Beneficial Ownership in The Extractive Industry

Beneficial Ownership In The Extractive Industries Sector
Recommendations for reporting beneficial ownership of extractive industry companies for

the new EITI Standard
Technical Note prepared for Revenue Watch Institute

Authors1:
Michael Aryee
Tulsi Byrne
Kristina Hamil
Rebecca Hollender
Georges L. J. Labrche
9 December 2013
The New School for Public Engagement
Milano School of International Affairs, Management, and Urban Policy
Michael Aryee <aryem332@newschool.edu>, Tulsi Byrne <byrnt905@newschool.edu>, Kristina Hamil

<hamik022@newschool.edu>, Rebecca Hollender <hollr061@newschool.edu>, Georges L. J. Labrche
<labrg448@newschool.edu>
Table of Content
ACRONYMS........................................................................................................................................5
EXECUTIVE SUMMARY .......................................................................................................................6
INTRODUCTION .................................................................................................................................7
I. METHODOLOGY ..............................................................................................................................8
II. DATA COLLECTION .........................................................................................................................9
III. DATA ANALYSIS........................................................................................................................... 13
BENEFICIAL OWNERSHIP GAPS IN CURRENT AML FRAMEWORK .......................................................................... 13
Defining Beneficial Ownership ........................................................................................................... 13
Disclosures and Reporting of Beneficial Ownership ........................................................................... 14
Incorporation Practices ...................................................................................................................... 15
Bearer Shares ..................................................................................................................................... 15
Corporate Service Providers (CSPs)..................................................................................................... 15
Shell Companies ................................................................................................................................. 16
Limited Statutory Powers ................................................................................................................... 16
LOOPHOLES WITHIN CURRENT AML FRAMEWORK WITHIN FINANCIAL INSTITUTIONS .............................................. 17
Banking loopholes .............................................................................................................................. 17
Bank Secrecy Laws .............................................................................................................................. 17
Due Diligence ...................................................................................................................................... 17
Verification ......................................................................................................................................... 17
ENFORCEMENT AND PENALTIES OF AML REGULATIONS..................................................................................... 18
IV. RECOMMENDATIONS .................................................................................................................. 18
1. PROMOTE STANDARDIZED DEFINITIONS AND DUE DILIGENCE PROCEDURES ...................................................... 19
Beneficial Ownership .......................................................................................................................... 19
Beneficial Ownership Thresholds ....................................................................................................... 19
Beneficial Ownership Due Diligence ................................................................................................... 20
Politically Exposed Persons (PEPs) ...................................................................................................... 20
2. TRANSPARENT INCORPORATION PRACTICES ................................................................................................. 22
CSPs: Compliance efforts Targeting Corporate Service Providers ...................................................... 22
Prohibiting Bearer Shares and Corporate Nominee Directors............................................................ 23
3. EXTENSION OF EITI BENEFICIAL OWNERSHIP REQUIREMENTS TO PUBLICLY LISTED AND WHOLLY-OWNED
SUBSIDIARIES .............................................................................................................................................. 22
4. DEVELOP A PUBLIC REGISTRY OF BENEFICIAL OWNERS................................................................................... 23
5. CREATE ENFORCEMENT MECHANISMS AND STRICT ADHERENCE TO REPORTING................................................. 24
CONCLUSION ................................................................................................................................... 25
APPENDIX A: RELATED/RELEVANT INITIATIVES ................................................................................. 26
STOLEN ASSET RECOVERY INITIATIVE .............................................................................................................. 26
RELEVANCE TO BENEFICIAL OWNERSHIP.......................................................................................................... 26
ASSET RECOVERY NETWORKS ........................................................................................................................ 26
OTHER LEGISLATIONS ................................................................................................................................... 27
APPENDIX B: FIGURES AND TABLES .................................................................................................. 28
APPENDIX C: COUNTRY NORMS AND PRACTICES .............................................................................. 31

BRAZIL....................................................................................................................................................... 31
CANADA .................................................................................................................................................... 31
FRANCE ..................................................................................................................................................... 32
ITALY......................................................................................................................................................... 32
JAPAN ....................................................................................................................................................... 33
NORWAY ................................................................................................................................................... 33
TIMOR LESTE .............................................................................................................................................. 33
UNITED KINGDOM ....................................................................................................................................... 34
BERMUDA .................................................................................................................................................. 34
APPENDIX D: PWC ANALYSIS OF KYC GUIDELINES, EITI PILOT COUNTRIES BENEFICIAL OWNERSHIP,
AND PEPS SUMMARY TABLES AND CHARTS ...................................................................................... 36
APPENDIX E: PWC ANALYSIS OF KYC GUIDELINES, EITI PILOT COUNTRIES BENEFICIAL OWNERSHIP,
AND PEPS SUMMARY DETAILED ANALYSIS........................................................................................ 39
REFERENCES .................................................................................................................................... 40
PRIMARY ................................................................................................................................................... 40
SECONDARY ............................................................................................................................................... 42
Figures and Tables

