The information and assistance that a securities and futures authority may need from a foreign counterpart in the course of an investigation varies depending on many factors, including the nature of the suspected violation, the powers vested in the requesting authority and the contemplated enforcement action. Typically, information concerning ownership and control of entities and accounts location of assets derived from illegal activities and transaction data is necessary to pursue an investigation and successfully prosecute securities and futures violations. When such information is unavailable because it is located in an uncooperative and under-regulated jurisdiction, enforcement efforts can be compromised. In fact, it is because of the potential to thwart investigations that some wrongdoers purposely locate their illegal operations in under-regulated and uncooperative jurisdictions.

There are two principal obstacles that may be encountered while trying to obtain information from under-regulated and uncooperative jurisdictions:

• they have no requirement or insufficient requirements to create records of beneficial ownership and controlling persons (under-regulation);
• they impose obstacles upon or do not provide sufficient means for foreign securities and futures authorities to obtain such information (uncooperativeness).

A. NEEDS FOR INFORMATION

In the course of their investigations, securities ant futures regulators may need information concerning the beneficial ownership or controlling persons of:

1. Entities or accounts of entities that engage, directly or indirectly, in securities or futures transactions

This refers mainly to persons or entities who choose to trade on regulated markets through entities or accounts opened with a financial institution located in an under-regulated and uncooperative jurisdiction. Obtaining information about the true identity of market participants is important in many types of investigations including: insider trading; and failures to report ownership information at the prescribed threshold; market manipulation.

2. Entities or accounts of entities that are used to hold and/or conceal the holding of securities and futures contracts or proceeds from their sale

In many instances, wrongdoers will use entities or accounts located in under-regulated and uncooperative jurisdictions to hold or conceal the proceeds of illegal securities or futures activity Identifying the true ownership and control of entities or accounts suspected of sheltering such proceeds is critical to securities and futures regulators in their efforts to trace and repatriate fraudulently obtained funds that have been deposited in or channeled through such jurisdictions.

3. Entities that engage in transactions that have or will materially affect the value of public companies or the price of a commodity for future delivery

Information about actual principals is particularly critical in situations where it appears that entities or accounts are being traded according to a common plan or scheme or are engaging in suspicious transactions among themselves. Transactions between entities of the same group or transactions designed to misrepresent the financial situation of a public company are often conducted through entities or accounts located in an under-regulated and uncooperative jurisdiction, to conceal the fact that the entities are owned or controlled by the same principals. Whether the suspicious transactions are performed on or off a regulated marker, or involve publicly traded securities, they have the effect of altering the appearance of the financial picture of an issuer. Similarly, for futures transactions, trading activity designed to affect the price of futures contracts may be more difficult to detect when the traders use multiple accounts or entities located in an under-regulated and uncooperative jurisdictions to accomplish their scheme.

4. Entities that market securities and futures products and services ²

Entities that make fraudulent misrepresentations and employ high pressure sales techniques to induce the investing public to buy securities and futures products have attempted to evade securities and futures regulators by locating their operations in under-regulated and uncooperative jurisdictions. Because they operate from such jurisdictions, information about the principals of the entities and the nature of the products they are selling is difficult to obtain.

B. OBSTACLES IN OBTAINING SUCH INFORMATION

1. Insufficient requirements to create or maintain records

Enforcement difficulties may arise because a jurisdiction has no requirement or insufficient requirements to maintain records identifying the beneficial ownership and controlling persons of entities or entities' accounts at financial institutions. In particular, the absence of a requirement that the bona fide initial shareholders and managers of a company be identified and that any subsequent transfer of ownership and control be recorded, may create substantial difficulties for investigations by securities and futures regulators.

