnational Organized Crime: Addressing Converging Threats to National Security. In it, the government states that the penetration of transnational organised crime into government and institutions is “exacerbating corruption and undermining governance, rule of law, judicial systems, free press, democratic institution-building, and transparency”.[27]
In June 2021, US President Biden’s administration went further, stating that corruption “contributes to national fragility, extremism, and migration; and provides authoritarian leaders a means to undermine democracies worldwide”.
“Corruption threatens United States national security […] and democracy itself. But by effectively preventing and countering corruption and demonstrating the advantages of transparent and accountable governance, we can secure a critical advantage for the United States and other democracies.”[28]
The role of beneficial ownership transparency
BO as a concept, and BO information as a resource, emerged as part of the customer due diligence and KYC obligations established under AML regulations, to identify the real individuals behind companies. In order to address challenges around data quality and speed of access for law enforcement, G8 countries agreed in 2013 to a set of principles for companies to make their BO information available to law enforcement and other competent authorities, a requirement that was reiterated by FATF in 2014. In the next few years, a number of countries, starting with Ukraine and the UK in 2015 and 2016, implemented BOT by establishing central registers and collecting, verifying, and publishing BO data. Since then, central registers have emerged as the most effective way of making BO data available to competent authorities fighting financial crime. Making this data public furthers AML aims by making the data available to a wider set of actors fighting financial crime, such as civil society and investigative journalists.
Whilst critics have been skeptical about the effectiveness of broader AML legislation,[29] conversations with law enforcement testify to the value of BO data in criminal investigations. BO disclosures can be useful in these investigations regardless of whether the information in them is a representation of the truth, as the information contains claims about ownership at particular points in time, which can be compared to other records. The information can help identify individuals with some level of real responsibility in a company and help identify links between companies to each other through individuals.[30] Central and public registers are core tenets of an effective disclosure regime.[31]
BO data can also be used to fight corruption domestically by using it in procurement processes. As procurement corruption presents a different set of national security threats, this will be discussed in more detail further on.
Endnotes
[15] See, for instance: Edda Müller et al., “Corruption as a Threat to Stability and Peace”, TI, February 2014, https://ti-defence.org/wp-content/uploads/2016/03/2014-01_CorruptionThreatStabilityPeace.pdf.
[16] “Why corruption matters: understanding causes, effects and how to address them”, Department of International Development, January 2015, 51, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/406346/corruption-evidence-paper-why-corruption-matters.pdf.
[17] See, for instance: Sarah Chayes, Thieves of State: Why Corruption Threatens Global Security, (London: W.W. Norton & Company Ltd., 2016).
[18] Jorum Duri, “Corruption and economic crime”, TI, 15 March 2021, 1, https://knowledgehub.transparency.org/assets/uploads/kproducts/2021-Corruption-and-economic-crime_final.pdf.
[19] “Transnational Organized Crime: A Growing Threat to National and International Security”, The White House, National Security Council, n.d., https://obamawhitehouse.archives.gov/administration/eop/nsc/transnational-crime/threat.
[20] “National risk assessment of money laundering and terrorist financing 2020”, HM Treasury and Home Office, December 2020, 26, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945411/NRA_2020_v1.2_FOR_PUBLICATION.pdf.
[21] “National risk assessment of proliferation financing”, HM Treasury, September 2021, 2, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1020695/National_risk_assessment_of_proliferation_financing.pdf.
[22] See: Agustin Armendariz et al., “Pandora Papers: An offshore data tsunami”, ICIJ, 2 October 2021, https://www.icij.org/investigations/pandora-papers/about-pandora-papers-leak-dataset/; Emile van der Does de Willebois et al., “The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It”, StAR, UNODC, and World Bank, 2011, https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf.
[23] “National risk assessment of money laundering and terrorist financing 2020”, 26.
[24] For instance, the UK Bribery Act 2010 and US Foreign Corrupt Practices Act (FCPA) 1977.
[25] “Directive (EU) 2018/1673 of the European Parliament and of the Council of 23 October 2018 on combating money laundering by criminal law”, Office Journal of the European Union, 12 November 2018, 5, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L1673&from=EN.
[26] “FATF: About”, FATF, n.d., https://www.fatf-gafi.org/about/.
[27] “Transnational Organized Crime: A Growing Threat to National and International Security”.
[28] Biden Jr., “Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest”.
[29] See, for instance: Petrus C. van Duyne, Jackie H. Harvey, Liliya Y. Gelemerova, The Critical Handbook of Money Laundering: Policy, Analysis and Myths, (London: Palgrave Macmillan), 2018.
[30] Federico Mor and Ali Shalchi, “Registers of beneficial ownership”, The House of Commons Library, 8 February 2021, 8, https://researchbriefings.files.parliament.uk/documents/CBP-8259/CBP-8259.pdf; Kiepe, “Making central beneficial ownership registers public”, 5-6.
[31] “The Open Ownership Principles – Public access”, OO, July 2021, https://www.openownership.org/principles/public-access/; “The Open Ownership Principles – A central register”, OO, https://www.openownership.org/principles/central-register/; Kiepe, “Making central beneficial ownership registers public”.