Understanding the Three Pillars of Beneficial Ownership

Do you know who really owns a company? While the answer may seem straightforward, the reality is more complex than you might think. Beneficial ownership refers to the individuals that ultimately control or benefit from a company, even if their names do not appear on official paperwork.

The issue of beneficial ownership is crucial for several reasons. First, opaque ownership structures can be used to hide illicit activities such as money laundering, terrorist financing, and tax evasion. Criminals can use shell companies, trusts, or other legal entities to move or conceal funds, making it difficult for law enforcement and regulatory authorities to trace the source and destination of the money.

Second, lack of transparency in beneficial ownership can also harm legitimate businesses by allowing unscrupulous or dishonest actors to operate with impunity. In some cases, companies may unknowingly enter into business relationships with criminal organizations or other high-risk entities, leading to reputational damage or legal consequences.

To address these challenges, the Financial Action Task Force (FATF) has recently issued updated guidance for promoting beneficial ownership transparency and accountability, entitled, 'Beneficial Ownership of Legal Persons' (March 2023) (the "Guidance").

The Guidance is comprehensive and a must read for AML authorities and stakeholders such as company Registrars, Regulators, FIUs and policy makers. It is also useful for regulated entities such as financial institutions and DNFBPs (in particular Company Service Providers).

This article provides an introduction and overview to the so called 'three pillars' of beneficial ownership information, based on the Guidance.

Beneficial Ownership Information

As defined in the Guidance, beneficial owner refers to 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 natural persons who exercise ultimate effective control over a legal person or arrangement.

Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person or arrangement.

Legal persons, such as companies, should obtain and hold up-to-date information on their beneficial owners, including their names, dates of birth, addresses, and details of their ownership or control. This information should be available to competent authorities, including law enforcement agencies and financial intelligence units, upon request.

Pillar 1: Beneficial Ownership Information must be Adequate

Per the Guidance, adequate information is information that is sufficient to identify the natural person(s) who are the beneficial owner(s), and the means and mechanisms through ownership, control or other means.

To adequately record the identity of a natural person who is a beneficial owner, requires information such as first and last name, nationality, and date of birth. Additional, useful information to further confirm identity includes a unique national identification number, passport number and tax identification number.

Information about the means and mechanisms through which the natural person exercises beneficial ownership is also important, including the type of participation and the scope of the beneficial interest. In addition, the Guidance notes that countries may consider recording the role of natural persons involved in foundations or similar legal persons (e.g. founders, councilors and beneficiaries).

Pillar 2: Beneficial Ownership Information must be Accurate

Verification processes must be adopted to ensure that beneficial ownership information is accurate. Verification involves checks and other processes that can be conducted during various stages to ensure the accuracy of the data.

Verification should be consistent across different sources and may require professional expertise. The means of verification would depend on the approach in holding beneficial ownership information. Verification applies to all prongs of the multi-pronged approach, and the criteria for identifying a beneficial owner should be consistent with relevant applicable requirements.

Countries should adopt a risk-based approach to verification, enhancing measures in cases of higher risk. Verification mechanisms can be used to detect inaccuracies in reported beneficial ownership information and/or deliberate concealment. Regardless of the mechanisms used upfront, countries may also require a declaration that the information disclosed is truthful and complete.

To verify the identity of the beneficial owner, appropriate steps should be taken to prove that the natural person exists and is who they claim to be, such as reviewing government-issued identity documents. Identity verification should consider the robustness of the evidence, and may involve automated data exchange with reliable national systems. Verification of status entails ensuring that the person identified as the beneficial owner has ownership, voting rights or control rights and is actually exercising those rights under their own name, and whether the identified beneficial owners are consistent with the structure and risk profile of the legal entity.

A risk-based approach should be taken to verification, and information should be updated upon expiry of identity documents or change of nationality.

Discrepancy reporting mechanisms may be implemented as a complementary measure to enhance the accuracy and completeness of beneficial ownership information, with processes or procedures to minimise administrative burden.

Pillar 3: Beneficial Ownership must be Up-To-Date

Mechanisms must be in place to keep beneficial ownership information up-to-date within a reasonable period, usually one month, following any change or outdated information.

As per the Guidance, countries should establish a practical framework specifying the meaning of "reasonable period" and how it will be enforced. There is flexibility for countries to determine a reasonable period in accordance with their risk and context, taking into account their institutional set-up and other domestic circumstances.

Practical hurdles may require more time, and countries should identify these and specify a period as short as practicable, with justifiable measures to mitigate them. Countries can consider requiring periodic validation of beneficial ownership information on a risk-based approach to uncover changes in corporate structures.

In conclusion, beneficial ownership is a key issue for companies, Registrars, regulators, and society as a whole. For beneficial ownership information to be useful and reliable the information must consist of three pillars, i.e. it must be adequate, accurate and up-to-date.

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