The availability of beneficial ownership information is a key instrument in the fight against financial crime. In this guide, we will delve into the rules, requirements, and significance of identifying beneficial owners, spotlighting its role in international compliance, transparency and illicit financial flows.
Who is a Beneficial Owner?
The Financial Action Task Force (FATF) defines an Ultimate Beneficial Owner (UBO) as the “natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.
It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” Anytime an account is opened or maintained, financial institutions must obtain the identity of all individuals who have significant ownership or control, and the UBO should undergo a Know Your Customer (KYC) check.
Identifying beneficial owners is not just a regulatory obligation; it is a key risk management procedure. For further details, see our blog on Beneficial Ownership: Compliance vs Business where we explore this topic further.
Examples of Beneficial Owners
Examples of different types of beneficial ownership include UBOs of a business, a trust, a property or securities. The UBO of a business will own the majority of its shares and will therefore earn money from the company.
A trust is a legal arrangement in which one party (the trustor) transfers ownership of assets to another party (the trustee) for management on behalf of a third party (the beneficiary).
Regarding property, the person who enjoys the benefits of a property is also usually its legal owner, however if individuals prefer to keep their ownership private, they can do so via a trust.
As for securities, although the publicly traded stocks are registered in the name of financial institutions, the individuals holding these shares are the UBOs as they are entitled to any capital gains from their sale or trade.
What is the Beneficial Owner Rule?
Transparency and compliance are the cornerstones of a robust financial system. The Panama Papers Leak demonstrated the complex and opaque nature of ownership structures employed by multinational companies. This lack of transparency surrounding beneficial ownership was a substantial loophole that enabled the illicit laundering of funds via offshore accounts. The investigation into the leaked documents served as a stark wake-up call for government agencies, emphasizing that the absence of beneficial ownership transparency is in fact a gap in due diligence infrastructure.
In order to prevent illicit financial flows, the United States government is introducing the Beneficial Ownership Information Reporting Rule in January 2024, enforced by the Financial Crime Enforcement Network (FinCEN), which will require many companies in the U.S. to disclose information about their beneficial owners.
This rule aims to safeguard the U.S.’s financial system from illicit use and, by association, help prevent or counteract financial crimes in the country, including money laundering and tax evasion. To achieve this, it is imperative to understand who companies are doing business with, including the underlying ownership and control structures of its business partners.
The Role of Beneficial Ownership in Banking & Financial Institutions
The anonymity afforded by companies who do not disclose UBOs facilitates fraud, which in turn erodes trust and hinders investment. Ensuring public access to reliable information about company ownership enables both businesses and governments to know who they are doing business with.
As a result, beneficial ownership disclosure serves as a powerful tool to enhance Anti-Money Laundering (AML) and KYC practices within the financial sector, as companies gain a clearer understanding of their business partners and any associated risks.
Anonymous or opaque beneficial ownership is synonymous to public invisibility; this encourages Illicit players to funnel dirty money through anonymous shell companies in order to conceal its origins. It further encourages terrorist groups to discreetly move funds in order to finance activities under the radar. Not to mention, wealthy individuals can dodge tax obligations by hiding their assets and income.
Nevertheless, financial institutions can combat money laundering, terrorist financing and tax evasion or by unmasking opaque offshore schemes. Understanding the individuals behind an entity, their source of wealth and source of funds of corporate accounts, makes it more difficult to disguise proceeds of corruption, fraud, or other crimes.
Consequently, identifying a company’s UBOs can prevent illicit funds from entering the financial system in the first place. From a global standpoint, public access to verified registries of company ownership improves the business environment by reducing risk. For example, government agencies can cross-check whether ultra-wealthy individuals and entities are declaring income appropriately.
KYC Beneficial Owner Requirements
While specific KYC requirements for UBO disclosures may vary across jurisdictions, the FATF has found that any individual holding 25% or more in a corporate customer is an “acceptable” equity ownership threshold to identify beneficial owners.
Similarly, any person with managerial control over the entity, such as executive directors, should be considered as a beneficial owner. Financial institutions must disclose the identity of all such individuals.
Why is Beneficial Ownership Identification Important for KYC Compliance?
In order to satisfy KYC compliance requirements, companies of all types must identify the beneficial owners of their customers, suppliers, and other third parties. This enables financial institutions to:
- Assess the potential risks associated with a business relationship, encouraging companies to make informed decisions about their partners
- Prevent illicit actors from infiltrating legitimate business relationships
- Meet transparency and good corporate governance requirements on the part of investors and consumers.
- Comply with due diligence and audit reporting laws to fight financial crime, bribery and corruption
Common Challenges to Determining a Company’s Beneficial Owner
- Laws, regulatory requirements and client documentation standards can vary significantly across jurisdictions, making the lack of a coordinated international approach one of the main challenges in identifying UBOs.
- Offshore entities and secrecy havens often exploit this lack of uniformity through lax laws around beneficial ownership, offering anonymity and opacity. As a result, cross-border variations in disclosure requirements obscure ownership, making compliance increasingly difficult for multinational organizations.
- On the topic of jurisdictional inconsistency, in some countries, ownership can be readily transferred. These shifts in control can occur without notifying the bank, meaning high-risk individuals could gain control of an entity without the bank's knowledge, exceeding the financial institution's risk appetite. If these ownership changes go undetected or undisclosed, financial institutions may unknowingly maintain high-risk clients.
- Not only is there a lack of standardized approach across jurisdictions, but UBO regulations are in a state of constant evolution. It is crucial financial institutions remain vigilant and adapt to changing requirements in order to stay compliant.
Beneficial Ownership FAQs
How is Beneficial Ownership Different from Legal Ownership?
Beneficial ownership refers to the ultimate beneficiary or beneficiaries of an entity; the person who truly profits from and controls the shares. Legal ownership on the other hand refers to the titleholder of the shares under their name or company. They are not necessarily entitled to economic or voting rights.
What Are the Risks Associated with Anonymous Beneficial Ownership?
Anonymous beneficial ownership can lead to complex webs of opaque shell companies that conceal the true owners' identities. In turn, this facilitates illicit financial activities, including money laundering, terrorist financing and tax evasion.
How Can Financial Institutions Identify Beneficial Owners Effectively?
When entering into business relationships, financial institutions are required to carry out customer due diligence measures to identify and verify the identity of the beneficial owners. They can ask their clients to provide a list of shareholders or other documentation that allows for the identification of people with significant control of the corporate customer.
Which Industries Are Most Susceptible to the Misuse of Beneficial Ownership?
Industries that involve complex ownership structures, such as real estate, shell companies, and trusts, are particularly susceptible to the misuse of beneficial ownership.
Who is the Beneficial Owner of a Trust?
The beneficial owner of a trust is the individual or entity that benefits from its assets and/or income, which is usually the beneficiary. However, legal ownership may be held by a trustee, settlor or protector. In certain scenarios, the trustee can also qualify as a beneficial owner if they stand to personally gain from how the assets are managed.
Customer Due Diligence & KYC With Fenergo
To minimize the risk of exposing your organization to financial crime, it is essential to implement due diligence processes aimed at collecting information about the beneficial owner.
This is a key step in KYC as it identifies the individuals who ultimately control and benefit from a business. Fenergo’s KYC solution gives financial institutions peace of mind that the correct levels of due diligence are being applied to clients and related parties.