FIGURE 1: COUNTRIES EVALUATED......................................................................................................... 28
FIGURE 2: COUNTRIES EVALUATED, CONTINUED ....................................................................................... 29
TABLE 1: WHICH JURISDICTIONS REQUIRE COMPANIES TO REPORT CHANGE IN OWNERSHIP? ............................. 29
TABLE 2: TECHNIQUES/METHODS EMPLOYED BY PEPS TO ADVERSELY AFFECT THE EFFECTIVE FUNCTIONING OF
ENFORCEMENT AGENCIES ............................................................................................................. 30
TABLE 3: AWARNESS OF FATF RECOMMENDATIONS ................................................................................. 30
TABLE 4: COUNTRIES THAT HAVE PRACTICE GUIDANCE BEYOUND THE FATF RECOMMENDATIONS ...................... 36
TABLE 5: BENEFICIAL OWNERSHIP TRESHOLDS FOR G8, BRICS AND EITI COUNTRIES ..................................... 37
TABLE 6: TABLE OF COUNTRIES THAT HAVE AMBIGUOUS LANGUAGE IN REQUIREMENTS AND DEFINITIONS OF
BENEFICIAL OWNERSHIP ............................................................................................................... 38
Acronyms
AML
ATF
BMA
BCL
BRICS
CARIN
CSP
CFT
ECOWAS
EU
EITI
FATF
FCA
FI
FSA
FSAN
G8
G20
ICAR
GIABA
KYC
NGO
OECD
PEP
PWC
PRA
SEC
SOEs
StAR
SARs
UNCAC
UNODC
WBG
Anti-money Laundering
Anti-terrorist Financing
Bermuda Monetary Authority
Brazilian Corporation Law
Brazil, Russia, India, China, and South Africa
Camden Asset Recovery Inter-Agency Network
Corporate Service Provider
Counter-Financing of Terrorism
Economic Community of West African States
European Union
Extractive Industries Transparency Initiative
Financial Action Task Force
Financial Conduct Authority
Financial Institution
Financial Services Authority
Financial Supervisory Authority of Norway (Fnanstilsynet)
Group of Eight
Group of Twenty
International Centre for Asset Recovery
Intergovernmental Action Group Against Money Laundering In West Africa
Know Your Customer
Non-governmental Organization
Organization for Economic Co-operation and Development
Politically Exposed Person
Pricewaterhouse Coopers
Prudential Regulation Authority
Security Exchange Commission
State-Owned Enterprises
Stolen Asset Recovery Initiative
Suspicious Activity Reports
United Countries Convention Against Corruption
United Countries Office on Drugs and Crime
World Bank Group
Executive Summary
This proposal recommends measures to enhance transparency and accountability in the
extractive industries sector by addressing the question of beneficial ownership in the Extractive
Industries Transparency Initiative (EITI). The EITI Standard provides a minimum framework for
improving transparency and accountability in extractive industries.2 The current standard limits
beneficial ownership disclosure requirements from state owned extractive industries and does
not require disclosure from publicly traded companies. EITI has made a commitment to extend
its beneficial ownership requirements to private companies that bid for, operate, or invest, in
the extractive sector. In order to promote the widening of EITIs beneficial ownership scope,
this technical note outlines: current regulatory approaches to beneficial ownership, gaps and
loopholes in current approaches, and recommendations to the EITI.
Given the absence of sector-specific regulations regarding beneficial ownership for non-publicly
traded companies within the extractive sector, data was collected by mapping the
requirements for transparency and accountability of beneficial ownership set forth by various
national and international entities that regulate beneficial ownership disclosure. Several
beneficial ownership regulations found within national and international anti-money laundering
(AML) and Know Your Customer (KYC) initiatives provide useful normative approaches for the
EITI. In addition to mapping current normative approaches of G8, BRICS, and EITI countries,
data was collected from Pricewaterhouse Coopers (PwC) KYC Quick Reference Guide and then
categorized into three sub-groups relating to beneficial ownership including: Identity
Verification, Due Diligence, and Reporting. Primary data on current approaches was also
obtained from international regulatory bodies such as the Organization for Economic Cooperation and Development (OECD), international financial institutions, issue-specific coalitions,
and task forces.
Data on current normative and practice-based approaches to beneficial ownership was
supplemented with secondary source analysis in order to identify the principal gaps and
loopholes in current beneficial ownership regulations, as relevant to the extractive industry
sector. Major loopholes include: (1) inconsistent definitions; (2) gaps in incorporation practices;
(3) banking loopholes, such as the absence of regulated customer due diligence requirements
including independent verification of reported information; and (4) lack of reporting and
enforcement mechanisms of penalties.
In order to address the loopholes, five main recommendations were identified: (1) promote
standardized definitions and due diligence procedures, (2) extend beneficial ownership
disclosure requirements to all publicly listed companies and their wholly owned subsidiaries, (3)
transparent incorporation practices, (4) develop public registries of beneficial owners, and (5)
create enforcement mechanisms and strict adherence. In addition to these five
recommendations an extensive list of additional recommendations is provided for follow-up
and future research.
2
EITI. July 2013. The EITI Standard. http://eiti.org/document/standard
Introduction
This technical note presents recommendations to the Extractive Industries Transparency
Initiative (EITI) to be used in extending the current beneficial ownership provision to private
companies, as well as publicly listed entities and wholly-owned subsidiaries, which are currently
exempt. The Extractive Industries Transparency Initiative (EITI) is a global coalition of
governments, companies and civil societies working together to improve openness and
accountable management of revenues generated from extracted natural resources. 3 The
current EITI Standard requires the reporting of payments between government and private
firms and encourages voluntary disclosure of contract terms. Currently, the EITI requires the
disclosure of beneficial ownership for government and state owned enterprises (SOEs)
operating in the extractive sector, and recommends that private non-exempt entities provide
disclosures on a voluntary basis. The provision exempts publicly listed companies and their
wholly-owned subsidiaries because it assumes that beneficial ownership information is already
collected from these companies by security exchange commissions in the countries where they
are traded. Given the absence of a robust international regulatory framework for identifying
the beneficial owners of private corporate entities, this report provides recommendations
distilled from various sources to serve as guidance in establishing future EITI beneficial
ownership requirements, and in strengthening accountability and transparency in the extractive
sector. To this effect this technical note highlights beneficial ownership disclosure norms that
are in line with the new EITI Standard, but also evaluates elements beyond the Standards
minimum requirements.
Section 1 outlines the methodology used to develop the technical guidance provided. Section 2
outlines current regulatory approaches of the various relevant actors within a set of G8, BRICS
and EITI pilot countries, along with those established by international institutions such as the
European Union (EU) and the Financial Action Task Force (FATF). Section 3 lists the loopholes
that exist in the current approaches. Section 4 sets forth a number of recommendations to be
adopted by the EITI implementing countries at the regional, national, and international level to
establish the ultimate beneficial owners of layered private enterprises, and to strengthen
resource governance within the extractive sector. Finally, the conclusion summarizes why this is
important for EITI implementing countries and how the recommendations proposed can
benefit overall transparency in the extractive industry. The appendices provide additional
information including: related international initiatives that shed light on approaches to
beneficial ownership in sectors other than the extractive industries, as well as tables that
display specific country norms and standards for select G8 and BRICS countries.
The mapping of beneficial ownership standards generated through this research provides a
realistic and critical technical framework for natural resource governance, and serves as an
important engine for sustainable economic growth [which] contributes to sustainable
ibid.
development and poverty reduction, a core objective of the EITI.4 More broadly, it is our hope
that these recommendations spearhead a genuine commitment among EITI implementing
countries to ensure proper transparency and accountability in beneficial ownership disclosure.
I. Methodology
Information on current practices related to beneficial ownership was collected from the
websites of various countries Security Exchange Commissions, relevant national competent
authorities, and private and national banks, specifically in BRICS, G8 and EITI implementing
countries. These sources of information were used because they provided the beneficial
ownership framework in the countries that were examined. Data drawn from national-level
actors include bills, regulations, procedural guidelines, and news articles. Data drawn from
international actors originated from regulatory bodies, issue-based networks, task forces, the
OECD, and international financial institutions. Also, PricewaterhouseCoopers (PwC) Know Your
Customer (KYC) Quick Reference Guide, which lists beneficial ownership regulations for
numerous countries, was used to underscore possible approaches that could be incorporated
into the EITI Standard.5 In order to validate this information, emails were sent to Know Your
Customer experts at PwC for each of the G8, BRICS, and EITI Countries. One response was
received from a Forensic Senior Manager at PwC.6
The information analyzed to develop recommendations was compiled from the Resource Curse
course lectures and discussions at The New School, as well as from online secondary sources.
Although sources of analysis on beneficial ownership in the extractive industries sectors is
limited, useful recommendations were found from documents produced by NGOs, multilateral
institutions, national banks, and governments.7 These documents outline recommendations for
beneficial ownership as it pertains to the prevention of money laundering and terrorism,
recovery of stolen public assets, and curbing corruption; providing useful insight on how
beneficial ownership can be approached in the extractive industry sector. Additional
information was obtained from business consultancy and reference sources, providing
guidelines and insider advice to businesses considering foreign investment. Students also
attended the panel, The Cost of Conflict Minerals: Human Rights and Corporate Compliance
at The New York City Bar Association on October 3, 2013.
ibid., p. 9
PwC, January 2013. Know Your Customer: Quick Reference Guide
http://www.pwc.com/en_GX/gx/financial-services/assets/pwc-kyc-anti-money-laundering-guide-2013.pdf
6
ibid.
7
Sources include: Revenue Watch Institute, EITI, Freedominfo.org, EITI, Transparency International, Banque de
France, Central Bank of Timor Leste, Royal Bank of Canada, Government of United Kingdom, Ministry of Justice in
Canada, The United States Securities Exchange Commission, Financial Services Authority of Norway, Financial
Services Authority of United Kingdom, Government of Bermuda, Intergovernmental Action Group Against Money
Laundering in West Africa, OECD, and the World Bank.
5
Data collection was hindered by the vast possibilities for tracking current approaches, which
overwhelmed initial collection efforts. In order to overcome this difficulty, research on current
approaches to beneficial ownership was narrowed to a realistic sample: BRICS, G8, and EITI
countries. Another hindrance was the lack of information specifically related to beneficial
ownership and extractive industries. As mentioned above, when possible, parallels were drawn
from other sectors (for example, AML). Finally, limited sources were available that resolved the
issue of whether the identification of the beneficial owner would be addressed through the
supply chains of companies or through identifying the ultimate beneficial owner. The only
document referring to tracing beneficial ownership down the supply chain was the OECD Due
Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and HighRisk Areas.8
II. Data Collection

