Financial institutions and understanding beneficial ownership

Accountable institutions can help protect themselves from criminal exploitation, and bring increased transparency to SA’s financial system, by developing a solid understanding of who their clients are, including who ultimately has strategic control or a dominant influence over the client and who is benefiting from the transaction.

For accountable institutions with corporate clients this means that institutions must take reasonable steps to determine the identity of their client’s beneficial owners.

Importance of establishing beneficial ownership

The use of front companies and offshore structures can be used to conceal beneficial ownership of assets and relationships with mainstream financial institutions, and though offshore structures in and of themselves are not illegal, they are often used to hide wealth (whether obtained legitimately or not), launder money or evade taxes. Understanding who ultimately benefits from a corporate structure will allow for a greater level of transparency.  

Beneficial ownership in SA

The Financial Intelligence Centre (FIC) Act provides an AML/CFT regulatory framework to protect the integrity of SA’s financial system and to support the criminal justice system. One of the outcomes of compliance with the FIC Act is to mitigate money laundering risks associated with legal entities and enhance SA’s ability to combat financial crimes by:

• enabling compliance through best practice;
• ensuring strengthened customer due diligence measures, particularly relating to beneficial ownership and individuals in prominent and influential positions;
• having a flexible risk-based approach to identifying and verifying customers; and
• enabling the sharing of information among designated entities and enhancing co-ordination and crime-fighting capabilities.

The obligation to understand who the client is, in terms of the FIC Act, applies to legal individuals, partnership, trust or similar arrangements between natural persons in the republic or elsewhere.

Accountable institutions must establish the nature of the client’s business, the ownership and control structure of the client, and identify and take reasonable steps to verify the beneficial owner of the legal person. The beneficial owner in respect of a legal person, means a natural person who, independently or together with another person directly or indirectly, owns the legal persons, or exercises effective control of the legal person. 

• identify the natural person who owns a controlling ownership interest. If in doubt whether the natural person owns a controlling interest or no natural person has a controlling interest, then the natural person who exercises control over the client, or the management of the client must be identified.

Types of beneficial ownership include:

• the natural person(s) who directly or indirectly holds a minimum percentage of ownership interest in the legal person (threshold approach);
• the natural person(s) who exerts control without ownership by participating in the financing of the business and contractual arrangement — such as debt management control; and
• the natural person(s) who exercises executive control over the daily or regular affairs of the business through a senior management position, for instance CEO or CFO.

For further guidance and information on beneficial ownership and the money laundering and terrorist financing risks faced by banks and other financial institutions, please visit the FIC’s website.  

This article was paid for by the Financial Intelligence Centre.