In the realm of corporate structures and investments, the concept of „nominee shareholders“ plays a significant role, particularly in the context of privacy and confidentiality. However, it is essential to understand why companies that employ nominee shareholders are often flagged as potentially higher-risk entities, especially in terms of regulatory compliance and financial transparency.
A nominee shareholder is an individual or entity registered as the holder of shares on behalf of the actual (beneficial) owner. This arrangement allows the beneficial owner to remain anonymous in public records. Nominee shareholders appear on the share register and may be involved in receiving dividends and exercising voting rights, but they do not have an economic interest in the shares.
- Confidentiality: The primary reason for using nominee shareholders is to keep the identity of the real shareholder private. This can be for legitimate purposes like protecting personal information or for strategic business reasons.
- Ease of Transactions: Nominee arrangements can simplify the process of transferring shares, as the public records do not need to be updated every time the beneficial ownership changes.
- Asset Protection: In some cases, beneficial owners use nominee shareholders to protect assets from legal disputes or creditors.
- Obscured Ownership: The anonymity provided by nominee shareholders can be exploited for illicit purposes. It becomes challenging to trace the ultimate beneficial owners, which can facilitate money laundering, tax evasion, and other financial crimes.
- Lack of Transparency: Regulatory bodies and financial institutions often flag entities with less transparency in ownership as high-risk due to the difficulty in ascertaining the source of funds and the true nature of the business.
- Regulatory Challenges: Companies with nominee shareholders might face more scrutiny under laws like the EU’s Fourth Anti-Money Laundering Directive. These regulations require enhanced due diligence for entities presenting a higher risk of financial crimes.
- Potential for Misuse: While many use nominee shareholders for legitimate reasons, the potential for misuse in hiding illicit activities makes these arrangements inherently riskier from a regulatory perspective.
Compliance and Due Diligence
To mitigate these risks, companies with nominee shareholders and the entities they engage with must adhere to strict compliance and due diligence protocols. This includes:
- Enhanced Due Diligence: Performing thorough checks to understand the nature of the business, the source of funds, and the identities of beneficial owners.
- Regular Monitoring: Continuously monitoring transactions and company changes to ensure compliance with anti-money laundering regulations.
- Transparent Agreements: Maintaining clear and legal agreements between nominee shareholders and beneficial owners, outlining roles, responsibilities, and the extent of authority.
The 4th AMLD (Directive (EU) 2015/849), particularly focuses on enhanced customer due diligence measures. These measures are crucial in identifying and mitigating the risks associated with money laundering and terrorist financing, especially in higher-risk scenarios. Nominee shareholders are highlighted within the context of potentially higher-risk customer factors.
The directive mandates that Member States ensure that obliged entities, such as financial institutions and credit institutions, apply more stringent due diligence processes in specific situations. These situations include dealings with natural persons or entities from high-risk third countries, complex and unusually large transactions, and any transactions that lack a clear economic or lawful purpose. Enhanced diligence is also required when establishing business relationships or conducting transactions with politically exposed persons (PEPs).
Regarding nominee shareholders, the directive points out that companies using nominee shareholders or having shares in bearer form present a higher risk. Nominee shareholders are individuals or entities listed as the holder of shares on behalf of the actual owners, making it challenging to identify the beneficial owners of the company. This anonymity can be exploited for money laundering or terrorist financing purposes, as it obscures the ownership structure of a company.
The directive underscores the importance of a risk-based approach, where the extent of the due diligence measures is commensurate with the level of risk identified. This includes assessing the background and purpose of all transactions that are complex, unusually large, or do not have an apparent lawful or economic purpose.
The sections from the German Money Laundering Act (GwG) specifically address enhanced due diligence requirements, with particular relevance to scenarios involving nominee shareholders. These provisions are designed to strengthen the measures against money laundering and terrorist financing by imposing additional checks and balances in situations identified as higher risk.
Section 15 (1) of the German GwG establishes that enhanced due diligence requirements are mandatory and supplementary to the general due diligence obligations. It sets the groundwork for a more rigorous investigation and monitoring process in higher-risk situations, which could include complex corporate structures or arrangements like nominee shareholders, where the true beneficial ownership might be obscured.
Obliged entities, such as financial institutions, are required to conduct enhanced due diligence when their risk assessments or specific risk factors indicate a heightened risk of money laundering or terrorist financing. This involves a detailed analysis of the customer’s background, business relationships, and transaction patterns, especially when nominee shareholders are involved, to understand the true nature of the risk. The measures taken must be proportionate to the identified risks, and entities must be able to demonstrate the adequacy of these measures, indicating a requirement for thorough documentation and justification.
In high-risk cases, including those involving nominee shareholders, at least the following measures must be implemented:
- Senior Management Approval: Initiating or continuing any business relationship in such scenarios requires explicit approval from senior management, ensuring an additional layer of oversight.
- Source of Funds Verification: Entities must take adequate steps to ascertain the origin of the funds involved in the business relationship or transaction, which is crucial in cases involving nominee shareholders to ensure transparency and legality of the funds.
- Enhanced Ongoing Monitoring: There must be continuous, intensified scrutiny of the business relationship to detect and address any suspicious activities promptly.
Additionally, if a contracting party or beneficial owner is identified as a politically exposed person (PEP) during the business relationship, continuation of this relationship requires senior management’s approval. This also applies to former PEPs, with a risk consideration period extending at least twelve months after their public role ends, during which appropriate measures must be taken to mitigate the associated risks.
Annex 2 lists various risk factors, including companies with nominee shareholders or bearer shares, highlighting the increased risk of money laundering or terrorist financing associated with such entities. This underscores the need for enhanced scrutiny and due diligence to uncover the true beneficial owners and understand the nature of the funds and transactions involved.
- Directive (EU) 2015/849 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32015L0849
- German Anti-Money Laundering Act (Geldwäschegesetz – GwG) https://www.bafin.de/SharedDocs/Downloads/EN/Aufsichtsrecht/dl_gwg_en.html
- BaFin-Interpretation and Application Guidance on the German Money Laundering Act (October 2021) https://www.bafin.de/SharedDocs/Downloads/EN/Auslegungsentscheidung/dl_ae_auas_gw2021_en.html
- Wikipedia, https://en.wikipedia.org/wiki/Shareholder