'Ultimate beneficial ownership': SECP speaks about 'complex' legal structures challenge

The Securities and Exchange Commission of Pakistan (SECP) has apprehended that the complex legal structures may be used to hide the 'ultimate beneficial ownership' by splitting shareholdings below the prescribed control level thresholds (10 percent).

In a presentation, the SECP further disclosed that the Asset Management Companies & Collective Investment Schemes (AMCs & CISs) are medium-high vulnerability to money laundering. The 98 percent of the active customer accounts in the asset management sector belong to individuals/natural persons. Politically exposed persons (PEPs) and their close associates, high net worth individuals, foreign and non-resident customers, and NPOs/ charitable organizations pose a higher degree of vulnerability if they are not identified through the KYC/CDD process.

Since all the payments/receipts in this sector are routed through the banking channels, the proceeds of crime could be routed through the banking channels for investment/placement in the fund/wealth management sector for the purpose of money laundering (ML).

The SECP said that the complex legal structures may be used to hide the ultimate beneficial ownership by splitting shareholdings below the prescribed control level thresholds (10%). The products and services offered by the fund/wealth management sector include the feature of investment/deposit as well the feature of easy entry and exit at any time. This makes the sector attractive for ML/TF and therefore is assessed as a level of medium-high vulnerability.

A presentation of the SECP revealed that there are only four active products currently offered in the securities market sector, such as Ready Market, Deliverable Futures Contract, Margin Trading System and Margin Financing. Equity market products could be used to layer or integrate the proceeds of crime, or to transfer value to terrorists, and are therefore vulnerable for money laundering activities.

The securities sector is inherently vulnerable to ML/TF from the 1,562 identified politically exposed persons (PEPs). Since almost all the payments/receipts in this sector are routed through the banking channels, the proceeds of corruption can be routed through banking channels for investment/placement in the securities sector. There are 5,134 high net worth customers investing in the securities sector.

These customers may have generated their wealth from multiple sources and regulated persons may not have enough information to identify and verify all sources of funds.. It is unknown how much money is invested in Pakistani capital markets by these non-residents. However, due to the significant possibility that large amounts of Pakistani criminal proceeds are laundered abroad, it also seems likely that final integration could occur by bringing back such proceeds and investing them in Pakistani assets, including through capital markets, the SECP said.

Geographically, 99 percent of branches of securities brokers are centered in Karachi, Islamabad and Lahore. Further, no broker has any branch out of Pakistan. Out of total active and inactive customers following is the region wise distribution of customers i.e. 7,199 in KPK, 209 in FATA, 75,649 in Punjab, 109,320 in Sindh, 1,454 in Balochistan, 7,554 in Islamabad, 112 in Gilgit/Baltistan and 823 in Azad Jammu & Kashmir.

The delivery channels can increase ML risk in the securities market based on the use of wire transfers, online payment transaction, payment through debit/credit cards, and internet-based payment systems, SECP added.