Companies Need to Know Who They Are Doing Business With: Why Beneficial Ownership Transparency Matters

Currently, opaque and poorly regulated beneficial ownership entities are used to launder money, finance terrorism, evade taxes and corrupt governments. In order for legitimate businesses to avoid involvement in these elements, the rules governing beneficial ownership need to be in place globally.
12/09/2015 03:54 pm ET Updated Dec 09, 2016

When it comes to transparency on who actually owns corporations, the question is no longer whether or not there will be regulation. Rather, the focus is now on when and how regulations will be implemented. The key is to figure out the best ways these rules can be used and how they can be applied on a global scale before being tailored to the circumstances of individual nations.

On June 2, 2015, the Business20 (B20), which represents businesses in all the G20 countries, stepped into the fray. The organization's Anti-Corruption Task Force's Beneficial Ownership (BO) Workstream drew together representatives from a variety of industries and NGOs. Ultimately, the group's goal is to create implementation guidelines for different industries based on the unique challenges each may face.

Currently, opaque and poorly regulated beneficial ownership entities are used to launder money, finance terrorism, evade taxes and corrupt governments. In order for legitimate businesses to avoid involvement in these elements, the rules governing beneficial ownership need to be in place globally.

In essence, companies must know whom they are doing business with -- whether it be direct customers, suppliers or third-party vendors. For financial services in particular, customers need to be assured that they are conducting business with stable institutions that are following the law. Shareholders need to see that their investment is in good hands and that profits aren't going to be eaten away by fines for violations.

Poor regulation can carry a huge price tag. Companies that fail to comply could lose their licenses. And, failing that, regulators are levying billions of dollars in fines on businesses that violate their regulatory obligations. For these violators, money that might have been used for product innovation or credit facilitation has instead been diverted to government coffers and costly remediation efforts. In June 2014, BNP Paribas paid $8.9 billion in fines. Others that have spent substantial bank capital on regulatory AML fines have been HSBC, JP Morgan Chase and Oppenheimer & Co.

Fines are only part of the penalty for companies that fail to regulate. A bigger cost, which is more difficult to measure, is the reputation damage that occurs after fines have been levied. This cost continues to accrue long after companies fully remediate their violations and institute robust compliance programs. Whenever a new violation hits the media, old violators (such as those mentioned above) are renamed and must again go through the ordeal of having their name dragged through the mud -- not to mention the ensuing hit on their share price. News stories are often reported with the ensuing drop in the share price of the violator.

While all companies should work to ensure proactive compliance to regulation, the wisest move is getting involved in the planning stage. Companies that help shape future regulation and implementation have an opportunity to post regulatory return on investment (ROI) as well as a competitive business advantage over those that are simply reactive to policy long after it has been solidified.

Of course, in order for companies to get involved, they need to have a voice in the discussion. That's part of what the B20 BO workshops provide. The G20 is the originator of many global regulations that then get nationalized at the country level. Although it's too late for companies to get involved in creating this particular policy, taking part in the workshops allows financial and corporate institutions to help craft realistic implementation of the regulation.

It also helps to limit regulatory arbitrage. When a policy is not adhered to equally in all jurisdictions, participants have the option of choosing the market with the lowest regulatory threshold. Inconsistency between regulatory requirements across various jurisdictions disadvantages markets that regulate more strictly. It also imposes significant costs on corporations and institutions that operate globally.

For financial institutions, the responsibility to ascertain the beneficial owners of their customers is not simply about providing credit to businesses. If all financial institutions played by the same rules, it would erode the ability of "bad actors" to use the financial services industry for illicit means. The banking system would be safer and more transparent, and an element of trust would be restored.

Over the course of the next year, the B20 plans to hold many workshops to gather the information necessary to create realistic implementation guidelines for Beneficial Ownership. Crucial to its success will be the participation of all industries. Make sure you have a seat at the table.

This blog post is part of the Plan B for Business series produced by The Huffington Post and The B Team to help articulate a Plan B for Business. To see other posts in the series, click here.