What are my business’s beneficial ownership obligations?

Corporate structures are often abused to hide the proceeds of crime, which places the onus on the business community in SA to understand and meet their beneficial ownership obligations.

In other words, when establishing a business relationship with — or conducting a single transaction for — a client who is a legal person, trust or partnership, it is essential to determine the identity of the warm body (that is the natural person), who holds controlling ownership in the company, trust or other corporate vehicle involved.

In its 2019 mutual evaluation report of SA, the Financial Action Task Force (FATF) — the watchdog that leads international action to combat money laundering and terrorist and proliferation financing — highlighted the need for enhanced beneficial ownership controls to be implemented by the country’s accountable institutions.

These controls assist law enforcement and other competent authorities to identify the persons who ultimately own, control and benefit from a company, trust or other corporate vehicle. FATF recommendations 24 and 25 detail the international standard regarding legal persons and arrangements in respect of beneficial ownership. 

As such, over the past two years SA has introduced reforms on beneficial ownership transparency to bring the country in line with global standards for combatting money laundering and countering terrorist and proliferation financing.

Among these is the requirement for accountable institutions listed under Schedule 1 of the Financial Intelligence Centre (FIC) Act to establish the identity of the beneficial owners of those companies, trusts or other corporate vehicles that are its clients, and take reasonable steps to verify the identity of the beneficial owners.

Thus all accountable institutions must comply with the beneficial ownership obligations set out in section 21B of the FIC Act, and explained in greater detail in public compliance communication 59 issued by the Financial Intelligence Centre (FIC). 

Such accountable institutions include designated non-financial businesses and professions, such as the dealers of high-value goods (for example, dealers in precious metals and stones, motor vehicle dealers and so on), legal practitioners, certain property practitioners, trusts and company service providers, as well as gambling entities.

Nature of business, ownership and control structure

When dealing with a client who is a legal person, trust or partnership, the accountable institution must gain an understanding of the nature of the client’s business, and the client’s ownership and control structure.

Documents such as an organigram, signed trust deed or partnership agreement, may provide information on the ownership and control structure.

Accountable institutions should be mindful that the different types of legal persons, trusts and partnerships face varying levels of money laundering, terrorist financing and proliferation financing risks.

Beneficial owners are natural persons

A beneficial owner is a natural person who either directly or indirectly owns or exercises effective control over a client of the accountable institution (the client could be a legal person, trust or partnership).

Often accountable institutions make the mistake of only identifying legal owners who are not natural persons, but juristic persons, which does not fulfil the beneficial ownership requirement. 

Process of elimination to identify beneficial owners for clients who are legal persons

Where the client is a legal person, the accountable institution must follow a process of elimination to determine the beneficial owners.

This may include three steps:

Step 1: Identify the natural person(s) who has a controlling ownership interest

A natural person is deemed to have a controlling ownership interest where that person can take decisions or influence the resolution, decisions and/or business operations.

The FIC strongly recommends that accountable institutions identify the natural person(s), who hold 5% or more of ownership interest in a legal person, as the beneficial owners.

Only if there is no such natural person, or doubt regarding this person, can the accountable institution proceed to step 2.

Step 2: Identify the natural person(s) who exercises control by other means

There are various ways by which a natural person can exercise effective control over a legal person by other means, including as nominee shareholders or directors or power of attorneys and so on.

Based on the client’s transaction patterns, accountable institutions should consider whether an external party exercises control over the legal person and apply customer due diligence on that person as a beneficial owner.

It may also become apparent from the client’s transaction patterns that family members are beneficial owners as they exercise control over the legal person. 

If a natural person is not identified in step 1 or 2, then the accountable institution must proceed to step 3.

Step 3: Identify the natural person(s) who exercises control over the management of the legal person

This step should be applied only where the first and second elimination steps are exhausted.

Natural persons who exercise control over the management may include the executive officer, directors or managers and so on.

Evidence that the process of elimination was followed

Accountable institutions must have evidence that they have followed the process of elimination when identifying the beneficial owner(s) of a client who is a legal person.

The accountable institution may in terms of its own risk-based approach identify the beneficial owner at all three levels.

Identifying beneficial owners of trusts

When dealing with a client that is a trust, the accountable institution must identify all the natural persons linked to the trust.

In practice, this includes trustees, founders or donors, settlors, protectors and named beneficiaries, and any other persons who exercise effective control over the trust. 

A similar approach should be followed when dealing with clients that are nonprofit organisations. 

Identifying beneficial owners of partnerships

The accountable institution must identify each partner within a partnership, including silent partners.

Where the partner is a legal person, then the accountable institution must follow the process of elimination to identify the beneficial owner(s). 

Risk management and compliance programme

All information gathered on beneficial owners must be accurate, adequate and up to date.

The accountable institution’s risk management and compliance programme must provide for the way it will comply with the beneficial ownership obligations, including record keeping thereof. 

More information and guidance for accountable institutions can be found on the FIC website. Alternatively, contact the FIC’s compliance contact centre on 012 641 6000 or log an online compliance query.

This article was sponsored by the FIC.