This section summarizes the findings from the primary and secondary data collection processes.
The primary data collection process focused on mapping the current norms employed by
national-level securities exchange commissions and banks, and international-level regulatory
bodies and financial institutions to obtain, record, and track the beneficial owners of private
companies. By examining the regulations in G8, BRICS, and EITI implementing countries it was
possible to identify strengths and weaknesses in each countrys compliance framework. Specific
data on individual country approaches to beneficial ownership is visualized in Tables 1, 2, and 3
(see Appendix B). Broader data on country norms and practices is summarized in Appendix C.
The primary data was used to determine gaps, loopholes, and recommendations, as relevant
for informing beneficial ownership regulation in the extractive industry sector. Conclusions
were bolstered by the information compiled in the PwC guide.9
The PricewaterhouseCoopers (PwC) guide summarizes and lists beneficial ownership due
diligence norms in countries of interest to its clients.10 In addition, the OECD Due Diligence
Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas
provides a list of recommendations vital to enhancing the transparency of mineral supply
chains.11 In particular, the OECDs Supplementary Sections on Gold and Tin, Tantalum and
Tungsten highlighted due diligence norms for beneficial owners. The current requirements
8
OECD (2013), OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
From Conflict-Affected and High-Risk Areas: Second Edition, OECD Publishing.
8
http://dx.doi.org/10.1787/9789264185050-en
9
PwC, January 2013. Know Your Customer: Quick Reference Guide. http://www.pwc.com/en_GX/gx/financialservices/assets/pwc-kyc-anti-money-laundering-guide-2013.pdf
10
ibid.
11
OECD (2013), OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
11
From Conflict-Affected and High-Risk Areas: Second Edition, OECD Publishing.
11
http://dx.doi.org/10.1787/9789264185050-en
8
related to beneficial ownership identified from these documents are outlined below. Mapping
these requirements led to the identification of gaps and loopholes and specific
recommendations for the extractive industries sector (see Data Analysis, below).
Requirement to retrospectively verify a clients identity before a new regime has been
implemented.
Financial Action Task Force (FATF) style Mutual Evaluation.
Existence of transaction thresholds under which due diligence can be evaded.
Conditions for reduced due diligence.
Requirements for enhanced due diligence.
Requirements for due diligence for beneficial owners.
Requirements for due diligence in regards to Politically Exposed Persons (PEPs).
Requirements for due diligence for correspondent banking relationships.
Requirements for additional due diligence for non face-to-face transactions.
Verification of customer identification information, and authentication of identification
document copies.
Requirements in beneficial ownership identification and verification.
Relationships with shell banks.
Suspicious activity reporting.
Reporting activities that are not limited to suspicious transactions.
Conditions under which transactions do not require disclosure.
Penalties for non-compliance with reporting requirements.
Handling ongoing transactions that have been flagged as suspicious.
Ultra vires monitoring of transactions.
Requirement for due diligence in the downstream mineral supply chain and in
downstream mineral companies.12
The norms and best practices that have been analyzed for AML can be transposed in the
context of beneficial ownership, in a manner that highlights the significance of transparency by
governments and companies in the extractive industries, and in the necessity to improve public
financial management and accountability13. However, before engaging in such a transposition,
12
Downstream supply chain means the gold supply chain from refiners to retailers. Downstream companies
include refined gold traders and gold markets, bullion banks and exchanges or other entities that do their own gold
vaulting, jewellery manufacturers and retailers, and other companies using gold in the fabrication of products [...]
OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
12
From Conflict-Affected and High-Risk Areas: Second Edition Supplement on Gold p. 70.
12
Upstream supply chain means the gold supply chain from the mine to refiners. Upstream companies include
miners [...], local gold traders or exporters from the country of gold origin, transporters, international gold traders
of Mined/Recyclable Gold and refiners [...] OECD Due Diligence Guidance for Responsible Supply Chains of
Minerals
12
from Conflict-Affected and High-Risk Areas: Second Edition, Supplement on Tin, Tantalum And Tungsten:
Section C (1H) p. 37 and Supplement on Gold Pg. 70
13
See principle number 5 in the The EITI Principles http://eiti.org/eiti/principles (accessed November 20, 2013).
10
it is important to categorize the gaps and loopholes in AML practices so as to obtain a broader
sense of the overarching issues that are common between AML and beneficial ownership.
AML norms and best practices address three areas of concern: Identity Verification, Due
Diligence, and Reporting.
Gaps and loopholes in AML identity verification processes are used to preserve the anonymity
of shareholders and key actors. Evading identification is achievable in the context of AML with
the following configurations:
For some countries such as India, China, and Russia, there are no requirements to verify
the identity of customers prior to the introduction of new Anti-Money Laundering (AML)
regimes.14
Use of third party identification verification services are based solely on an assurance
that the third party has adopted measures for client identity clarification 15 or that the
certifier is suitable.16
Shareholders of a company are not subject to identification or verification unless they
have more than a certain threshold of share or voting rights in the company. These
thresholds are subject to country regulations and are not standardized. See Appendix D
for the table of thresholds.
Policies use ambiguous language such as shall, should, may, or recommend
when addressing conditions for identity verification.
Factors such as size, hinders the progress of downstream companies identification of
refiners in their supply chain, and in the identification of actors upstream from their
direct suppliers.17
Due diligence gaps and loopholes in AML practices, revolve around evading detection of
suspicious transactions and customer activities. Due diligence can be evaded or reduced
through the following methods:
Lack of enhanced due diligence based on nature and location of activity, or in respect to
PEPs.18
Reduced due diligence based on types of transactions such as with the government or
governmental entities.19
14
PwC, January 2012. Know Your Customer: Quick Reference Guide. p. 126, 134, 165.
15
ibid., p.135.
16
ibid., p.131.
17
OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
17
from Conflict-Affected and High-Risk Areas: Second Edition Supplement on Gold: Section II - Risk Management
for Downstream Companies C(1B)
18
PwC, January 2012. Know Your Customer: Quick Reference Guide. p. 44.
19
ibid., p. 90.
11
Applying reduced due diligence for transactions between banks or licensed

intermediaries regardless of whether the countries in which banks/branch are located
effectively implement the FATF Recommendations.20
Evading customer due diligence by using remittance agents, money changers, or
carrying out transactions by authorized institutions on behalf of a non-account
holder.21
Regulators sometimes only exist for banks but not for other financial services, as is the
case of regulators for AML controls in Cte dIvoire.22
Policies use ambiguous language such as shall, should, may, or recommend,
allowing client relationship managers to avoid enhanced due diligence of beneficial
owners.23
In order to elucidate suspicious activities, it is important that banks and financial institutions
enforce reporting practices. Gaps and loopholes in reporting practices result in a failure to
capture activities that could inform banks and institutions about suspicious customer activities:
Reporting suspicious activities arent always thorough. For instance, reports can be
limited to only monitoring transactions that go above a certain threshold, without any
obligation to report transactions with suspicious beneficiary identities or originators.24
Customer behavior is not taken into account (e.g. reluctance to provide information
when opening an account, or providing information that is complex or expensive for
the institution to verify).25
Lack of penalties for not complying with reporting requirements.26
Having identified these overarching themes, the collected data can be utilized to analyze and
elaborate on how institutional weaknesses identified in AML practices can also apply to tracking
beneficial owners.27
20
ibid., p. 194.
ibid., p. 131.
22
ibid., p. 28.
23
ibid., p. 91.
24
ibid., p. 81.
25
ibid., p. 133.
26
ibid., p. 24.
21
27
Refer to Appendix D and E for noted current beneficial ownership norms and issues in select
countries of interest and a summary table of the PwC findings for beneficial ownership.
12
III. Data Analysis

This section builds upon the findings from the primary data collection process in order to
identify gaps and loopholes in current normative approaches to beneficial ownership; and to
provide recommendations to the EITI in expanding the scope of its beneficial ownership
provision to privately owned companies, publicly listed entities, and wholly-owned subsidiaries
within the extractive industries, which are currently exempt.
In mapping current national standards and norms, the analysis found that while AML
frameworks identified the relevant actors, and provided a platform for untangling the
relationship between individuals and financial institutions; due diligence measures to reveal the
ultimate benefactor of privately held companies in the extractive industry sector did not
necessarily produce a chain of facts exposing beneficial owners of corporate entities. In its 2011
report, the World Bank and UN Office for Drugs and Crime Stolen Asset Recovery Initiative
revealed that 150 out of the 213 grand corruption cases investigated, involved the use of
corporate vehicles to hide beneficial ownership and the sources of funds, totaling $56.4 bn.28
Recognizing the divergent aims of the existing AML frameworks, the analysis highlights the gaps
which must be addressed in order to materialize the EITI intent regarding beneficial ownership
of privately held corporations within the extractive sector. Additionally, the analysis uncovered
loopholes within the current AML framework, which would bolster the EITIs transparency and
accountability efforts, if rectified.
Beneficial Ownership Gaps in current AML Framework

Defining Beneficial Ownership
Mapping of current beneficial ownership norms found that definitions of beneficial ownership
are inconsistent. The concept is highly contextual, and changes depending on its reference. A
general definition of beneficial ownership refers to any individual who directly or indirectly
owns a financial instrument, and enjoys the benefits conferred through control. In the context
of AML banking regulations, beneficial ownership statutes are concerned with revealing the
true identities of individual benefactors and the origins of funds.
The EITI intent differs in that it seeks to ascertain the ultimate benefactors of incorporated legal
entities, through the ownership of shares or other means of control. In its most recent
articulation, the EITI defines beneficial ownership in respect to companies as the natural
person (s) who directly or indirectly ultimately owns or controls the corporate entities, and
invites countries to draft disclosure requirements within these broad terms. 29 Mapping
28
Department for Business Innovation and Skills. July 2013. Transparency & Trust Recommendation 30:
Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business Government of
United Kingdom. Transparency and Trust: A discussion Paper.
29
EITI. July 2013. The EITI Standard http://eiti.org/document/standard p. 24
13
approaches across sample countries revealed a range of varying definitions. The general
threshold for beneficial ownership across countries involves corporate entities with more than
a 25% interest in company shares or voting rights.30 This threshold was found to be the
threshold at which a shareholder has a minority blocking position in company positions.31 In
addition, entities tasked with regulatory responsibilities of publicly traded companies, provide
narrower definitions of beneficial ownership for individuals that have part ownership in a
publicly listed company by requiring individuals to disclose their ownership at lower thresholds.
For example, the U.S Securities and Exchange Commission requires the disclosure of secured
interests by individuals at a 5%32 threshold, whereas the U.K. Companies House requires
disclosure at 3%33 for individuals. In order for the EITI to achieve its aims, it is imperative to
establish a standardized definition and threshold of beneficial ownership to be applied across
EITI compliant countries.
Disclosures and Reporting of Beneficial Ownership

