Quick guide on assessing the Money Laundering risks of legal persons and arrangements

• Take into consideration relevant legal and regulatory contextual issues specific to the country, and the threats and vulnerabilities that country faces, e.g., PEP ownership of legal persons, foreign national ownership of legal persons.
• Consider the country’s attractiveness as a regional or international formation or incorporation center for non-residents, identify groups of non-resident clients for whom the jurisdiction is a preferred location for entity formation, and consider associated risks. Certain features that make a jurisdiction attractive for bona fide business investments (such as tax attractiveness, strong legal framework, economic stability, significant business sector of professional service providers catering to foreign clients) may also increase its attractiveness to illicit actors seeking to form legal entities or arrangements to hide or invest proceeds of crime.
• Consider the legal framework of the country, for example, if trusts are not legally recognised, can foreign trusts still be legally administered by residents in the jurisdiction and if not, is there evidence that foreign trusts are being administered in the jurisdiction, nonetheless? It is important to look into the legal requirements to settle a legal entity or a trust, especially if it is mandatory to have information on the ownership, BO, entities in a group relationship, etc.
• Is the country’s definition of BO in line with the FATF definition of BO and what measures are in place for authorities to obtain both basic and BO information

Countries could consider including the following stakeholders:

• Public sector: company registries, trust registries, FIUs, tax authorities, financial and non-financial supervisory authorities (especially Trust and Company Service Provider (TCSP) supervisors), judicial authorities, LEAs, anti-corruption agencies.
• Private sector: company secretaries, law firms, TCSPs, business associations, civil society organisations and academics conducting evidence-based research into ML risks.

Countries should complete a scoping exercise to identify all types of legal persons and arrangements created in the country, examining the different types, forms and basic features in order to analyse the risks. Identify and describe the processes for a) creating those legal persons; and b) obtaining and recording basic and BO information on those legal persons/arrangements.

The reference to “all” legal persons and arrangements includes those associations (for legal persons), trusts and/or foundations (for legal arrangements) that may be used for establishing an NPO. While countries may wish to examine the use of NPOs for fraud or ML, they should do so ensuring the assessment and any measures to safeguard the NPO sector are targeted and proportionate, and that governments do not enforce obligations regarding NPOs for ML purposes in a way that causes unintended consequences which are unduly disrupting or discouraging legitimate NPO activities.

For foreign legal persons, the key element is identifying whether a legal person has “sufficient links” to the country. Countries can determine this on the basis of risk. This could include (but is not limited to) situations where the legal person: 

• Has a permanent establishment or branch or agency in the country, e.g., a foreign registered insurance firm sets up an agency office in the country to sell insurance products, but most of its financial operations are in a foreign jurisdiction.
• Has significant business activity in the country. Significant business activity may be defined either in terms of a monetary threshold, or by such other parameters as may be suitable to the particular situation of the country, e.g., a foreign incorporated trading company sources most of its raw ingredients from the country and has multiple long-term contracts with local suppliers.
• Has significant, ongoing business relations with FIs, VASPs or Designated Non-Financial Businesses and Professions (DNFBPs) subject to AML/CFT regulation in the country. Significance could be in relation to the size of the relevant market and/or the impact of the business activity in the relevant market or the areas/sectors in which a legal person operates, e.g., a foreign created investment firm with multiple business banks accounts with a bank based in the country to process international transactions, or a foreign real estate firm that relies on the services of lawyers and accountants in the country for property transactions.
•  Has significant real estate or other investment in the country, including any asset subject to registration, such as ownership of high value commercial or residential real estate, securities market investment or other assets. Significant here could be determined with reference to the average price of the real estate/corresponding asset market in the country, or the quantity of real estate held, e.g., a foreign company with a portfolio of high-value properties in the country.
•  Employs staff, or is a tax resident (i.e., by reason of having its place of effective management or administration there) in the country, e.g. a foreign-headquartered multinational company is legally incorporated in the country for tax purposes. 

Countries should identify legal arrangements governed under national law, which are administered in their country or for which the trustee or equivalent resides in their country, and types of foreign legal arrangements that have sufficient links to the country. Countries could analyse types of legal arrangement individually as they may have different risk ratings, and different risk levels for ML and TF. 

ML risks are commonly associated with the ways in which legal arrangements can represent obstacles to transparency. Countries could consider the following:

• How different types of legal arrangements are recognised and defined in the laws of different countries.
• Legality of administering, managing or otherwise operating a legal arrangement established/ settled in a foreign jurisdiction.
• Nature of links identified between foreign legal arrangements and jurisdictions – country should identify and analyse the links and explain in the risk assessment which ones are deemed to have “sufficient links” to the country.
• Consider obstacles to transparency, e.g., private nature of arrangements, choice of law, ease of formation, flexibility, overlap of several parties to trust, flee clause, protection of assets, multiple layers and distance between beneficiary and other parties. 

