Corporate structures form the backbone of organizations, defining ownership, control, and accountability. For professionals in Anti-Money Laundering (AML) and due diligence, understanding these structures is more than just a technical skill—it’s a necessity. Here, we’ll explore what corporate structures are, why they matter in AML, and how to effectively review and analyze them during due diligence.
What Is a Corporate Structure?
A corporate structure refers to the hierarchy and framework of an organization, detailing how it operates and who holds decision-making authority. This includes:
- Ownership Structure: Identifying shareholders or members and their percentage of ownership.
- Corporate Governance Structure: Outlining the roles of the board of directors, executives, and other decision-makers.
- Subsidiaries and Affiliates: Highlighting related entities that impact the organization’s operations or financial health.
- Corporate Structure Chart: A visual representation that maps out relationships between individuals, entities, and hierarchies within the organization.
Why Do Corporate Structures Matter in AML?
Corporate structures are integral to uncovering risks in financial transactions and business relationships. Here’s why they are vital to AML efforts:
- Transparency in Ownership: Understanding who owns or controls a company helps detect beneficial owners and identify potential risks, such as:
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- Shell companies hiding illicit activity.
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- Nominee shareholders or directors masking true ownership.
- Identifying Risky Relationships: Complex or opaque structures can signal attempts to obscure connections to politically exposed persons (PEPs), sanctioned individuals, or high-risk jurisdictions.
- Compliance with Regulations: Many AML frameworks require businesses to perform due diligence, including verifying corporate governance structures and ensuring compliance with Know Your Customer (KYC) obligations.
- Red Flags for Money Laundering: Intricate or unusual corporate arrangements may be designed to:
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- Evade taxes.
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- Launder money.
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- Facilitate fraud or other financial crimes.
How to Review and Analyze Corporate Structures
Conducting a thorough review of corporate structures is a key step in due diligence. Here’s a step-by-step guide:
- Obtain the Corporate Structure Chart: Request a clear and comprehensive corporate structure chart. If unavailable, create one based on available documents.
- Verify Beneficial Ownership: Identify and verify the ultimate beneficial owners (UBOs). Cross-check ownership percentages and ensure no nominee structures are used to disguise true ownership.
- Analyze Corporate Governance: Examine roles and responsibilities within the corporate governance structure. Look for conflicts of interest or unusual patterns, such as:
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- Overlapping roles (e.g., a single individual serving as both director and shareholder across multiple entities).
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- Unqualified individuals in key positions.
- Assess Subsidiaries and Affiliates: Review the relationships between parent companies, subsidiaries, and affiliates. Pay attention to:
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- Entities operating in high-risk jurisdictions.
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- Transactions between related parties that seem irregular.
- Evaluate Historical Changes: Investigate past changes in the corporate structure. Frequent or abrupt shifts may signal attempts to evade scrutiny or hide activities.
- Use Technology and Public Records: Leverage tools to analyze data, including AI-driven solutions for identifying patterns and inconsistencies. Supplement findings with public records and databases.
Why Corporate Structures Are Key to Due Diligence
In the context of due diligence, corporate structures provide a roadmap to:
- Risk Assessment: Uncover hidden risks related to ownership and operations.
- Legal and Regulatory Compliance: Ensure adherence to AML laws, including understanding the entities you’re doing business with.
- Enhanced Decision-Making: Equip organizations with the information needed to make informed decisions about partnerships, investments, or customer relationships.
Conclusion
Understanding corporate structures is essential for effective AML and due diligence practices. By analyzing ownership, governance, and affiliations, organizations can identify risks, ensure compliance, and contribute to a transparent financial ecosystem. A robust review of corporate structure charts and governance models isn’t just best practice—it’s a cornerstone of combating financial crime.
