Client identification - ownership database

Client identification continues to be in focus within the relationship of clients and service providers

The fight against money laundering and terrorist financing in the European Union has recently become much more focused than in the past. Although the process laid down in EU legislation has not fundamentally changed, with the actual ownership database now in place, all accounting and registered office services firms will have a serious task if they want to avoid fines. Below is an overview of the risks associated with the new changes.

Process Solutions is active in this field for two main reasons. The accounting activity has been an important part of the screening process from the very beginning. However, it is only since January 2020, when all companies had to be registered with the authorities, that the provision of domiciliation services has received special attention, as it gives the Tax Office a better chance of immediately detecting risks such as false owners and companies without operational substance. It is important to note that, in contrast, in the case of accounting activities, the potential risk or potential criminal activity is usually only visible to the service provider and the authorities after the actual event.

 

With the register of ultimate beneficial owner, client identification may now pose a new risk also for service companies. However our teams found that clients are already basically aware of the screening process, thanks to the processes operated by financial institutions, lawyers and auditors, among others.

 

Client identification should not be a brand new concept to anyone, just thinking of the procedure we have to go through with banks or insurance companies when, as an individual, we have to prove that we are acting on our own behalf by providing our details. And under EU anti-money laundering law, certain companies have to take part in a similarly rigorous process to screen out suspicious activity. This applies to cooperation with firms providing accounting and registered seat services.

 

The screening is done using a three-part form, which must be completed in person or via an audited electronic communication device, which is often difficult even in the fast-evolving digital environment of the pandemic.

The three parts of the form contain the following information:

  1. the details of the client company with a supporting document (e.g. a company certificate) no more than 30 days old,
  2. details of the acting representative in a similar manner to the previous one,
  3. the details of the beneficial owner, i.e. the individual who is at the top of the corporate chain and has at least 25% ownership, effective management, control or decisive influence over the legal entity.

Part 3 is became more focused in 2021, as banks were required to register the beneficial owners of their clients, and from 2022, accounting and domiciliation service providers, among others, will have to check the companies from time to time against the database.

 

This is an extension of the ongoing monitoring activity already carried out before. The clients must continue to provide information about the changes within 5 days, both to the banks that hold their accounts and to their service providers covered by the Anti-Money Laundering Act. In any event, accountants are always required to report any kind of mismatch or suspicion of money laundering.

For Process Solutions the majority of clients are local subsidiaries of multinational companies, most of which have an average risk rating. A company is considered high risk if, among other characteristics, its ultimate owner is a politically exposed person or if a major risk third country is present in its ownership structure or among its partners. The risk rating is determined at the time the contract is concluded, so the data in the beneficial ownership register and the client’s TT index (the degree of confidence in the beneficial ownership data stored there) will also help providers in the future.

 

In addition, the service providers have to operate a complex screening function, as the UN and the EU have sanction lists, which have to be continuously checked with the companies and individuals in the client portfolio. Awareness abou the screening process impacts the entire team of the service providers so proper training process should be maintained about the legislation.

 

If a screening reveals shortcomings the Tax Office first warns the service provider and then imposes a deadline for correcting the infringements. It can ban a company from operating for 1 to 12 months or even cancel the service provider.

The amount of the fine depends largely on the seriousness of the breach and whether the company is a repeat offender.

 

The importance of this topic is reflected in the fact that, while in Hungary the Tax Office website used to be the place where the rules on money laundering were explained, there is now a separate website with all the relevant information.

 

It is in the interest of both clients and service providers to have up-to-date information to comply with the rules, and it is of the utmost importance to remind companies to inform their service providers of any changes in a timely manner.

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