Regarding legal ownership, requirements differ across countries, with some countries more
stringent than others. In Appendix B, Table 1 shows the countries that require reporting
changes of ownership, and those that are not obligated to report. With the exception of
publicly listed companies that operate under stringent requirements, including the necessary
disclosure of beneficial ownership of 10% or more, beneficial ownership provisions are absent
in most countries.34
30
Department for Business Innovation and Skills. July 2013. Transparency & Trust Recommendation 30:
Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business Government of
31
Ibid.
32
Securities Exchange Commission. 2012. Securities Exchange Act 1934.
33
Department for Business Innovation and Skills. July 2013. Transparency & Trust: Enhancing the Transparency of
UK Company Ownership and Increasing Trust in UK Business Government of United Kingdom. Transparency and
Trust: A discussion Paper. pg 24
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/212079/bis-13-959transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-ukbusiness.pdf
34
Rosenberg & Weinberg Attorneys at Law. 2013. Reporting Requirements for Public Company Insiders.
http://www.jrhwlaw.com/newsletters/business-law/reporting-requirements-for-public-company-insiders/
14
Incorporation Practices
It is imperative to note the importance of an institutional framework which allows for ease in
doing business, and fosters the expedient development of new ideas and entrepreneurial
endeavors. This need to remain competitive, however, must be balanced with the need to
regulate and ensure fair and transparent practices. In regards to company formation,
competition among states has resulted in a race to the bottom, with many states requiring less
information for incorporation. All 27 European Union countries require the identities of
beneficial owners at the time of incorporation, whereas a few states within the U.S and a few
notorious offshore tax havens do not require this identification at the time of incorporation. 35
Bearer Shares
Another important development is the tendency for countries to eliminate the use of bearer
shares. Bearer shares allow for anonymity on company registers. Brazils Law No. 8,021 dictates
that no payment or redemption regarding any security or investment shall be made out to any
unidentified beneficiary, and neither securities nor payments shall be issued or paid in bearer
form; this represents a strong example of the bearer share reform (see Brazil in Appendix C). 36
Nonetheless, individuals continue to hide ownership with nominee and corporate directors
serving as willing frontmen. Without disclosure on the part of the involved parties, the ultimate
beneficial owner requirements prove futile. To this effect, incentives and penalties must be
developed to compel corporate directors to indicate the existence of beneficial owners subject
to the proposed disclosure requirements.
Corporate Service Providers (CSPs)

Given the inconsistency in formation laws across countries and between states, a lucrative
market exists for private actors seeking to take advantage of the most lenient of formation laws.
Corporate Service Providers facilitate the creation of shell corporations; a corporation without
business operations and no significant assets. Often, these entities market the anonymity of
beneficial owners within certain jurisdictions to solicit business from individuals with a need or
desire to obscure their financial interests. CSPs are generally unknown, unregulated, and
susceptible to bribery in order to bypass beneficial ownership and other disclosure
requirements.26
35
Trust: A discussion Paper.
36
Brazil: Tax Haven Jurisdictions - Haven or Hell? Mondaq, January 2013.
http://www.mondaq.com/x/215184/Income+Tax/Tax+Haven+Jurisdictions+Haven+Or+Hell
15
Shell Companies
In the US, states such as Delaware, Nevada, and Wyoming serve as attractive locations for the
development of shell companies. In particular, Delaware has a large amount of shell companies
due to its ability to permit companies to lower their tax bills in another state, (the other state is
usually where the companies headquarters or business tasks are performed). The lowered tax
bill is achieved through the movement of royalties and similar revenues to holding companies
in Delaware, where they are not taxed.37 Moreover, during the registration process for a
company in Delaware, entrepreneurs are allowed to establish a bank account, internationally,
with the facade of an American address. Thus, companies dont possess US bank accounts and
are not required by Delaware to present documentation, which makes identifying the owners
of these companies difficult. Shell companies they often serve as a tool for tax avoidance and
prove a major roadblock to transparency and accountability.
Limited Statutory Powers

Within the current AML framework, there exists some measures by which the identities of
beneficial owners may be disclosed. In most countries, banks, lawyers, and other professional
bodies are required to determine the beneficial owners of companies before conducting
business. Additional law enforcement agencies may compel the disclosure of beneficial
ownership through a summons or court subpoena.38 These measures are, however, limited by
the need to obtain additional orders along each node of the supply chain in reaching the
beneficial owner. Likewise, professional bodies may fall short in ascertaining beneficial
ownership despite their best efforts. Making public the beneficial owners of companies is not
simply an aim of the EITI but enhances the ability for authorities to combat other hosts of
fraudulent practices and malevolent actors.
37
Wayne, Leslie. How Delaware Thrives as a Corporate Tax Haven.

http://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-taxhaven.html?pagewanted=all&_r=0
38
UK Company Ownership and Increasing Trust in UK Business. Government of United Kingdom. Transparency and
Trust: A discussion Paper.
16
Loopholes within current AML Framework within Financial

Institutions
Banking loopholes
While banking loopholes do not directly target beneficial ownership in the extractive industry,
the data collection analysis found financial institutions pivotal to collecting beneficial ownership
information in this industry because they are a key institution that is already interacting with
privately-owned extractive companies; and in theory, are already collecting this type of
information. The following loopholes within financial institutions were identified:
Bank Secrecy Laws

Many countries have banking secrecy laws that permit banks to maintain strict confidentiality
of their clients information, even when those clients are under investigation for involvement in
illegal financial flows. These secrecy laws allow shell companies to hide beneficial ownership
information.
Due Diligence
Another loophole related to the banking sector is that of banking due diligence and the
ambiguous language used in beneficial ownership policies. Occasionally, banks are only
required to take a risk based approach or adequate measures when verifying beneficial
ownership. This allows the relationship managers of the bank to rely on their own discretion
prior to verifying client identity and uncovering complex beneficial ownership structures.
Furthermore, the existence of minimum transaction thresholds under which due diligence is
not required allows for customers to split large transactions into series of small unregulated
ones to avoid identification disclosure.39
Verification
When banks record beneficial ownership, there is no independent verification mechanism that
validates this information; which increases the risk of reporting inaccurate or partial
information to avoid delayed transactions.40
39
PwC, January 2012. Know Your Customer: Quick Reference Guide. Ghana. p. 19.
40
ibid., India, China and Russia. p. 126, 134, 165.
17
Enforcement and Penalties of AML Regulations

This analysis found that due to the apparent importance of enforcement of beneficial
ownership regulations, country data and secondary analysis rarely provide statistical data on
rates of enforcement and penalties. Nevertheless, the analysis extracted from reporting norms
of Suspicious Activity Reports (SARs) in 76 countries are used in this data as an indicator for
penalty norms within the AML context.41 The analysis found that 13% of countries do not
enforce penalties for excluding reporting SARs, or for reporting misinformation on SARs, or
have penalties that are not clearly defined. 42 The lack of enforcement mechanism and
penalties provides little incentive to report and maintain records on beneficial ownership.
Therefore, although most countries have clauses in anti-money laundering policies that cover
beneficial ownership, reporting and enforcement are still inadequate. Where recommendations
do exist on enforcement and compliance practices, there is an emphasis on the necessity of
thoroughly communicating compliance expectations and strictly applying penalties.
Refer to the case of CSPs in the recommendation section for further data on enforcement.
IV. Recommendations
As a result of mapping the G8, BRICS, EITI implementing and additional countries, the analysis
concludes that the following recommendations be integrated into the EITI beneficial ownership
standard.
It is recommended that EITI:
1. Standardize definitions, thresholds, and due diligence procedures.
2. Extend EITI beneficial ownership requirements to publicly listed and wholly-owned
subsidiaries.
3. Ensure transparent incorporation practices.
4. Require EITI implementing countries to create public registries.
5. Create reporting and enforcement mechanisms.
41
PwC, January 2012. Know Your Customer: Quick Reference Guide.
42
Countries include: Angola, Cameroon, Colombia, Cte dIvoire, Gabon, Indonesia, Italy, Kenya, Pakistan, and
Portugal PwC. 2013. KYC Guidelines Anti-Money Laundering Understanding global KYC differences
18
1. Promote Standardized Definitions and Due Diligence

Procedures
To recognize ambiguity and inconsistencies in definitions and due diligence procedures, it is
recommended that the following definitions and procedures be standardized and promoted by
the EITI, as well as required for all EITI implementing countries.
Beneficial Ownership
The recommended standard definition of beneficial ownership is borrowed from the
Incorporation in Transparency Assistance Act (S 1465) proposed by the U.S. Senate and aligned
with the current EITI definition:
As any natural person who, directly or indirectly
(i) exercises substantial control over a corporation or limited liability company; or
(ii) has a substantial interest in or receives substantial economic benefits from the assets
of a corporation or limited liability company.43
Beneficial Ownership Thresholds

For disclosure purposes, it is recommended that the EITI Standard adopt a 10% threshold for
corporate entities and a 3% threshold for individual shareholders. These thresholds should be
required for all EITI implementing countries. It should be noted that, of the countries reviewed,
the most stringent requirement for corporate disclosures was found in the UAE and Nigeria,
which require a 5% disclosure, but this raises questions of effective implementation (See Table
2). 24 of the countries reviewed use a threshold of 25% (Appendix C).44 Most of the countries
reviewed (69 countries) do not have a disclosure threshold in their policies, which presents an
opportunity for the EITI to determine an effective and feasible threshold. The example of
Bermuda shows the feasibility for countries to decrease their thresholds. Bermuda is one of few
countries to take the step towards reducing its threshold from 25% to 10% (See Bermuda in
Appendix C). The recommended thresholds need to be adopted in order to build effective
regulatory regimes with proper enforcement mechanisms that ensure transparency and
accountability.
A threshold is necessary to standardize and create public registries. However, identifying
beneficial owners should not rely on thresholds alone because these thresholds can be
manipulated by company owners who assert decision making power in the company. For
example a coalition of individuals with ownership below the threshold can decide to vote in
concert to influence company decisions. It is important to build a comprehensive framework for
addressing the question of beneficial ownership.
43
Grassley, Feinstein and Harkin. August 2013. S 1465: Incoporation Transparency and Law Enforcement
Assistance Act. 113th Congress. Section 2d (i,ii). https://www.govtrack.us/congress/bills/113/s1465/text
44
EITI. Oil and Gas. http://eiti.org/files/Oil%20and%20gas.pdf
19
Beneficial Ownership Due Diligence