Examples of foreign legal arrangements with “sufficient links” to the country can include but are not limited to:

•  The trust or similar legal arrangement or a trustee or a person holding an equivalent position in a similar legal arrangement has significant and ongoing business relations with FIs, VASPs or DNFBPs in the country. Significant business could be in relation to the size of the relevant market and/or the impact of the business activity in the relevant market or the areas/sectors in which the trust or arrangement or a trustee or equivalent operate. 
• The trust or similar legal arrangement or a trustee or a person holding an equivalent position in a similar legal arrangement has significant real estate or other local investment in the country. Examples for such other local investment may include (but are not limited to) securities market investment. Significant real estate or other local investment could be determined with reference to the average price of the real estate and the corresponding asset market in the country, or the quantity of real estate held. 
• The trust or similar legal arrangement or a trustee or a person holding an equivalent position in a similar legal arrangement is subject to taxation in the country (e.g., VAT, income tax, property tax, wealth tax).

Countries could consider the following data sources to support their risk assessment. This list in non-exhaustive:

• Analysing registration statistics on all types of legal persons and arrangements that can be created under their national laws, and the intended use of each type (e.g., tax vehicle, NPO, company). The use of domestic legal persons in high-risk sectors or countries.
• Examining the ease and speed at which a legal person or arrangement can begin to operate after being created, and if there are any supplementary requirements (e.g., having a bank account in the country, opening activities with the tax authorities). Analysing ease with which ownership of legal persons and beneficiaries of trusts can be changed and complex structures can be put in place.
• Countries are encouraged to take a multi-agency approach to data gathering and obtaining case studies – including FIs, tax authorities and TCSPs.
• Review and analyse SAR/STRs and cases or typology reports from LEAs and prosecutors in which domestic or foreign legal persons or arrangements have been misused for criminal purposes including ML. This can help identify common typologies for abuse. Countries should record details on the nature of abuse, type of legal structure (e.g., with regard to nominee shareholders or directors and shell companies), jurisdiction of incorporation, concealment techniques in ownership/control arrangements, involvement of intermediaries (e.g., lawyers, accountants, TCSPs), and other details.
•  FIU statistics (e.g., on legal entities suspected of being abused for ML or predicate offences that are included in SARs/STRs reported to the FIU, analysed by the FIU or disseminated by FIU to LEAs).
• Information gathered from FIs on dormant bank accounts linked to new entities with few transactions recorded. 
• Data from tax authorities on entities with no tax reports since they were created. Number of tax enforcement cases.
• Data from tax authorities and FIs (cooperation between authorities required) on entities that have stopped submitting tax reports but still have bank account transactions.
• Information on TCSPs including compliance records, data from supervisors etc. 
• Conduct expert consultations with external experts from the private sector, civil society, and academics conducting evidence-based research on ML risks, who hold expertise on setting up legal structures, on their benefits and risks. Review academic literature on legal persons and arrangements. 
• OECD’s common reporting standard (CRS) reports and Tax Information Exchange Agreements.
• Tax attractiveness index. 
• Reports by international organisations highlighting typologies and risk indicators (e.g., FATF and Egmont’s trade-based ML (TBML) risk indicators, the FATF’s report on Laundering the Proceeds of Corruption, the World Bank’s report on risks related to nominee services “Signatures for Sale” and “The Puppet Masters”). 
• Aggregate public procurement data - combined with tax information and financial intelligence - can be analysed for red flag indicators, e.g., the percentage of tenders awarded to legal persons created in the period just before tender announcements (a high percentage could suggest that tenders were prearranged), and links between procurement data with STRs filed and tax discrepancies (a red flag indicator would be companies that have not declared any revenue to the tax authorities being awarded contracts). Misuse of legal persons may be more common in certain sectors than others, so countries can consider whether there are differences in sectoral vulnerabilities. 
• Incoming and outgoing MLA and other international cooperation requests related to legal persons and legal arrangements. 
• Objective press reports and independent, investigative journalism can provide useful background information and context.
• Information from academics, interviews with subject matter experts and NPOs conducting evidence-based research into ML. 
• Countries can supplement their knowledge through the analysis of cross-border risks, international cooperation, typologies report, etc. 

For domestic legal persons specifically:

• Collect and analyse registration statistics (e.g., incorporation volumes and trends) on all types of legal persons that can be created under their national laws.
• Investigate advertising practices by TCSPs promoting the jurisdiction as an international centre for incorporation/entity formation to non-residents - which attributes (e.g., anonymity, asset protection) are they advertising to non-residents to attract incorporation business? 

For foreign legal persons specifically:

• Cross-border transaction monitoring from FIU can show where funds have been moved between multiple legal persons in different jurisdictions (especially high-risk jurisdictions and tax havens) and show links with foreign legal persons. 
• Countries should consider their jurisdiction’s exposure to risks stemming from legal persons created in high-risk jurisdictions subject to a call for action or under increased monitoring of the FATF, or jurisdictions subject to economic or financial sanctions, embargoes or similar measures that are related to TF and issued by organisations such as the UN.

For legal arrangements specifically: 

• Data on creation and registration of legal arrangements (e.g. quantity of legal arrangements created, their nature etc.) from corporate or trust registries (where applicable) or tax authorities. 
• Cross-border transactions monitoring from the FIU involving trusts. 
• Records of investments linked to trusts (BO registry) e.g., real estate, luxury goods, companies. Records of trusts that hold bank accounts and other assets.