The Bangko Sentral ng Pilipinas (BSP) has issued the guidelines on beneficial ownership (BO) due diligence to strengthen the country’s anti-money laundering (AML), terrorist financing (TF), and proliferation financing (PF) risk management rules.

The Anti-Money Laundering Council (AMLC), in identifying a BO refers to this as any natural person who: ultimately owns or controls the customer and/or on whose behalf a transaction or activity is being conducted; or as someone who has ultimate effective control over a legal person or arrangement.

Based on BSP rules, banks are required to collect BO information as a default AML response.

BSP Deputy Governor Chuchi G. Fonacier in a memo (Memorandum No. M-2024-021) explaining the guidance paper on BO due diligence, said “juridical entities” which are BOs “play a crucial role in the economic growth of a country through the different commercial and business activities they undertake” since their “financial transactions contribute to the breadth and depth of the country’s financial system.”

However, she warned that the unique separate legal personality of juridical entities can be used for “elaborate and complex schemes to conceal the true identity of beneficial owners and the real nature or purpose of the transactions.”

Fonacier said criminals “may hide behind seemingly legitimate businesses by concealing” their BO status with “complex corporate ownership structures or arrangements.”

This is why BO due diligence, she added, is increasingly regarded as an essential element of money laundering (ML), TF and PF risk management framework.

The guidance paper specifically discussed the requirements for both banks and non-banks to identify the BO as well as take reasonable measures to verify BO identity. “In case of juridical person or legal arrangement (banks and non-banks are) to have a system to understand the nature of the customer’s business and its ownership and control structure,” said Fonacier.

In addition, the BSP official said the guidelines should provide BSP supervised financial institutions with “functional reference material in benchmarking best practices in the industry” as well as “calibrating their policies, system, process and controls for enhanced BO identification and verification process, tailored-fit to the institution’s risk and context.”

Based on the guidance paper, financial transactions of juridical entities such as corporations, partnerships, foundations, as well as trusts and other types of legal persons and arrangements, are coursed through banks and other financial institutions.

It is crucial for banks and non-banks to recognize juridical entities to prevent exploitation as these can be concealed.

“As such, juridical entities can be misused or abused to facilitate various illegal activities, such as ML, TF or PF, and sanctions evasion. Criminals may hide behind the corporate veil to avoid detection, disguise their identity and/or conceal the real purpose, source or destination of financial transactions, to appear legitimate,” according to the BSP.

The BSP emphasized that BO due diligence ultimately plays an essential element of the ML/TF/PF risk management framework to effectively mitigate associated risks and prevent abuse or misuse of corporate vehicles for financial crime.

“It is imperative that BSFIs, through the proper conduct of IRA (institutional risk assessment) continue to understand their respective risk exposures to crimes and criminal proceeds hidden through shell companies and complex corporate structures, and assess the suitability of corresponding measures and controls on beneficial ownership due diligence. The results of the IRA must inform their risk mitigation strategies,” said the BSP.

The Philippines as of February 2024 is still on the global money laundering “gray list” of Paris-based Financial Action Task Force (FATF) despite progress made in complying with the required action plans on AML and combating financing of terrorism (CFT) measures. 

The BSP cited a March 2023 FATF document on the BO of legal persons, and indicates, among others, the generally insufficient level of effectiveness in combating the misuse of legal persons for ML and TF globally.

It noted that FATF wants countries such as the Philippines to use a multi-pronged approach for the collection of BO information to ensure that adequate, accurate and up-to-date information on the BO of legal persons is on hand.

The AMLC, which is headquartered in the BSP, in 2020 has reviewed that the risk assessment on legal persons and other business entities to ML was medium high. It further noted that the most common crimes involving them were corruption, illegal drugs, violations of the Electronic Commerce Act, and fraud.

Last February, the FATF urged the Philippines to implement its action plans as soon as possible. The original deadline given the Philippines to implement action plans was January 2023. After a year of extension or until January 2024, the country sought 12 months more of extension which means another year – or less – under the gray list.

The FATF however said that “the Philippines has taken steps towards improving its AML/CFT regime, including by identifying and investigating TF cases.”

The FATF reiterated that the Philippines should work more to address its strategic deficiencies such an effective risk-based supervision of designated non-financial businesses and professions. 

It should also show that it is using AML/CFT controls to mitigate risks associated with casino junkets; enhancing and streamlining law enforcement agencies’ access to BO information and taking steps to ensure that BO information is accurate and up-to-date; demonstrating an increase in money laundering investigations and prosecutions in line with risk; and that it is increasing the prosecution of terrorist financing cases.

The Philippines has been one of jurisdictions closely watched by FATF since June 2021.