Legal Instruments and Structures that disguise beneficial ownership

A beneficial owner is a natural person who effectively owns or controls a legal person or legal arrangement or on whose behalf transactions are conducted. Criminals deploy a range of methods to conceal their ownership over their illegally derived assets and funds.

Scrutinising the ownership structure is a part of AML/CFT obligations for Financial Institutions (FIs), Designated Non-Financial Businesses and Professions (DNFBPs) and Virtual Asset Service Providers (VASPs). Some of the commonly used techniques to disguise beneficial ownership have been listed below:

Bearer Securities

Bearer securities are instruments that grant ownership to individuals who physically hold the certificate. Bearer securities have recently gained prominence due to their anonymity feature, as they are not registered and can be transferred easily, as there are requirements to record the transfer of bearer securities.

However, the lack of transparency in determining the owner of shares makes it easy for criminals to conceal the identity of beneficial owners that control the bearer instruments. That being said, UAE has implemented Federal Decree Law No. (32) of 2021 for commercial companies and Cabinet Decision No. (109) of 2023 On Regulating the Beneficial Owner Procedures for legal persons in the state (including commercial free zones) that restricts them from issuing bearer shares and bearer share warrants.

Fronts and Nominees

Front companies are completely functional companies that have the same attributes as a legitimate business entity but are used for disguising illegal financial activities While front companies can be used to simplify transactions or for other lawful purposes, they can also be misused for fraudulent schemes, such as false invoicing and phoenix activity.

Offenders can additionally use nominee shareholders or directors to further obscure the identity of beneficial owners. A nominee shareholder holds shares in a company for the benefit of another person. A nominee director is appointed to the board of a company to represent the interests of the appointer.

Nominees can be exploited to circumvent restrictions on foreign business ownership or foreign trade or by individuals who are prohibited from acting as directors of a company owing to their past conduct.

UAE’s regulatory regime requires nominee board members to disclose to the legal person that they are acting as a nominee within fifteen days of becoming a nominee board member. The nominee member is also obligated to inform the legal person if he or she ceases to be a nominee board member.

The Register of Partners or Shareholders kept by the legal person must also include data of any of the partners or shareholders serving as a nominee board member. This includes:

Number of shares held along with the category of the shares and associated voting rights
The date on which the partner or shareholder acquired that position in the legal person
Particulars of the partner or shareholder, depending on whether they are a natural or legal person

The nominee member must inform the legal person if there are any updates in any of the above-mentioned information within 15 days of such change.

Non-Profits, Charities and Foundations

Non-Profit Organisations (NPOs), charities and foundations are natural or legal persons or legal arrangements that work to raise funds for purposes such as charitable, religious, cultural, educational, social, and other noble causes. However, the goodwill associated with non-profits is abused by illicit actors to funnel the proceeds of their crimes by way of donations, as charities have access to considerable sources of funds.

The regulatory regime in UAE also requires DNFBPs dealing with NPOs to adopt a risk-based approach.

Offshore Companies

Offshore companies are entities whose place of incorporation and principal place of operation fall under different jurisdictions. When creating complex structures, criminals often resort to setting up offshore companies in tax haven countries or countries with flexible business regulations and stringent privacy laws.

Shell and Shelf Companies

Shell companies are companies which have no significant independent business operations or related assets or employees, whereas shelf companies are companies that have been dormant for a long duration with inactive shareholders, directors, and secretaries. Shell companies offer a variety of functions during corporate mergers or to protect the company’s brand name and identity against third-party violation.

Shell companies are also used for illicit purposes, such as the distribution of assets across multiple countries and pass-through transactions to hide the origin of funds. On the other hand, shelf companies can be used by new owners to secure business relationships based on the company’s history or access markets based on pre-established relationships with financial institutions, making it difficult to identify the real owners of the company.

Trusts

A trust is a fiduciary relationship where a settlor gives the trustee the right to hold title for the beneficiary’s assets. Trusts such as express trusts are commonly misused by criminals to maintain anonymity, creating an additional layer of complexity by separating the legal title and control of an asset from its beneficial ownership.

Private Investment Vehicles

Private Investment Vehicles or Companies (PIVs/PICs) are investment companies that have a few investors without any intention of public offering. Generally, PIVs or PICs are used by high-net-worth individuals to hold their assets.

Criminals can misuse PIVs/PICs and appoint nominee shareholders, directors and secretaries to create an additional layer of confidentiality that can obscure beneficial ownership and create complex structures.