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Instruction Guide to Mitigate Beneficial Ownership Risk within Procurement Systems

Updated: Sep 17

The lack of transparency in beneficial ownership is a route that is understood by global anti-money laundering organisations as high risk in the majority of countries that can facilitate organised and coordinated criminal activities, that facilitates the laundering of the proceeds of crime and hides corrupt actors and an individual’s direct link in the influence and award of high value contracts.

Beneficial ownership

Beneficial ownership (BO) risk arises when the true owners of a business are hidden, often leading to corruption, money laundering, and other illicit activities. Within procurement, this risk can compromise the integrity of the process and lead to unfair practices. This guide provides a structured approach to mitigate such risks, ensuring transparency, accountability, and integrity in procurement processes.


1. Understanding Beneficial Ownership


Beneficial Ownership Definition

Beneficial Ownership refers to individuals who ultimately own, control, or benefit from a company, even if the ownership is indirect or obscured by intermediaries. Identifying these individuals is crucial to ensure transparency and integrity in procurement.


Associated Risks

Understanding the crime typologies and methods of moving and diverting public funds through national procurement and payment systems can be a valuable step in identifying the level of risk.

  • Money laundering──knowing how public funds can be diverted from payment systems including the creation of fictitious works and ghost companies to launder funds within national and international financial and commercial systems.

  • Fraudulent activities──within the pre-tender, tender, award and contract management activities.

  • Conflicts of interest──and the undisclosed association with individuals working within the procurement lifecycle or political interference in the award of contracts.

  • Hiding criminal associations──including links to organised criminal activities and/or political funding and influence.


2. Establish Clear Policies and Procedures

The implementation of a national Beneficial Ownership registry is crucial in reducing the risks of corruption and money laundering. When formulating national procurement policies, it is important to take into account various policy areas beyond just anti-corruption measures.


2.1. Development of Policies

Key Elements:

  • Define beneficial ownership and its relevance to procurement.

  • Outline the importance of transparency in beneficial ownership.

  • Specify due diligence requirements.


2.2. Procedure Implementation

Procedures consist of:

  • Beneficial ownership disclosure requirements in tender documents.

  • Regular updates and declarations by suppliers and contractors.

  • Verification processes for the disclosed information.


2.3. Contract Clauses:

  • Include clauses requiring suppliers to disclose beneficial ownership information.

  • Specify penalties for non-compliance or false information.


Beneficial ownership transparency is not just a regulatory requirement; it is a fundamental pillar in the fight against global corruption and illicit financial flows Elena Panfilova, Vice-Chair of Transparency International

3. Perform Comprehensive Due Diligence

In addition to standard supplier due diligence, the vetting process should incorporate how a new supplier is going to ensure that it doesn’t pass on its fraud risk that might include their counter fraud programmes and education. Beneficial ownership verification should be part of this evaluation.


3.1. Initial Due Diligence

Supplier Registration:

  1. Require suppliers to provide detailed information on their ownership structure.

  2. Use a standardised form for beneficial ownership declaration.

  3. Verify the identity of beneficial owners using reliable sources, comparing this information with staff and supplier, other bidding companies or where appropriate, friends, family or associates of national PEPs.

  4. Assess the financial health and reputation of the supplier.

    Verification Process:

  5. Verify the information provided through independent sources, such as corporate registries and databases.

  6. Utilise third-party verification services if necessary.

    Risk-Based Approach:

  7. Apply a risk-based approach to due diligence, focusing more resources on high-risk suppliers and projects.

  8. Consider factors such as jurisdiction, industry, financial stability and ownership complexity.


3.2. Ongoing Due Diligence

This is particularly important in contracts where a contractor has failed to meet contractual requirements, whether this is because of substandard works or services, or having inadequate resources to fulfil contractual obligations. At this point due diligence should be introduced to determine whether there was irregularity in the contract award process and whether there was any hidden influence with the intention of directing funds away from the project.

Actions:

  • Regularly update and review beneficial ownership information.

  • Monitor changes in ownership and control structures.

  • Reassess risk levels periodically and after significant changes.


4. Use Technological Tools

Within the global advancement of technology solutions, there exists a significant opportunity to reduce the risk of BO by obtaining access to or developing a national solution.


4.1. Beneficial Ownership Databases

Having access to or creating databases that can verify beneficial ownership information is crucial for procurement and other relevant organisations.

