Each individual with a 25% or more equity stake in the legal organization, whether directly or indirectly, must be considered for calculating the beneficial ownership level. There will be a minimum of one and a maximum of five beneficial owners for a legal company. This article elaborates on ‘Calculation Thresholds For Beneficial Ownership Levels’.

Key Beneficial Ownership Thresholds

The following are the key beneficial ownership thresholds, prescribed by different organizations and bodies:

• FATCA – a 10% ownership threshold or below for Foreign Investment Vehicles
• High risk or PEPs – a threshold as low as 1% or 0.01% is required
• EU AML Directive – 25% shares or voting rights in a corporate entity. If, after having exhausted all possible means and provided no UBO is identified, the natural person(s) holding the position of senior managing officials are, in principle, considered to be the UBO
• Dodd-Frank – the beneficial owner of more than 5% of certain equity securities are to disclose information relating to such beneficial ownership: [sections 13(d) and 13(g)]
• SEC – 506(e) disclosure requires issuers to perform due diligence on any person that is going to become a 20% beneficial owner upon completion of a sale of securities

Utilizing financial records for calculation thresholds

To establish and configure transaction and UBO thresholds, thresholds are also computed using the customer’s financial statements, or in the event of a legal company, the information of the group entities. As reflected in the constituent papers, the ownership and control level and the financial records are utilized to calculate the threshold when UBOs are expressly recognized and validated.

Before onboarding, the client, calculations about beneficial ownership are made based on the thresholds, which serve as the foundation for determining the transaction thresholds that should be expected in each customer’s account. Any operation involving the exchange or recording of financial amounts that are initiated or processed is referred to as a transaction.

The risk profile determines the transaction threshold, which is a monetary value allocated to accounts or consumers. Every customer has a unique risk profile produced using the identifying information and other factors gathered throughout the customer or client’s onboarding process.

Threshold limits

Transactions and activities of the customers/clients must be within the threshold limit assigned to them based on the income level or the estimated business activity of the customers. At the time of opening their accounts, customers mention their income level or expected business volume, which enables the account opening time to define the financial threshold as a benchmark of monitoring for each customer.

The benchmark thresholds are linked with the account of the customers in the system so that whenever a transaction is occurred breaching the linked threshold, then an alert is generated by the system for review and investigation purposes. The MLRO or AML Team reviews the account activity based on the alert generated to identify any potential money laundering risk or suspicious transaction. 

Beneficial owner identification methods

For identifying a beneficial owner based on an existing organization chart of the corporate structure of the contracting party, an essential distinction is made between two methods, which are explained below. The calculation methods are discussed below: 

Accumulation method

The classification as the beneficial owner is assessed in the overall view of the organization chart. All direct and indirect shares of a natural person in a legal entity are taken into consideration. If an individual holds shares in several intermediate companies, all indirect shares are added together. When determining the beneficial owner based on the ownership and control structure, the calculation is always “bottom-up,” in other words, from the natural person through the levels of participation up to the contractual partner. If the total share thus determined reaches or exceeds the threshold of 25%, the natural person is considered the beneficial owner. 

Dominance method

Under the dominance method, a natural person or legal entity with a controlling interest in an entity, for example, a person is the owner of 50% or above of the share capital shares or rights to vote at the second or higher level in the customer’s ownership structure is considered to be a person with a controlling influence over that entity. The controlling person/entity has attributed the share of the company that controls it. This applies as long as control is exercised. If the dominance method’s calculation results in additional owners/persons with a controlling influence, these are deemed beneficial owners and the persons identified using the accumulation method.

Final Thoughts

This article elaborates on ‘Calculation Thresholds For Beneficial Ownership Levels’ and how it is relevant to CDD and KYC program for new and existing customers. There will be a minimum of one and a maximum of five beneficial owners for a legal company. Therefore, calculating the beneficial ownership level must be considered by the organizations.