An exclusive article by Fred Kahn

The creation of public Ultimate Beneficial Ownership (UBO) registers represents a significant global effort to combat illicit financial flows and terrorist financing by shining a light on who truly owns and controls corporate entities. Yet, for experienced money launderers, this transparency often proves to be an illusion, a predictable hurdle easily managed rather than an insurmountable barrier. The reality is that sophisticated criminal networks exploit structural loopholes, multi-jurisdictional complexity, and the fundamental challenge of verifying submitted data, turning a powerful transparency tool into a mere box-checking exercise for law enforcement and regulated entities. This procedural compliance masks the continued ease with which shell companies facilitate the concealment of dirty money, undermining the core objective of anti-money laundering regulations.

Circumventing Beneficial Ownership Transparency

The primary challenge to the effectiveness of UBO registers is the structural complexity employed by illicit actors to obscure the real owner. While legislation, such as the European Union’s Anti-Money Laundering Directives and Financial Action Task Force recommendations, mandates the reporting of a UBO, typically defined by a 25 percent ownership threshold or significant control, this standard is readily subverted. Money launderers employ elaborate layering through chains of corporate entities, where no single natural person meets the statutory ownership threshold in the reporting jurisdiction. For instance, a shell company in one jurisdiction might be 24 percent owned by four different, seemingly unrelated offshore trusts, each having its own layered structure, effectively keeping the genuine beneficial ownership below the radar.

These arrangements frequently leverage different legal vehicles, such as trusts, foundations, and partnerships, which often have different reporting requirements than standard corporations. A discretionary trust, for example, grants the trustee the power to select beneficiaries from a designated class, meaning no specific natural person can be definitively identified as holding a vested right to the assets, making it almost impossible to pinpoint a UBO with confidence. Moreover, the use of nominee directors and shareholders, who are professional intermediaries legally registered as owners but act entirely on the instruction of the hidden beneficial owner, adds another layer of legally compliant obfuscation. These proxies willingly submit their names to the register, knowing that the legally binding, but often secret, contractual agreements with the criminal principal protect their true identity. The absence of mandatory, routine, independent verification of the submitted UBO data by the register authority further enables this deceit.

The Enforcement Arbitrage Loophole

A critical vulnerability is the lack of universal consistency in both the rules governing UBO reporting and the rigor of enforcement. Money launderers exploit a mechanism known as enforcement arbitrage, selecting jurisdictions with deliberately weak regulatory oversight to base their complex structures. They often register holding companies in secrecy jurisdictions, characterized by a minimal corporate registration burden, non-existent or inaccessible public registers, and a tradition of protecting corporate anonymity. By setting up the ultimate holding vehicle in a jurisdiction with high secrecy and then placing intermediate layers in jurisdictions that have UBO registers but lack aggressive enforcement, the criminal network insulates the illicit funds.

When a regulated entity, such as a bank, attempts to conduct customer due diligence on a company registered in a jurisdiction with a public UBO register, they might see a legal entity or a nominee director listed. However, because the ownership structure ultimately leads back to an offshore trust or shell company in a low-transparency jurisdiction, the trail quickly goes cold. The legal obligation to identify and verify the UBO of a customer is rendered practically futile when the disclosed UBO is simply another legal entity that resides in a territory where the local authorities either do not collect beneficial ownership data or do not cooperate internationally with the necessary speed and depth. This cross-border asymmetry effectively creates a financial crime blind spot that defeats the purpose of centralized domestic registers.

Concealment in Plain Sight: The Case of Public-Facing Compliance

The ultimate paradox of the UBO register is that it provides a veneer of transparency without delivering true visibility into criminal control. The public registry acts as a front of compliance for the sophisticated money launderer. By meticulously following the letter of the law in the registering jurisdiction, such as appointing a legally compliant nominee or structuring ownership just below the disclosure threshold, the illicit actor receives a stamp of legal legitimacy that eases their entry into the global financial system. When a financial institution performs its due diligence, the UBO register, which is intended to be a crime-fighting tool, actually furnishes a seemingly clean record, diverting attention from the deeper, more complex scheme.

This is often compounded by the operational nature of many financial intelligence units, or FIUs, which rely heavily on suspicious activity reports, or SARs, filed by the financial sector. When a corporate structure looks clean on the public register, the likelihood of a firm escalating a transaction to a SAR decreases, allowing the criminal principal to move large volumes of illicit funds uncontested. The focus shifts from the intent of the law, identifying the ultimate controller of the funds, to the minimum procedural requirements of the compliance process. This exploitation of procedural weaknesses allows for illicit funds to be layered through multiple accounts in different countries, facilitated by the initially clean UBO registration.

Rebuilding Integrity: A Call for Verified Registers

The current structure of UBO registers often prioritizes data collection over data integrity, which fundamentally limits their utility in tackling complex money laundering schemes. To move beyond mere procedural compliance, reforms must address the verification and enforcement deficits. First, a shift is required from passive, self-declared registers to active, verified registers where the data submitted by the company is cross-referenced with external data sources, such as tax records, biometric data, and other government databases, before being accepted. This verification process should not be optional or reliant solely on the integrity of the declarant.

Second, the international standard-setting bodies, like the Financial Action Task Force, must push for lower, more uniform beneficial ownership thresholds, as the existing 25 percent threshold is too high and provides an obvious window for layering ownership. Furthermore, there must be a global push for robust, extraterritorial enforcement actions against professional service providers, lawyers, accountants, and trust administrators, who knowingly facilitate the use of nominee arrangements and complex structures for illicit purposes. Only through mandatory, consistent, and verified data, backed by a global commitment to enforcement against facilitators, can the illusion of beneficial ownership transparency be shattered and the registers become the effective anti-money laundering tool they were intended to be.

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Key Points

• The 25 percent UBO ownership threshold in many jurisdictions is easily bypassed by criminal groups using four or more shell companies or trusts.
• Nominee directors and shareholders, who act as legal proxies, conceal the criminal principal’s identity despite appearing compliant on UBO registers.
• Money launderers exploit enforcement arbitrage by leveraging jurisdictions with weak UBO verification and international cooperation.
• The public UBO register provides a false sense of security, furnishing seemingly clean corporate records that allow illicit funds to enter the financial system undetected by basic due diligence.
• Effective reform requires moving to actively verified UBO data, lowering ownership thresholds, and applying severe sanctions against professional facilitators.

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Related Links

• Financial Action Task Force Guidance on Beneficial Ownership Transparency
• European Union Fifth Anti-Money Laundering Directive Text
• World Bank Stolen Asset Recovery Initiative Publications
• US Treasury Financial Crimes Enforcement Network Beneficial Ownership Reporting Rule
• Egmont Group of Financial Intelligence Units Information Sharing Principles

Other FinCrime Central Articles About Beneficial Ownership

• How AI Can Help Unmasking UBO Networks
• The Shell Company Mirage: Why Beneficial Ownership Registries Fail By Design
• Swiss Transparency Shake-Up Boosts Beneficial Ownership Oversight
• Canada Tightens Beneficial Ownership Rules to Combat Dirty Money

Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.

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