Editor note: article originally published in February 2023, and has been updated in April 2024 to reflect regulatory changes.
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.
The intricacies of establishing beneficial ownership has also been on the Financial Action Task Force (FATF) agenda for some time, and last month (March 2024) they published their updated recommendations. These changes aim to improve transparency of beneficial ownership and provide guidance on how to assess risk, and the requirements to obtain and verify beneficial ownership information.
Here we relook at beneficial ownership, the recent recommended changes, and the impacts to your current AML policies and procedures.
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 changes have the FATF made to help identify beneficial ownership?
The key change is the recommendation to identify ultimate effective controllers and ensure you understand how much control they have. Previous recommendations meant you had to capture active controllers, beneficial ownership and persons acting on behalf, but now you have to dig a little deeper in case the person acting on behalf has control elsewhere also.
These new guidelines are intended to help close this loophole and they will now be captured under the regime.
It sounds complex and it is, but this is where knowing your client comes in handy so you truly know who you’re acting for. Remember, just because a person is sitting in front of you signing necessary documentation it doesn’t mean they have full control over that transaction.
While this may require more checks it is a risk based approach which will make it harder for ultimate holding companies to be used to hide identities.
What hasn't changed?
The New Zealand Government has been discussing for some time now the development of a beneficial ownership register which would help provide visibility to entities. In December 2021, it was agreed that companies and limited partnerships should be required to provide to the Companies Office information about their beneficial owners, however a Bill has not yet been introduced to this effect.
A register would benefit entities as it would mean information on beneficial owners of companies would become more accessible and make it easier to make reliable identification.
Some countries such as Iceland have established a beneficial ownership register but other countries, like NZ, are also experiencing delays or barriers to establishing this resource. For example, the EU removed the requirement to have beneficial ownership registers stating privacy as the reason.
Without the right tools it can make it extremely hard for obligations to be met, however it is a requirement to establish beneficial ownership, and your efforts to do this should be completed and documented on all relevant clients.
What do you need to add to your policies and procedures?
Anybody conducting CDD should ensure they now carry out ultimate holding company checks where necessary, if not already doing so.
You should be able to find the ultimate holding company in the company register, however overseas companies will not be listed.
The impact on entities will vary. For example, it is likely to Impact lawyers in particular who deal with commercial transactions for large companies. However, real estate businesses with a New Zealand client base will face less risk unless dealing with the commercial sector, when beneficial ownership will be more exposed.
Multinational organisations or conglomerates trying to do business within New Zealand will also be more exposed.
In summary
Establishing beneficial ownership is a critical requirement of customer due diligence but it’s not always easy, and the recommended changes add to this complexity.
Without a central beneficial ownership register, you will need to rely on your own research, due diligence checks, and your relationship with your client to understand identities and ownership.
Know your customer, and you’ll find it easier to identify when something doesn’t make sense and needs investigation.
If you’d like some advice on how to implement changes, or help with your due diligence checks contact us on 09 369 6867 or info@ticcompany.com
Alice Tregunna | tic company 
tic company 
