Economy & Business
KYC and UBO guidance in Taiwan
New guidance aimed at identifying the real owners of entities used for illicit activities makes sense but some of Taiwan’s banks are afraid that implementing them may lose them legitimate customers
By Paul Shelton
The practice of KYC (Know Your Customer) is integral to the prudent operation of a financial institution (FI). It may seem simply obvious that FIs should know their customers, but in reality global financial criminals are used to concealing the controlling a person’s real identity by establishing fake personas, legal arrangements, or by controlling such entities through complex ownership structures.
It is essential that FIs can identify not only their individual customers but also the beneficial ownership of the legal person that they have onboarded as a customer. In this sense, a legal person can mean, for example, a company or a trust.
FIs are accustomed to referring to this as knowing the Ultimate Beneficial Owners (UBO) of their customers. In Taiwan, the Ministry of Justice (MOJ) defines the term “beneficial owner” to mean a natural person who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted, including those persons who exercise ultimate effective control over a legal person or arrangement.
Don’t be under any misapprehension that identification of the UBO is just a paper shuffling exercise. As noted above, financial criminals use extremely complex company and trust structures to hide their criminal activities and identity and will use a variety of means to prevent revealing the required information. But it must be said that some perfectly legitimate customers also have complex company and trust structures in place, reflecting a complex family arrangement or as a means of legitimately minimizing their tax obligations. Even these legitimate customers can be reluctant to be completely transparent with their FIs.
In both cases FIs spend inordinate amounts of time asking questions and trying to untangle these structures. No FI wants to have it revealed that they failed to sufficiently identify their customer and ended up doing business with a known criminal or, especially in the current geopolitical environment, with a sanctioned individual, company, or country.
So, how do FIs go about identifying the UBO of a customer? Well, FIs are required to have their own policies and procedures pertaining to UBOs and Taiwan’s regulator and at the global Financial Action Task Force (FATF) has published guides and advice on this very subject.
In March 2022, the FATF agreed on tougher global beneficial ownership standards in its Recommendation 24 by requiring countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies. In March of this year, the FATF published an updated guidance that will help countries implement the revised Recommendation 24.
The revisions to the UBO standard are intended to help prevent organised criminal gangs, the corrupt and sanctions evaders from using anonymous shell companies and other businesses to hide their dirty money and illicit activities.
Some of you may remember back to 2021 when a leak of nearly 12 million documents incriminated hundreds of the global wealthy elite for tax avoidance and corruption (the Panama Papers). The Panama Papers showed that money laundering and other illicit financial activities are all too common, particularly when tax havens and shell corporations are involved. FIs need to be aware of these risks when offering services to such customers.
The new FATF guidance suggests that countries identify, design and implement appropriate measures in line with the revised Recommendation 24 to ensure that beneficial ownership information is held by a public authority or body functioning as a beneficial ownership registry, or an alternative mechanism that enables efficient access to the information.
The guidance is intended to also help countries assess and mitigate the money laundering and terrorist financing risks associated with foreign companies to which their countries are exposed.
The guidance explains types and sources of relevant information, and mechanism and sources to obtain such information. This includes adopting a multi-pronged approach, which consists of combining information from, among others, companies themselves, public authorities in a registry, or alternative mechanisms if it ensures rapid and efficient access to beneficial ownership information.
FATF’s mutual evaluations (when FATF evaluates a country on its commitment to AML, CTF, and Sanctions) demonstrated that countries using a multi-pronged approach were more effective in preventing the misuse of legal persons for criminal purposes and ensuring transparency of beneficial ownership than countries using a single approach.
This guidance is the result of intense consultations with external stakeholders and the private sector. It aims to assist policy makers and practitioners in national authorities and private sector stakeholders in implementing the necessary measures so that shell companies can no longer be safe havens for illicit proceeds with links to crime or terrorism.
What the FATF is now recommending regarding UBOs makes perfect sense in the fight against financial crime. The concept of a central national registry has been discussed in global markets for many years. Even the concept of a central public authority to which FIs could turn to in order to standardize and simplify the onboarding, KYC and UBO concept has been a much longed for dream within many countries or institutions.
However, despite FATF’s recommendations, the global market shows little sign of rushing to fully adopt the centralized approach. There also appears to be some lack of uniformity within the Taiwan market itself. If we look at the Taiwan’s AML law, it tells FIs that they need to establish ownership down to a level of 25%. This simply means that an FI needs to identify a beneficial owner being a person who owns more than 25% of the company's shares, controls more than 25% of the voting rights or who can similarly exercise significant control over the company. However, when Taiwan amended its company law it required disclosure of shareholders down to just 10%. That is a wide disparity. What does it mean for Taiwan’s FIs? Well, FIs can take a conservative approach and adopt the 10% requirement to their onboarding/KYC process but as the market knows that 25% also applies, there is likely to be pushback from some sectors, especially those intent on non-disclosure whether for malicious reasons or simply a desire for privacy.
There is no legal impediment to FIs adopting stricter rules but doing so can lead to a loss of business and FIs are all about customer numbers since they are in the business of making money for their shareholders. Losing customers because of restrictive policies is rarely popular with shareholders.
Further, there appears to be some resistance within the Taiwan market for the creation or adoption of FATF’s centralized and standardized approach. Many FIs are extremely reluctant to adopt this approach. They fear it may lead to loss of market share, although their arguments are often convoluted. FIs also fear the consequences of a leak from the centralized body and how it would impact the market. FIs are always reluctant to share. It will require the endorsement of the Taiwan government and the financial regulator, the FSC, for this attitude to change. Oddly however, for those of us who are obliged to open more than one bank account in Taiwan, the experience is usually very similar in terms of the documentation required. So, the argument against a single approach seems quite hollow.
So, we seem to be in a bit of a holding pattern. The FATF has put out its guidance. Taiwan will go through a further mutual evaluation (whether by FATF or the Asia/Pacific Group on Money Laundering) at some time in the future and how it performs in that evaluation will depend on its adoption and adherence of FATF’s recommendations.
Let’s hope for a positive resolution.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management