Examples:

  • Utilize national and international beneficial ownership registries.

  • Leverage commercial databases that provide beneficial ownership information.


4.2. Data Analytics and Monitoring

Capabilities:

  • Employ data analytics to detect unusual patterns or red flags.

  • Comparison of BO, Company formation information and Politically Exposed Person data for matches.

  • Implement automated monitoring systems for continuous oversight.


4.3 Technology Tools

  • Blockchain Technology: Utilise blockchain for transparent and immutable records of beneficial ownership.

  • Artificial Intelligence: Deploy AI tools to analyse ownership data and detect patterns indicative of hidden beneficial ownership.

  • Database Solutions: Leverage comprehensive databases to cross-check and verify beneficial ownership information.


5. Training and Awareness


5.1. Staff Training

Focus Areas:

  • Importance of beneficial ownership transparency including how BO is used as part of a money laundering methodology

  • How to collect and verify beneficial ownership information.

  • Identifying red flags and risk indicators.


5.2. Supplier Awareness

Initiatives:

  • Educate suppliers about the importance of disclosing beneficial ownership.

  • Provide clear instructions on how to complete disclosure forms.

  • Communicate the consequences of non-disclosure or false information.


6. Strengthen Contractual Controls


6.1. Contract Clauses

Incorporate:

  • Clauses requiring the disclosure of beneficial ownership information.

  • Penalties for non-compliance or false disclosures.

  • Right to audit and investigate beneficial ownership information.


6.2. Enforcement Mechanisms

Implement:

  • Regular audits and compliance checks.

  • Swift action against non-compliant suppliers, including termination of contracts, if appropriate.


Corruption risk assessment

7. Collaboration and Information Sharing

Many countries acknowledge the necessity of enhanced cooperation between procurement entities or regulators and national law enforcement agencies to mitigate the risk associated with beneficial ownership. This involves sharing information to more effectively pinpoint money laundering risks, especially in high-value contracts where corruption and money laundering risks may increase.


7.1. Inter-Agency Collaboration

Actions:

  • Collaborate with other governmental agencies including financial intelligence units and anti-corruption agencies to share beneficial ownership information.

  • Participate in national and international initiatives aimed at increasing transparency.

  • Involve procurement regulators in the national anti-money laundering discussions.


7.2. Industry Partnerships

Approaches:

  • Work with industry associations to promote best practices.

  • Engage in public-private partnerships to enhance transparency including receiving feedback from bidding companies.


7.3. Compliance Requirements

  • Identify and verify beneficial owners.

  • Maintain accurate and up-to-date records.

  • Report suspicious activities to relevant authorities that might include regulators or law enforcement agencies.


8. Monitoring and Reporting

Due to the significant financial risks associated with beneficial ownership, continued monitoring and reporting should be integrated into a risk management approach.


8.1. Internal Monitoring

Methods:

  • Establish an internal audit or review function focused on beneficial ownership compliance.

  • Regularly report on beneficial ownership risk management activities to senior management.

  • Implement systems to continuously monitor suppliers for red flags.


8.2. Reporting Mechanisms:

  • Establish clear procedures for reporting suspicious activities.

  • Ensure that reports are promptly escalated to the appropriate authorities.


8.3. External Reporting

Requirements:

  • Introduce a reporting mechanism of beneficial ownership information to relevant regulatory bodies.

  • Disclose beneficial ownership information publicly, where appropriate.


9. Continuous Improvement


9.1. Feedback Mechanism

Develop:

  • Mechanisms for receiving feedback on beneficial ownership processes from stakeholders.

  • To help refine procedures, collect feedback from procurement staff and suppliers on the effectiveness of controls and/or non-compliance with BO requirements.


9.2. Periodic Review

Conduct:

  • Regular reviews of policies, procedures, and practices at an organisation and national level.

  • Stay updated with changes in legislation and best practices.


Conclusion

Addressing the risk of beneficial ownership in procurement is a continuous effort that demands transparency, due diligence, and ongoing enhancement. Adopting a holistic strategy includes developing policies, conducting due diligence, continuously monitoring, and leveraging advanced technology. By following the recommendations provided in this guide, entities can boost transparency, minimize risks, and uphold the integrity of their procurement procedures.


 

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