Beneficial Ownership Matters In An AML World

Beneficial ownership

Establishing beneficial ownership isn’t always as easy as it sounds but it’s a critical part of customer due diligence activity. It can become even more difficult when trusts are involved, something which was highlighted in the Pandora Papers 2021.

Changes to recommendations on beneficial ownership are imminent with a Financial Action Task Force (FATF) review already underway. In the meantime, we need to remain vigilant, understand how we can best meet requirements, and ensure we take the necessary steps to reliably establish ultimate beneficial ownership.

What is beneficial ownership?

A beneficial owner, or ultimate beneficial owner (UBO) is someone who has effective control of a customer, or owns a prescribed threshold of a customer on whose behalf a transaction is carried out. The UBO can be an individual customer, or part of a company or a trust. As a reporting entity the task is to ensure you understand who is managing the transaction and who will benefit the most.

We’re often asked if there is a difference between a beneficial owner and the ultimate beneficial owner. The answer is, no – there is no difference. In some company structures you may have two or three people that will benefit equally, whereas in a very complex structure you might have one person at the very top who is hidden by other structures. Whatever the situation, beneficial owner, or ultimate beneficial owner means the same.

However, whether the structure is simple or complex the UBO will always be an individual – it can never be a company as a company can’t make decisions or experience ramifications in the same way a person can.

Why is it important?

Ultimately, establishing beneficial ownership is important for a number of reasons:

  • It helps you to assess the risk of money laundering.
  • It saves time and money by identifying who needs to undergo due diligence.
  • It makes it harder for people to get away with using complex structures to hide the source of wealth and funds.

It’s clear criminals have, and will continue to try to use corporate vehicles to hide beneficial ownership if they can. This can make it difficult to identify who is controlling transactions or who benefits, which in turn means if we are not careful customer due diligence (CDD) could be carried out on the wrong person. For most entities, carrying out CDD when it’s not strictly necessary is a waste of time and money, identifying the beneficial owner at the outset makes sense from a financial point of view as well as when considering our AML obligations.

It can be complex and take a bit of effort to ensure you’ve got the right answers but it’s worth taking the time to do it right. And, in most cases, if you’re dealing with a company where all information is available, and you are reasonably comfortable there are no nominees, establishing UBO should be fairly straightforward.

How is beneficial ownership being hidden?

Disguising the UBO for nefarious purposes can be relatively easy, for example when setting up a company.

In New Zealand, setting up a company doesn’t have to take up much time, effort or money. So, once a company is registered and has a tax number it can become an attractive option for overseas actors intending to use NZ corporate structures to set up trusts for dubious purposes. On the face of it, it’s great to encourage business growth in NZ by making it easy to establish companies, but the very ease with which it can be done, can be used to hide the true source of funds and beneficial ownership.

The UK faces a similar challenge as it is very cheap and easy to set up a company there also. There are no checks done on addresses used to register companies. It can quickly turn into a quagmire for unwitting addressees, if their address is wrongly used by bad actors when the company is set up.

Here in New Zealand, we don’t check addresses either when a company is set up. While we are not yet seeing the same level of issues experienced in other countries, it is a situation which can quickly be taken advantage of.

What's being done to help identify UBO?

Well change can often be slow but it is coming.

For example, the Companies Register will also soon be used as a beneficial ownership register. This means information on beneficial owners of companies will become more accessible and make it easier to make reliable identification. This will also remove the nominee layer.

As nominees are basically nominated by the beneficial owner to hold shares or directorships in their name, removing this layer will provide more transparency.

However, there is still room for error. Like many things in the fight against money laundering, it ultimately boils down to how well you know your customer. There are a lot of legitimate reasons to have a nominee, i.e. if you’re based overseas and need somebody on the ground to make decisions on your behalf. And, there are a lot of illegitimate reasons to use a nominee. So don’t get tripped up, dig a little deeper to find the real beneficial owner if a nominee has been used.

What is the FATF doing?

The FATF are currently looking at recommendations 24 and 25 which look at trusts and companies and beneficial ownership, and are updating guidance 24 on beneficial ownership in general.

Recently, the FATF shared a draft of the proposed guidance. It appears changes are being made to better reflect real life and to make it more meaningful and useful.

This is a good start as its important regulators understand what dealing with beneficial ownership requirements is like for reporting entities and the difficulties faced. There’s no doubt it can be challenging and ultimately reporting entities will take the brunt of any regulation changes.

While change is required, it’s important the tools are in place for reporting entities to manage the requirements. If the tools don’t exist it makes it extremely hard for obligations to be met.

Take the EU as an example. They have removed the requirement to have beneficial ownership registers stating privacy as the reason. This makes it difficult to identify beneficial owners, the decision makers, what money is being made and streams of income.

So even though recommendations are aimed at governments to take and implement into their frameworks, there needs to be serious consideration into how changes would play out for a reporting entity.

In summary

Establishing beneficial ownership is a critical requirement of customer due diligence but it’s not always easy. Yes, a large majority of cases you deal with may be fairly simple, but there are likely to be cases where you may need to further your enquiries.

Know your customer, and you’ll find it easier to identify when something doesn’t make sense and needs investigation.

With many entities already feeling the cost of compliance, any changes to meeting beneficial ownership requirements, need to include the provision of tools to help entities meet their obligations. Without the right tools it will become increasingly hard for entities to carry out their due diligence with any real meaning.

We don’t have a date for publication of the new guidance just yet but we’ll keep you posted on any updates.

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