Circular ownership refers to a complex form of corporate structuring where a company holds a significant stake in another company, which in turn has a stake in the original company, creating a loop or circle of ownership.
According to Moody’s, this arrangement can involve multiple organizations, forming large, layered networks. Such structures are often used for managing business operations, risk mitigation, and tax optimisation. However, they can also obscure ownership, posing a risk of illicit activities. Due diligence is essential in these cases to ensure a clear understanding of the businesses involved.
The creation of circular ownership structures, while not illegal, serves various legitimate and potentially illicit purposes. For financial institutions and regulated businesses, it is crucial to conduct thorough due diligence and risk assessments due to the opaque nature of these structures.
The lack of transparency can obscure the identity of the ultimate beneficial owners (UBOs), who may be high-risk individuals or entities under sanctions, thereby necessitating further action to mitigate associated risks.
Moody’s Shell Company Indicator tool has identified approximately 61,000 corporate entities worldwide that demonstrate patterns of circular ownership. This tool facilitates targeted enhanced due diligence, crucial for uncovering the layers of ownership and determining the risk exposure associated with UBOs within these complex corporate structures.
Understanding beneficial ownership is key to navigating circular ownership. Defined by the Financial Action Task Force (FATF) as the natural persons who ultimately own or control a customer or the natural persons on whose behalf a transaction is conducted, beneficial ownership includes those who exercise ultimate effective control over a legal entity. Circular ownership can be strategically used to exploit loopholes in beneficial ownership regulations, allowing individuals to control entities indirectly, thus evading regulatory scrutiny.
An illustrative case of circular ownership involves Jane Doe, who officially holds a minor percentage of shares in Company A, insufficient to classify her as a beneficial owner.
However, through a series of interconnected ownerships, she effectively controls a much larger share of the company. Such structures, while legal, can also be employed by criminals and sanctioned individuals to conduct money laundering, evade taxes, finance terrorism, and other illicit activities, often shielded by the complexity of the ownership structures.
The prevalence of circular ownership is evident from Moody’s data, which shows significant occurrences in various countries, highlighting the global scale of this issue. Identifying and understanding these patterns is essential for those in compliance, risk management, and anti-financial crime roles.
The Shell Company Indicator provides a comprehensive method for detecting such risky corporate behaviors and incorporating this information into due diligence and monitoring processes. This tool is invaluable for uncovering hidden risks and supporting targeted investigations to improve decision-making in financial compliance.
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