The current EITI Standard fails to address how EITI implementing countries should conduct due
diligence on ultimate beneficial owners. To avoid loopholes and ambiguous language in national
beneficial ownership due diligence requirements, it is recommended that EITI standards require
all EITI implementing countries to conduct due diligence on beneficial owners similar to legal
entities and individual clients. Furthermore, ongoing and comprehensive due diligence practices
should not compensate for lack of beneficial ownership thresholds (e.g. Timor Leste in
Appendix C).
The due diligence procedures of the Czech Republic, (disregarding the threshold of ownership
requirement) provide a comprehensive due diligence framework for the EITI standard
concerning identification requirements. 45 These requirements include:
The shareholders of a legal entity (with more than 25% holding) must be.
Individuals: Name, surname, birth identification number or date of birth, place of birth,
sex, address and citizenship. These would normally be verified by an identity card or
passport.
Individuals who conduct business: In addition to the above, full name of the business,
place of business and identification number needs to be noted.
Legal entities: the full name, residency/seat, identification (or similar identification
received from foreign offices) showing evidence of the companys existence (i.e.
certificate of incorporation, trade register statement or other). The same principles for
'Individuals' apply for the identification of individuals in the companys statutory body. If
the companys statutory body or the owner is another legal entity, identification
documentation must also be collected for that entity.
Politically Exposed Persons (PEPs)

Current national definitions of PEPs are inconsistent and allows for the flexible interpretation of
due diligence measures. Several countries only conduct due diligence on foreign PEPs, and omit
domestic/national PEPs. The analysis of 107 countries found that 53% of countries had
ambiguous definitions of PEPs and/or PEP due diligence requirements.46 Furthermore, in
Appendix B, Table 2 reveals the techniques and methods employed by PEPs in GIABA countries
to adversely affect the effective functioning of enforcement agencies. 47 The case of Bonaccorsi
in Italy (Appendix C, Italy) reveals the importance of a definition of PEPs that accounts for
family ties, especially for people who have been informally labelled as trustworthy.
It is recommended that the EITIs beneficial ownership standards address the policy loophole in
defining PEPs, and PEPs due diligence by standardizing the definition of PEPs to include foreign
45
PwC, January 2013. Know your Customer: Quick Reference Guide.

PwC, January 2013. Know your Customer: Quick Reference Guide and Appendix D and E.
47
GIABA s an institution of the Economic Community of West African States (ECOWAS) responsible for facilitating
the adoption and implementation of Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) in
West Africa. http://www.giaba.org/
46
20
and domestic PEPs. EITI should require all PEPs to undergo measures of enhanced due diligence
regardless of rank or association.
Nigerias Securities and Exchange Commission provides a comprehensive definition of a PEP,
and it is recommended that EITI consider this definition for the Standard. As defined by the
Securities Exchange Commission of Nigeria, a Politically Exposed Person includes:
(a) individuals who are or have been entrusted with prominent public
functions by a foreign country, for example Heads of State or Government,
senior politicians, senior government, judicial or military officials, senior
executives of State owned corporations and important political party
officials;
(b) individuals who are or have been entrusted domestically with prominent
public functions, for example Heads of State or of Government, senior
politicians, senior government, judicial or military officials, senior executives
of State owned corporations and important political party officials; and
(c) persons who are or have been entrusted with a prominent function by an
international organization and includes members of senior management
such as directors, deputy directors and members of the board or equivalent
functions other than middle ranking or more junior individuals. 48
Specific recommendations regarding the due diligence of PEPs:49
Apply enhanced due diligence to all PEPs, foreign and domestic.

Require a declaration of beneficial ownership.
Request asset and income disclosure forms.
Conduct a periodic review of PEP customers.
Avoid setting one size fits all limits on the time a PEP remains a PEP.
Investigate family members or close associates of a PEP.50
48
Securities Exchange Commission. 2013. Securities and Exchange Commission (Capital Market Operators Antimoney Laundering and combating the Financing of Terrorism) Regulations. The Federal Republic of Nigeria. 2013
Pg 56 http://www.sec.gov.ng/capital-market-operators-anti-money-laundering-and-combating-the-financing-ofterrorism--regulations-2013.html
49
Stephenson, Kevin M. et al. 2011. Barriers to Asset Recovery. The International Bank for Reconstruction and
Development/The World Bank.
50
Revenue Watch Institute. 2012. International Standards on Beneficial Ownership.
21
2. Extension of EITI Beneficial Ownership Requirements to

Publicly Listed and Wholly-owned Subsidiaries
SECs already collect beneficial ownership information from companies traded on national stock
exchanges. Therefore, it will not place additional burden upon companies to share this
information with the EITI. By including data of publicly listed companies and their wholly-owned
subsidiaries in public registries, data that was once confined to national borders will be
universally available. By collecting the disclosure information from these companies, the EITI
will play a critical role in standardizing the information disclosed and in streamlining public
access to the data, which symbolizes an important contribution to transparency. Specific
recommendations for the sharing of public registry data are listed below.
3. Transparent Incorporation Practices

CSPs: Compliance efforts Targeting Corporate Service Providers
According to Findley et al. (2012), there are three possible levels for targeting beneficial
ownership compliance efforts: competent legal authorities, company registries, and Corporate
Service Providers (CSPs). Due to the degree of feasibility to implement compliance in these
areas, addressing CSPs has the greatest potential for successful efforts. For instance, competent
authorities are restricted to national enforcement, so compliance efforts at this level are limited,
as beneficial ownership transcends boundaries. Also, compliance efforts at the level of
company registries are limited because of the minimal information gathered in these registries,
negligence of many companies to collect information, and lack of will to do so.51
In order to adequately target CSPs beneficial ownership legislation enforcement measures, the
following actions are recommended:
Map and register CSPs globally.

Require CSPs to collect and maintain company information based on the Know your
Customer (KYC) model.
Enforce penalties. Empirical evidence shows that CSPs are more likely to comply with
beneficial ownership rules if penalties are enforced52.
A risk-based approach towards PEPs is an important practice when tracing beneficial ownership
in the extractive industries through national registries and banking records. However, FIndley et
al. (2012)53 demonstrates that requiring CSPs to follow such guidelines has not been useful in
51
Findley, M, Mielson D, Sharman J. 2012. Global Shell Games: Testing Money Launderers and Terrorist
Financiers Access to Shell Companies. September 2012: Political Economy and Development Lab.
52
ibid
53
ibid
22
preventing the illicit transfer of funds to high-risk customers.54 Hence, the identification of PEPs
should be the responsibility of country governments.
It is recommended that EITI consider Bermudas recent enhancement of regulations around
CSPs as a model of how to regulate and use CSPs for collecting beneficial ownership
information. See Appendix C for details on Bermudas legislation for CSPs.
Prohibiting Bearer Shares and Corporate Nominee Directors

The opportunity to conceal beneficial ownership through structures of bearer shares and
corporate nominee directors, inhibits opportunities for increased transparency and
accountability in ownership structures. Furthermore, these structures aid companies in tax
evasion schemes and money laundering. It is recommended that the EITI, in line with country
regulations like Brazil, prohibit the use of bearer shares and corporate nominee directors for all
EITI implementing countries. Moreover, for all companies with current bearer shares and
corporate nominee structures, it is recommended that EITI propose a timeline in which holders
of bearer shares convert holdings to ordinary registered shares and corporate nominee
directors, to require any director who has entered into a legal arrangement which
permanently hands over all responsibility for the management of the company to another
individual to disclose this fact to Companies House; as well as the identity of the person on
whose behalf they have been appointed. This should make the use of nominee directors less
attractive as a means to conceal corporate control. 55
4. Develop a Public Registry of Beneficial Owners

