Recommendation 24 (R-24) of the FATF- Looking beyond façade for ‘beneficial ownership’

[somesh arora]

The Financial Action Task Force (FATF) in its meeting on 4^th March, 2022 held in Paris adopted amendments to its Recommendation- 24 and its interpretative Note, which pertain to requirement of countries to prevent the misuse of legal persons for money laundering, as terrorist financing. This was done to ensure that there is adequate, accurate and up to date information on the beneficial ownership and control of such legal persons. The changes made in the recommendation were outcome of two years of deliberations and review including inviting comments by keeping proposed changes in public domain. The objective of strengthening international standards on beneficial ownership of juristic person is to ensure greater transparency about the ultimate ownership and control of artificial persons and to reduce the risk associated of their misuse in money laundering operations.  The aim is to being greater transparency and international cooperation in relation to requirements of beneficial ownership globally, while allowing member states to have a degree of flexibility in their local laws to maintain their sovereignty.  It requires member countries to direct their registered companies to collect and collate adequate, accurate and updated information about their beneficial ownership and to make such information available to competent authority in a time bound manner.  Quite likely, it will result in data base not only of common promoters of various companies but also when facades of employees or other shareholders are used to conceal real entity of the promoters or company is just a shell company created for some extraneous considerations.

The recommendation also requires any public authority to function as a registry for information relating to beneficial ownership and even to obtain information relating to such companies through regulated financial institutions and professionals and even regulators of stock exchanges.  The changes also require stronger control to prevent the misuse of bearer shares and nominee arrangements, including issue of new bearer shares and share warrants.  The information relating to beneficial ownership shall be shared on need based basis by the Member States, if so required as part of the international cooperation under their respective Prevention of Money Laundering legislations.

It is to be noted that Indian Legislation by way of major amendments brought in through amending of Act of 2013 had already brought in the concept of `beneficial ownership’ by introducing Section 2(f)(a) w.e.f. 15.02.2013 in PMLA,2002.  Section 2(f)(a) inserted the relevant definition as follows:

“Beneficial Owner’ means an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a judicial person;”

It also vide Section 11A of the Prevention of Money Laundering Act, 2002 inserted by (Act 14 of 2019) effective from 25.07.2019 in Clause 11A (2) required the reporting entities shall perform AADHAR based authentication to verify the identity of its clients or the beneficial owner, but the same shall be done as per voluntary choice of client of beneficial owner and it shall not be denied, services for not having AADHAR number.  Therefore, while requiring beneficial ownership to be reported by various financial institutions etc., the AADHAR based identification was still kept as a voluntary exercise.  However, Indian authorities still did a commendable job by identifying and closing shell companies by cracking down upon them and freezing thousands of crores of assets through money laundering proceedings in India and overseas. In reply to a Parliament Question, it was stated that 3.82 lakh shell companies were struck off in three years prior to September, 2020 in various special drives undertaken by the Ministry of Corporate Affairs.  It was also reported that Financial Intelligence Unit (FIU) had sent 289 legal requests to its counterparts across the world during the year 2018-2019 seeking cooperation from various countries regarding undisclosed foreign assets and cross border co-holding of various shell companies.  It is in this context of international cooperation that the recent amendment adopted by FATF will have a major role to play, it is expected that the member States of FATF shall amend their own enactments at the national level, incorporating the agreed changes and standards within the time frame agreed upon.  India has a good track record and has established itself as a country that has taken adequate enforcement measures against  shell companies which were being used for money laundering, what has been lacking is  response to international cooperation being sought from other nations by India.  Further, institutionalizing, international mechanism on this aspect may only go to help FATF compliant countries like India to strengthen their enforcement.  Further, coming to existence of dummy shares in corporate system, there are lot of old shares which are lying in physical form in India. The shares in DEMAT forms are subjected regularly to KYC compliance. But physical shares are now required by law to be under Demat form in time bound manner or those lying unclaimed are required to vest in the State.  However, the Investor Education and Protection Funds (IEPF) Authority has not been acting proficiently till now even in relation to claims lodged with it. Even processing of genuine claims has been made a cumbersome process by the IEPF at it has just delayed things during pandemic times leading to huge pendency of claims with them.   

It is estimated that about ₹ 7 to 8 Lakhs worth of shares are lying in physical form, many of whom are genuine shares and required to be transmitted as per law.   But the babus in IEPF are making things rather difficult by demanding unnecessary papers and even the Secretaries of concerned companies have a lackadaisical approach while dealing with such shares. The pathetic response in this regard and time being taken to dispose claim can be a matter of system failure study.  While it is expected,  that the Government Authorities will be able to separate the wheat from chaff, the over enthusiastic but inefficient IEPF Authorities may and secretaries of the companies  may not allow the genuine funds of the Indians to just vest in the Government as unclaimed or benami just due to their lethargy.  For such a huge sums to be vested as benami or laundered will only reflect badly on India.  Another aspect which India needs to work upon is frequently found different `beneficial owners’ behind imports done by someone else under its IEC Code.  Such financers in DRI Investigation are termed as ‘mastermind’ and most of the show cause notices are issued as ‘either importer on documents or the master mind’ being liable for customs duties.

It is required that such mastermind who are nothing but beneficial owners of the imported consignments are covered under scope of definition of ‘beneficial owner’ under Prevention of Money Laundering Act, 2002 and brought to book like any other person and even international cooperation should not be confined only to juristic person as definition at least in our statute covers any individual also.

While proposed international cooperation  on `Beneficial Owner` is definitely a step forward, it is hoped that India will not have same harrowing experience from some of the founding State members of FATF on cooperation,  as it is having in relation to known  fugitives who ran away with billions of rupees of loans.

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By:

SOMESH ARORA (ADVOCATE), [Chief Consultant (Amicus Rarus) and Former Commissioner of Customs & Central Excise]

&

GARVESH KABRA (ADVOCATE-ON-RECORD), Supreme Court of India