Beneficial Ownership Versus Control

Posted in Know Your Customer (KYC) on March 12, 2024
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This article elaborates on ‘Beneficial Ownership Versus Control: Accurate Definition In 2022’.

To detect, disrupt, and prevent money laundering and terrorism funding, it’s crucial to know who has ultimate authority over the consumer. The control that has to be identified and understood is frequently held by beneficial owners. In certain cases, a group of businesses may have influence over a client, although the ultimate beneficial owner may be a single individual or a single group firm. 

Although identifying controls can be difficult, especially when a group of organisations is involved, the organisation must guarantee that real controls are identified before onboarding the client or creating the account. Control information may be public, or it may need to be recognised and confirmed specifically in some instances.

Beneficial Ownership:

Because of the participation of several investors or corporations, the control structure for big enterprises can be complicated. In such circumstances, the final control must be understood as part of the customer’s risk profile.

Beneficial owner, concerning a company or LLP, means: 

  • any individual who owns or controls (directly or indirectly), whether through bearer shareholdings or other methods, more than 25% of the company’s or LLP‘s shares or voting rights; 
  • any person who controls the company or LLP, or 
  • any person who exercises control over the management of the company or LLP.

In the case of a partnership, the term “beneficial owner” refers to someone who is ultimately entitled to or controls (whether directly or indirectly) more than 25% of the partnership’s capital or earnings or more than 25% of the voting rights.

Beneficial Ownership Versus Control: Accurate Definition In 2022

What is Control?

A person shall have “control” if: 

  • concerning a company, such person: 
  • holds, directly or indirectly, more than 25% of the company’s shares; 
  • holds, directly or indirectly, more than 25% of the voting rights in the company; or
  • holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company; 
  • concerning an LLP, the person, holds, directly or indirectly, more than 25% of the voting rights in the conduct and management of the LLP;

FATF on beneficial ownership

The FATF became the first international body to set global standards on beneficial ownership. It required countries to ensure that their authorities could obtain up-to-date and accurate information about the person(s) behind the company’s foundations and other legal individuals. The FATF further strengthened and clarified its beneficial ownership requirements in 2012.

The FATF has finalized best practices with examples from across the global network of FATF and other regional bodies, which will help countries implement the FATF‘s requirements. The report highlights that jurisdiction using a multi-pronged approach with several sources of information is often more effective in preventing the misuse of an entity or legal person for criminal purposes.

To ensure the transparency of control and beneficial ownership are essential to AML/CFT regimes so that the competent authorities may help the organizations in tracing and identifying the right control structure, as well as to provide high-quality financial information where needed.

Adequacy, accuracy, and timeliness of control information:

Inadequate measures to ensure that control information was accurate and up-to-date may lead to the risk of ML and TF.

Following are the risks involved, where control may not be accurately identified:

  • Information was not accurate – they are not adequately and actively verified, tested, or monitored. There was no obliged party to verify, test, or monitor the information or the obliged party might not have a rigorous implementation of CDD measures; 
  • Relevant parties were not required to keep records for some time (for at least five years); 
  • Legal persons did not update their beneficial ownership information or inform the company registry when there was a change of beneficial ownership; 
  • There was a lack of coordination among different sources of information and there was no cross-checking to ensure the accuracy of the information;
  • Information on beneficial ownership was difficult to identify when a complex structure was involved; 
  • Information on beneficial ownership was not always available when foreign ownership was involved.

Importance of identification control

The identification of control safeguards the organization from being used for money laundering or terrorist activities due to the non-identifying of genuine beneficial owners. Customers’ control and genuine beneficial owners must be identified by all companies.

This may be accomplished by acquiring legal information about the company or customer and studying the group’s or entity’s audited financial records. If the firm is publicly traded, getting control information is typically a simple and straightforward process.

The organization must understand that the beneficial owner is an individual who ultimately owns or controls the entity, which information is usually available as public information. If the customer is not a listed company, then there may be difficulties in identifying control structure.

However, the organizations must explore all possible avenues to identify the true control and beneficial ownership by contacting the regulators or registrars or the bankers of the customers.

Final Thoughts

To detect and prevent ML/TF risks, it’s crucial to know who has ultimate authority over the consumer. The control that has to be identified and understood is frequently held by beneficial owners.