In order to avoid loopholes in bank secrecy and information sharing across-borders, the World
Bank and the Financial Action Task Force (FATF) recommends that countries implement
national bank registries to collect and maintain account identification data, beneficial owner
information, and powers of attorney that can be accessed via a legal submission process by
recognized authorities56. Additionally, the FATF notes that information about shareholders such
as the amount of shares possessed, and the different categories of shares should be included.57
In the Financial Services Authoritys (FSAs) analysis of banks in the UK, it is recommended that
54
Ibid
Trust: A discussion Paper. pg 13
56
The Financial Task Force (FATF). (February 2012). InternatIonal Standards on Combating money laundering and
the Financing of terrorism & ProliferatIon The FATF Recommendations. (accessed November 20, 2013 from
www.imolin.org/pdf/imolin/FATF_New_Standards.pdf
57
Revenue Watch Institute, 2012. International Standards on Beneficial Ownership
55
23
commercially available PEP databases be expanded and enhanced so banks are able to easily
identify high risk customers with reliable information.58
Public databases are a viable tool for cross country and cross institution information sharing. As
a result of the recent G8 meeting, in June 2013, an agreement on tackling tax evasion was
reached. To date, the G8 endorsed 8 core principles to frame the implementation of National
Action Plans for the regulation and enforcement of beneficial ownership disclosure.59 A major
component to these action plans is the proposal for the disclosure and publication of beneficial
ownership information. A proposal to create public registries, which is maintained by the state,
was introduced during the meeting, but a decision remains to be agreed upon. It should be
noted, supporters for public disclosure (such as Global Witness) are not discarding the
possibility for future public registries.60 Several countries such as Bermuda, Brazil, and the
United Kingdom have publicly committed to creating a public registry with beneficial ownership
information. 61
As a starting point for the adoption of public beneficial ownership databases, it is
recommended that the EITI use the G8 principles on beneficial ownership to reinforce the new
beneficial ownership requirements in the EITI Standards. Likewise, it is recommended that the
EITI require all EITI implementing countries to create and maintain public databases, as
proposed by the G8 and the FATF.
5. Create Enforcement Mechanisms and Strict Adherence to

Reporting
The current EITI Standard requires all EITI implementing countries to review and update
beneficial ownership of government and SOEs on an annual basis.62 Further, to the current
requirement, a recommended EITI norm is to incorporate reporting of beneficial ownership
changes into the annual reports submitted by EITI implementing countries. Proposed reporting
timelines should be consistent with tax reporting by reaffirming, on an annual basis, whether a
beneficial owner crosses the 10% threshold throughout the year. Findley et al. (2012), shows
that the enforcement of penalties has proven to be an effective way to improve compliance,
58
The Financial Services Authority (UK), 2011. Banks management of high money-laundering risk situations.
www.fsa.gov.uk/pubs/other/aml_final_report.pdf
59
Government of United Kingdom. June 2013. G8 action plan principles to prevent the misuse of companies and
legal arrangements Policy Paper issued by the Prime Minister's Office.
https://www.gov.uk/government/publications/g8-action-plan-principles-to-prevent-the-misuse-of-companiesand-legal-arrangements/g8-action-plan-principles-to-prevent-the-misuse-of-companies-and-legal-arrangements
60
The Economist, June 2013. Reasons to be Cheerful http://www.economist.com/blogs/newsbook/2013/06/g8summit
61
62
EITI. 2013. The EITI Standard 1.5 (f)
24
and therefore, EITI can use enforcement and penalties as a mechanism for increased disclosure
of beneficial ownership structures.63
In addition to increasing reporting requirements, it is recommended that the EITI enforce
beneficial ownership disclosure for EITI implementing countries by listing all non-reporting
countries as non-compliant in the EITI annual assessments. Also, it is recommended that the
EITI support EITI implementing countries in defining and implementing penalties. Finally, it is
recommended that compliance to EITI require implementing countries to enforce penalties.
Failure to do so will result in being listed as non-compliant. As such, EITI regulatory bodies need
to be implemented at the national level.
Conclusion
It is clear that increased transparency, without addressing the question of beneficial ownership,
is unlikely to produce an associated increase in accountability. The importance of significantly
improving the disclosure of beneficial owners in privately owned companies of the extractive
industries sector is illustrated by the following questions: how to legitimize concessions of
public resources made to private firms, if we cannot properly ascertain their owners, and to
what degree can governments remain custodians of natural wealth for the benefit of citizens, if
we cannot determine their involvement and vested interest in resource extracting enterprises?
As the EITI Standard gains institutional traction with a greater number of countries adopting its
principles, it is important that transparency initiatives capture and benefit from the growing
political will to develop accountability in extractive industries. Currently, the EITI Standard
requires that governments report all payments made to and by companies to government
entities for the exploitation of natural resource wealth, and further encourages those entities
to make available contract disclosures to the public. The Standard also outlines the disclosure
for state owned enterprises. While this marks an important starting point in holding
governments accountable to their citizens, this effort is severely limited due to the lack of clear
regulatory norms for identifying and tracking the ultimate beneficial owners of privately owned
companies within the extractive industry. In addition, the lack of adequate enforcement
mechanisms and subsequent implementation of mechanisms (including penalties) weakens
current beneficial ownership approaches. The question of beneficial ownership is one that
demands immediate attention, and will prove a monumental gain if properly addressed. The
recommendations presented in this analysis provide critical contributions towards this
objective.
63
Findley, M, Mielson D, Sharman J. 2012. Global Shell Games: Testing Money Launderers and Terrorist
Financiers Access to Shell Companies, September.: Political Economy and Development Lab.
25
APPENDIX A: Related/Relevant Initiatives

A variety of international initiatives shed light on approaches to beneficial ownership in sectors
other than the extractive industries. The following initiatives are valuable in their use of
definitions, practical approaches, and because each initiative reveals existing structures that are
already in place that could be built upon to extend beneficial ownership requirements to the
extractive industries sector.
Stolen Asset Recovery Initiative

The Stolen Asset Recovery (StAR) Initiative is a partnership between the UN Office on Drugs and
Crime (UNODC) and the World Bank Group (WBG) with the aim of reclaiming corrupt assets.64
This is achieved through the following objectives:
1. Aiding countries with establishing the legal framework, institutional expertise, and skill
necessary to recover assets.65
2. Providing practical counsel on the strategy and management of asset recovery
efforts.66
Relevance to Beneficial Ownership

The StAR initiative recommends ratification of the UN Convention against Corruption, and
compliance with FATF (especially those on PEPs and KYC norms).
Asset Recovery Networks

The International Centre for Asset Recovery (ICAR) is a branch of Switzerlands Basel Institute
on Governance, and assists countries in retrieving stolen assets through training programmes,
legal assistance, and international cooperation.67 The Camden Asset Recovery Inter-Agency
Network (CARIN) is an informal network of contacts and a cooperative group focused on
blocking criminals from obtaining illicit profits.68 A few goals the Agency advocates include
forming a network of contact points, underscoring the significance of exchanging information
and best practices, training initiatives, and providing recommendations to governmental
organizations such as the European Commission and Council of the European Union.69
64
Stolen Asset Recovery Initiative. Our Work. http://star.worldbank.org/star/about-us/our-work

ibid., Capacity Building.
66
ibid., Case Assistance.
67
Basel Institute on Governance. International Centre for Asset Recovery (ICAR).
http://www.baselgovernance.org/icar/
68
Camden Asset Recovery Inter-Agency Network (CARIN). The History, Statement of Intent, Membership and
Functioning of CARIN.
https://www.europol.europa.eu/sites/default/files/publications/carin-manual.pdf
69
ibid.
65
26
Other Legislations70
G20 Anti-Corruption Action Plan 2013-2014 is at its halfway point.

Some positive developments in the last year include Saudi Arabia ratifying the UN
Convention against Corruption (UNCAC), China becoming the final G20 member to sign
the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and
the G8s commitment to developing national action plans to address secrecy in shell
company structures.
The European Union (EU) has also passed strong transparency legislation calling for the
extractive industries to report on additional indicators on a country-by-country and
project-by-project nature.
The Canadian Corruption of Foreign Public Officials Act, established in 1998, denotes
measures that would hinder bribery amongst foreign public officials or Politically
Exposed Persons (PEPs).71
The Sarbanes-Oxley Act of 2002 delves into the prevention and punishment of
corporate and accounting fraud and corruption.72 In addition, the Act establishes a
Public Company Accounting Oversight Board, which increases corporate responsibility
and usefulness or corporate financial disclosure, increases penalties for corporate
wrongdoing, and strengthens the independence of firms that audit public companies.73
According to Section 1504 of the Cardin-Lugar Amendment (2010) to the Dodd-Frank
Wall Street Reform and Consumer Protection Act, extractive industry companies are
required to outline, in an annual report, any payments made by the company or its
corresponding entities to a foreign government or the Federal Government concerning
oil, natural gas, or mineral commercial projects.74
70
Transparency International. Global Voices Call For G20 Action On Corruption. September 2013.
http://www.transparency.org/news/feature/global_voices_call_for_g20_action_on_corruption
70
71
Minister of Justice, Canada. Corruption of Foreign Public Officials Act, 1998 (Last amended on June 19, 2013).
http://laws-lois.justice.gc.ca/PDF/C-45.2.pdf
72
Zameeruddin, Rizvana. The Sarbanes-Oxley Act of 2002: An overview, analysis, and caveats.
72
http://www.westga.edu/~bquest/2003/auditlaw.htm
73
ibid.
74
Section 1504 Disclosure of Payments By Resource Extraction Issuers
27
APPENDIX B: Figures And Tables