Arrangements, such as the use of a series of legal entities. that are designed to conceal the identity of principals can be established in regulated as well as in under-regulated jurisdictions. In a regulated jurisdiction, generally, the identifying information is required to be recorded and maintained within the system, and securities and futures regulators have the authority to obtain such information. In under-regulated jurisdictions, however, this information may not be available to regulators, so it often is easier for persons to conceal their identities ³. Securities and futures regulators have identified a variety of methods used by wrongdoers to conceal their identity, including⁴:

• Operating through a shell company that has no legitimate business purpose other than to conceal the beneficial identity of its owner; wrongdoers can operate either through an existing shell company or one specifically created to accomplish an illegal scheme. In some under-regulated jurisdictions, there are businesses that have developed to create shell corporations for sale to "customers". Using an existing shell corporation has the advantage of disguising the true nature of the business operation and giving the impression that the business pre-dated the illegal activity.
• Using nominee shareholders to establish a corporation whose ownership is in bearer form, then transferring ownership of the bearer shares from the nominees to the true beneficial owners. Usually, the transfer of ownership is conducted through an intermediary, such as an attorney or a banker, so that the nominees themselves have never been in contact with and do not know the identity of the true beneficial owner of the corporation.
• Establishing a trust for the beneficial owner and directing transactions through a trustee who is not the beneficial owner but who has a fiduciary ob1igation to protect the identity of the beneficial owner. In jurisdictions where records of the beneficial ownership of the trust are not required to be established or made available to regulators, the trustee may be the only source of identifying information.
• Using an attorney to conduct transactions on behalf of the account, and then relying on claims of attorney-client privilege to protect the identity of the account holder. A similar scheme may be organized which auditors who, in some jurisdictions, can assert a similar privilege based on fiduciary obligations.
• In jurisdictions where there is no requirement to provide beneficial ownership information to the bank or brokers with which the account is established, or where secrecy or blocking laws prevent transmission of such information to regulators, assertion of the privilege may thwart regulator's investigative efforts.

The problems associated with such entities can be compounded when wrongdoers combine the various approaches to protect themselves from being identified. In addition, by establishing the entities and accounts in several under-regulated and uncooperative jurisdictions, principals can further complicate the investigative efforts of regulators. 2. Obstacles to the transmission of information to a foreign securities and futures regulator

Enforcement difficulties may also arise from the fact that uncooperative jurisdictions impose obstacles on or do not provide sufficient means for foreign securities or futures authorities to obtain information about ownership and control of entities and accounts. The difficulties may result (a) from a lack of ability of the local authorities to obtain records and/or information or (b) from a lack of reliable channels for information sharing.

a . Lack of ability of the local authorities to obtain records anal/or information

The inability of local authorities to obtain information and records may result from the existence of professional or financial secrecy laws that do not allow information to be obtained and used for securities and futures enforcement purposes by the local authority.

Most jurisdictions, including highly regulated ones have established legal provisions protecting privacy and individual rights, which inter ail, prohibit banks from disclosing information about their customers' accounts. However, in many regulated jurisdictions, securities and futures authorities have been granted legal authority to obtain information otherwise protected by secrecy laws. In under-regulated and uncooperative jurisdictions, securities and futures authorities, where they exist, do not have the authority to obtain such information.

Local authorities in uncooperative and under-regulated jurisdictions may also be restricted in their ability to obtain records and information in securities and futures investigations because of their lack of power to compel testimony or the production of documents. Such authorities may be forced to rely on voluntary cooperation which may not be forthcoming, particularly where the suspicious activity involves potential violations of foreign laws and regulations.

Last, the local authority may lack the necessary resources, in terms of staff, money and expertise, to conduct investigations on behalf of a foreign authority. This may constitute a hurdle to the establishment of a regular cooperative relationship with the jurisdiction involved.

b. Lack of reliable channels for information sharing

Even where a local authority has been granted the authority to compel the production of documents and testimony, and to obtain information otherwise protected by secrecy laws for use in its own domestic investigations, enforcement difficulties still may occur if the local authority is not empowered to obtain the information on behalf of, or provide it to, a foreign securities or futures regulator.

In such jurisdictions, mechanisms for international cooperation in securities and futures enforcement either may not exist, or may be inadequate to provide the assistance needed by the foreign regulator.

Footnote:

2. This part of the mandate has ,to a large extent , already been addressed within the IOSCO report issued in October 1993 entitled "Protecting the small investor : combatting transnational retail securities and futures fraud "(the "boiler room "report). The Working Party does not intend to duplicate here the work done in the boiler room report.

3. In addition to this IOSCO mandate , we are aware that the Financial Action Task Force has considered issues raised by the use of some of the forms described below in the context of its recommendations concerning customer identification requirements for financial institutions to combat money laundering.

4. The Working Party recognizes that many transactions through under-regulated and uncooperative jurisdictions using these forms, do not violate securities and futures statutory or regulatory provisions.