Figure 1: Countries evaluated
28
Figure 2: Countries evaluated, continued
Sources: EITI Countries75. PwC, January 2012. Know Your Customer: Quick Reference Guide76.
Table 1: Which jurisdictions require companies to report change in ownership?
Source: Marriage, A., (2013) Secret structures, hidden crimes: Urgent steps to address hidden ownership, money
laundering and tax evasion from developing countries. European network on debt and development.77
75
http://eiti.org/countries
http://www.pwc.com/en_GX/gx/financial-services/assets/pwc-kyc-anti-money-laundering-guide2013.pdf
76
29
Table 2: Techniques/Methods employed by PEPs to adversely affect the effective

functioning of enforcement agencies
Source: GIABA Report, May 2010. Corruption and Money Laundering Nexus: An analysis of Risk and Control
Measures in West Africa78
Table 3: Awarness of FATF recommendations
Source: GIABA Report, May 2010. Corruption and Money Laundering Nexus: An analysis of Risk and Control
Measures in West Africa79
77
http://eurodad.org/files/integration/2013/01/Secret-structures-hidden-crimes-web.pdf
GIABA Report. May 2012. Corruption and Money Laundering Nexus: An analysis of Risk and Control Measures in
West Africa p. 48.
http://www.giaba.org/media/f/114_corruption-and-money-laundering-nexus---english-rev051810-1-.pdf
79
ibid., p. 41.
78
30
APPENDIX C: Country Norms and Practices

To further understand current practices in relation to properly addressing beneficial ownership,
specific norms and issues have been compiled for some G8, BRICS and EITI pilot countries. By
identifying loopholes and best practices that are already in place in these countries we can
bring forth and define recommendations that are of value in tackling the beneficial ownership
problem.
Brazil
Law No. 8,021 of April 12, 1990 establishes that no payment or redemption regarding any
security or investment shall be made out to any unidentified beneficiary, and that neither
securities nor payments shall be issued or paid in bearer form. Therefore, the disclosure of the
identity of the beneficiary is a legal mandatory requirement in Brazil. Furthermore, the Brazilian
Corporation Law (BCL) explicitly states that shares and debentures must be issued in registered
form.80
Requirements of identification and control go beyond the usual requirements imposed on
participants elsewhere, to the extent that all transactions carried out in the Brazilian financial
and capital markets must be identified up to the level of the final beneficiary.
In order to create a contractual framework for investors identification in Brazil, the Brazilian
Securities Exchange Commission has made special use of Principle 5 on Third Party Reliance.
According to this principle, among the specific actions recommended by IOSCO, the Brazilian
system has adopted the following81:
Prohibition of anonymous accounts or accounts held under fictitious names.

Creation of policies that describe the Client Due Diligence (CDD).
Approval of the CDD processes by competent authorities know your client internal
procedures.
Maintenance of record keeping.
Canada
Canada follows international beneficial ownership policies such as the NYSE rules, SEC
regulations, and The Sarbanes-Oxley Act of 2002, adopting best practices from each. For
instance, the Royal Bank of Canadas Investor Services (a branch of the RBC Investor & Treasury
80

81
BM&F Bovespa. Final Beneficial Owner. http://www.bmfbovespa.com.br/en-us/international-investors/finalbeneficial-owner/final-beneficial-owner.aspx?idioma=en-us
31
Services) ranked #1 in the Global Investor/ISF Beneficial Owners Survey.82 According to the
news release: Beneficial owners made up from asset manager/mutual funds, public and
private pension funds, insurance companies, corporations, central banks, sovereign wealth
funds, endowment funds, private wealth managers and family offices were invited to rate their
lenders across twelve service categories. The global survey covers both custodial lenders and
non-custodial (third party) agent lenders.83 The four categories beneficial owners rated RBC on
were collateral management, risk management, dealing with corporate actions/dividends, as
well as settlement and responsiveness to recalls.
France
During the process of identity verification of a client, banks are required to collect source of
wealth information that will enable an analysis of the clients economic operations in order to
determine, in concreto, if such operations are plausible in relation to the clients actual
economic capacities or if they are suspiciously improbable84.
By building a transaction feasibility profile of beneficial owners, banks and financial institutions
can better detect suspicious transactions based on transactional plausibility.
Italy
The Bank of Italy has reported multiple suspicious transactions revolving around priests or
other religious actors as frontmen for obscure financial transactions. A case made popular by
the Italian press took place in 2010 when the Sicilian Antonio Bonaccorsi managed to launder
EUR 300,000 by channeling funds through the account of his priest son, Don Orazio, via The
Institute for the Works of Religion (IOR, also known as The Vatican Bank)85.
This case reveals the importance of having a robust definition of PEPs that doesnt overlook
people who are traditionally viewed as trustworthy and, as such, informally exempt from risk
analysis.
82
RBC Investor Services Tops Global Investor/ISF Beneficial Owners Survey. January 2013.
http://www.rbc.com/newsroom/2013/0110-rbcis-tops-global-investor-survey.html
83
Ibid.
84
Banque de France: Autorit de Contrle Prudentiel. September 2011. 2. Obligations de vigilance relatives au
bnficiaire effectif in Lignes Directrices Sur Les Bnficiaires Effectifs, p. 9.
84
http://www.acpr.banque-france.fr/fileadmin/user_upload/acp/publications/registre-officiel/2011-lignesdirectrices-ACP-pour-beneficiaires-effectifs.pdf
85
Damg, Mathilde. 2012. La difficile lutte contre le blanchiment au sein des banques. Le Monde.
http://www.lemonde.fr/economie/article/2012/07/18/la-difficile-lutte-contre-le-blanchiment-au-sein-desbanques_1735126_3234.html
32
Japan
Japans civil service is filled with situations in which key discussion points [are] debated and
agreed upon in study meetings and subsequently rubber-stamped in formal meetings, so as to
avoid substantive deliberations from being minute.86 Thus, reporting in Japan suffers from a
lack of clearly defined and enforced reporting requirements in which non compliance is subject
to penalties.
Efforts to promote transparency have been non-government related, for instance with The
Transparency of Japanese Law Project that aims to provide legal information on international
transactions in Japan to the overseas community by organizing and translating into English,
information which includes: overviews of Japanese law, specific Japanese legislation, doctrines,
and case law.87
Such processes in Japan reveal the need for proper reporting practices to be implemented and
penalties to be enforced. Without these regulatory check, institutions arent made accountable
and can operate in obscurity. The Transparency of Japanese Law Project introduces an
interesting approach to filling the gap left by official institutions: promoting independent
transparency initiatives.
Norway
Norway is regulated by the Financial Supervisory Authority of Norway (Fnanstilsynet) (FSAN).
There are no specific beneficial ownership policies under the FSAN, but the AML Act covers
beneficial ownership as it relates to money laundering prevention. Beneficial ownership is
defined by any natural person who ultimately owns or controls the customer and/ or on whose
behalf of a transaction or activity is being carried out. FSAN uses 25 percent of the shares or
voting rights as the threshold for direct or indirect ownership. If the company has financial
instruments on a regulated market in another European Economic Area state, the company is
subject to those disclosure requirements. Verification of the identity of beneficial owners is
only based what the institution deems as reasonable measures and therefore, is dependent on
the situation. Reporting is only required if the entity requires beneficial ownership to be
reported. If reported it should be clear and unambiguous88.
Timor Leste
Timor Leste does not have an independent regulatory body, but the Central Bank of Timor Leste
established the beneficial ownership policies for in country transactions. While the policies
outline how to verify and conduct due diligence for beneficial ownership, they fail to define
86
ibid.
The Transparency of Japanese Law Project. http://www.tomeika.jur.kyushu-u.ac.jp/
88
The Financial Supervisory Authority of Norway, 2009. Act relating to measures to combat money laundering and
the financing of terrorism, etc. (Money Laundering Act).
87
33
beneficial ownership or thresholds at which to consider a natural person a beneficial owner.

The anti-money laundering policy states: identify beneficial ownership and control, i.e.
determine which individual(s) ultimately own(s) or control(s) the direct customer, and/or the
person(s) on whose behalf a transaction is being conducted; (d). verify the identity of the
beneficial owner of the customer and/or the person on whose behalf a transaction is being
conducted, corroborating the information provided in relation to (c); and (e). conduct on-going
due diligence and scrutiny i.e. perform on-going scrutiny of the transactions and account
throughout the course of the business relationship to ensure that the transactions being
conducted are consistent with the banks expectation and knowledge of the customer, its
business and risk profile, including, where necessary, identifying the source of funds. Timor
Leste, however does explicitly outline the obligation to conduct due diligence on an ongoing
basis.89
United Kingdom
The United Kingdom is regulated by The Financial Conduct Authority (FCA) and the Prudential
Regulation Authority (PRA), the predecessors of the Financial Services Authority (FSA). There
are no specific beneficial ownership policies under the FCA or PRA, but the FSAs Banks
management of high money-laundering risk situations covers beneficial ownership as it relates
to money laundering prevention and the FSAs findings of banks compliance with due diligence
of beneficial ownership. The FSA defines beneficial ownership beneficial owners of bodies
corporate (for example companies, trusts and charities) include any individual who ultimately
owns or controls more than 25% of the shares or voting rights in the body; or otherwise
exercises control over the management of the body. In their findings, the FSA found a third of
their sample of banks (8 major banks and 19 medium and smaller sized banks) did not
understand legal requirements for client due diligence obligations in relation to beneficial
owners. Yet, the FSA only requires a firm to conduct adequate measures to identify the
beneficial owner and only requires client due diligence of beneficial ownership on a risk based
approach.90
Bermuda
Bermudas prudential and anti-money laundering and anti-terrorist financing (AML/ATF)
legislative framework was updated in July 2013 to include regulation of CSPs. The updates
include decreasing the threshold for which beneficial ownership is defined from 25% to 10% for
89
Central Bank of Timor Leste, 2004. Banking and Payments Authority of Timor-Leste. Public Instruction no
02/2004 on the Prevention of Money Laundering, Customer Identification and Record Keeping. The Governing
Board.
90
34
all CSPs that setup beneficial ownership structures. The anti-money laundering and antiterrorist financing legislation now requires:91
Both the Companies Act 1981 and the Exchange Control Act 1972 impose requirements
to identify the beneficial owners of Companies;
There is a requirement to submit to a central authority (the Bermuda Monetary
Authority), for vetting and approval, information on ultimate beneficial owners (using a
10% threshold), at time of application for incorporation. In addition, Exchange Control
permission is required for transfer of shares for non-residents. All such information is
retained in the Bermuda Monetary Authoritys (BMA) files.
Basic information must be provided to the Registrar of Companies annually;
Companies are required to maintain a registered office in Bermuda and must keep a
register of shareholders which must be accessible for public viewing;
Companies formed under the laws of another country, who wish to carry on business in
Bermuda, are required to obtain a permit issued by the Minister of Economic
Development.
Permission requires a full vetting of ultimate beneficial ownership by the BMA;
Under the regulatory legislation there are shareholder controller provisions for Financial
Institutions, requiring approval of such persons by the Bermuda Monetary Authority;
Provisions in the Companies Act require approval from the Minister of Economic
Development for a local company to exceed the 40% shareholding limit for non
Bermudian ownership; and allow the Minister, (who also gets information on ultimate
beneficial ownership and has such information vetted), to stipulate detailed
requirements in relation to such ownership;
CSPs are now required to apply to the BMA for licenses and will be regulated as
Financial Institutions and subject to prudential and AML/ATF requirements ( this regime
came into effect January 1, 2013);
Persons acting as nominees are classified as CSPs and therefore subject to the
appropriate licensing and prudential requirements;
Information requirements in relation to beneficial owners are imposed on FIs, lawyers
and accountants at the 25% threshold. However for CSPs, which are also regulated as FIs,
the threshold is 10%;
There are a variety of enforcement powers in relation to non-compliance under
regulatory, AML/ATF and company legislation;
There are established legislative gateways for exchange of information - to domestic
and international competent authorities; and Law enforcement authorities and other
relevant agencies can gain full access to beneficial ownership information and can share
with foreign counterparts.
91
Government of Bermuda. 2013. Bermudas G8 Beneficial Ownership Action Plan. The Cabinet Office.
http://www.royalgazette.com/assets/pdf/RG140491730.pdf
35
APPENDIX D: PwC Analysis of KYC Guidelines,

EITI Pilot Countries Beneficial Ownership, and
PEPs Summary Tables and Charts
Table 4: Countries that have practice guidance beyound the FATF recommendations
* G8 Countries
** BRICS
*** EITI Countries
Source: PwC, KYC Guidelines, 2013. Data not available for Iraq and Portugal. Only 8 EITI countries were included.
36
Table 5: Beneficial Ownership Tresholds for G8, BRICS and EITI Countries
The following countries did not specify beneficial ownership thresholds: Afghanistan, Albania, Argentina,
Azerbaijan , Bahrain, Belgium, Bolivia, Bosnia & Herzegovina, Brazil, Burkina Faso , Central Republic of Africa,
Cameroon, Chad, China, Colombia, Cte dIvoire, Democratic Republic of Congo , Egypt, Finland, France, Gabon,
Ghana, Guatemala , Guinea, Honduras, India, Indonesia, Iraq, Isle of Man, Israel, Italy, Jamaica, Jordan,
Kazakhstan, Kyrgyz Republic , Kenya, Lebanon , Liberia, Madagascar, Malaysia, Mali, Mauritania , Mexico,
Mongolia, Mozambique, Netherlands, Niger, Oman, Pakistan, Paraguay, Peru, Philippines, Romania, Russia, So
Tom and Prncipe , Senegal, Singapore Solomon Islands, South Korea, Spain, Switzerland, Taiwan,
Tajikistan ,Tanzania , Thailand, Timor-Leste , Turkey, Uruguay, Vietnam, Zambia.
Source: PwC, KYC Guidelines, 2013 and local regulations. See details in Appendix E for local regulations used.
37
Table 6: Table of countries that have ambiguous language in requirements and definitions of
beneficial ownership
Source: PwC. 2013. KYC Guidelines, 2013 and local regulations. See details in Appendix E for local regulations used.
38
APPENDIX E: PwC Analysis of KYC Guidelines,

EITI Pilot Countries Beneficial Ownership, and
PEPs Summary Detailed analysis
39
References
Primary
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vigilance relatives au bnficiaire effectif in Lignes Directrices Sur Les Bnficiaires Effectifs, p.9.
http://www.acpr.banque-france.fr/fileadmin/user_upload/acp/publications/registreofficiel/2011-lignes-directrices-ACP-pour-beneficiaires-effectifs.pdf
Central Bank of Timor Leste. 2004. Banking and Payments Authority of Timor-Leste. The
Governing Board.
Department for Business Innovation and Skills. July 2013. Transparency & Trust: Enhancing the
Transparency of UK Company Ownership and Increasing Trust in UK Business. Government of
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GIABAs Mission. http://www.giaba.org/
GIABA Report. May 2012. Corruption and Money Laundering Nexus: An analysis of Risk and
Control Measures in West Africa. http://www.giaba.org/media/f/114_corruption-and-moneylaundering-nexus---english-rev051810-1-.pdf
Government of Bermuda. 2013. Bermudas G8 Beneficial Ownership Action Plan. The Cabinet
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Government of United Kingdom. June 2013. G8 action plan principles to prevent the misuse of
companies and legal arrangements. Policy Paper issued by the Prime Minister's Office.
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Grassley, Feinstein and Harkin. August 2013. S 1465: Incoporation Transparency and Law
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Revenue Watch Institute. 2012. International Standards on Beneficial Ownership.
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42
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43

Beneficial Ownership in The Extractive Industry

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Beneficial Ownership In The Extractive Industries Sector

Recommendations for reporting beneficial ownership of extractive industry companies for

Technical Note prepared for Revenue Watch Institute

Michael Aryee <aryem332@newschool.edu>, Tulsi Byrne <byrnt905@newschool.edu>, Kristina Hamil

APPENDIX C: COUNTRY NORMS AND PRACTICES .............................................................................. 31

Figures and Tables

EITI. July 2013. The EITI Standard. http://eiti.org/document/standard

II. Data Collection

Applying reduced due diligence for transactions between banks or licensed

III. Data Analysis

Beneficial Ownership Gaps in current AML Framework

Disclosures and Reporting of Beneficial Ownership

Corporate Service Providers (CSPs)

Limited Statutory Powers

Wayne, Leslie. How Delaware Thrives as a Corporate Tax Haven.

Loopholes within current AML Framework within Financial

Bank Secrecy Laws

Enforcement and Penalties of AML Regulations

PwC, January 2012. Know Your Customer: Quick Reference Guide.

1. Promote Standardized Definitions and Due Diligence

Beneficial Ownership Thresholds

Beneficial Ownership Due Diligence

Politically Exposed Persons (PEPs)

PwC, January 2013. Know your Customer: Quick Reference Guide.

Apply enhanced due diligence to all PEPs, foreign and domestic.

2. Extension of EITI Beneficial Ownership Requirements to

3. Transparent Incorporation Practices

Map and register CSPs globally.

Prohibiting Bearer Shares and Corporate Nominee Directors

4. Develop a Public Registry of Beneficial Owners

5. Create Enforcement Mechanisms and Strict Adherence to

APPENDIX A: Related/Relevant Initiatives

Stolen Asset Recovery Initiative

Relevance to Beneficial Ownership

Asset Recovery Networks

Stolen Asset Recovery Initiative. Our Work. http://star.worldbank.org/star/about-us/our-work

G20 Anti-Corruption Action Plan 2013-2014 is at its halfway point.

APPENDIX B: Figures And Tables

Figure 2: Countries evaluated, continued

Table 1: Which jurisdictions require companies to report change in ownership?

Table 2: Techniques/Methods employed by PEPs to adversely affect the effective

Table 3: Awarness of FATF recommendations

APPENDIX C: Country Norms and Practices

Prohibition of anonymous accounts or accounts held under fictitious names.

Brazil: Tax Haven Jurisdictions - Haven or Hell? Mondaq, January 2013.

beneficial ownership or thresholds at which to consider a natural person a beneficial owner.

APPENDIX D: PwC Analysis of KYC Guidelines,

APPENDIX E: PwC Analysis of KYC Guidelines,

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