What are the obligations of beneficial ownership of my company?

Corporate structures are often misused to conceal the proceeds of crime, which places the onus on South Africa’s business community to understand and fulfill their beneficial ownership obligations.

In other words, when entering into a business relationship with – or carrying out a single transaction for – a client that is a legal entity, trust or company, it is essential to establish the identity of the warm body (i.e. the natural person), who has controlling ownership in the company, trust or other corporate vehicle involved.

In its 2019 mutual evaluation report, the Financial Action Task Force (FATF) – the watchdog leading international action to combat money laundering and the financing of terrorism and proliferation – highlighted the need for improved beneficial ownership controls to be implemented by the responsible institutions of the country. .

These controls assist law enforcement and other appropriate authorities in identifying the persons who ultimately own, control and benefit from a company, trust or other asset. FATF Recommendations 24 and 25 detailing the international standard regarding legal entities and beneficial ownership arrangements.

As such, South Africa has implemented beneficial ownership transparency reforms over the past two years to bring the country into line with global anti-money laundering and countering the financing of terrorism and proliferation standards .

This includes the requirement for responsible institutions listed in Schedule 1 of the Financial Intelligence Center (FIC) Act to establish the identity of the beneficiary. owners of those companies, trusts or other business vehicles that are its customersand take reasonable steps to verify the identity of the beneficial owners.

All responsible institutions must therefore comply with the beneficial ownership obligations set out in section 21B of the FIC Act, and explained in more detail in public compliance communication 59 published by the Financial Intelligence Center (FIC).

Such responsible institutions include designated non-financial businesses and professions, such as traders of high-value goods goods (e.g. precious metals and stones dealers, car dealers and so on), legal practitioners, certain real estate practitioners, trusts and corporate service providers, as well as gambling entities.

Nature of the business, ownership and control structure

When dealing with a client that is a legal entity, trust or company, the responsible institution should understand the nature of the client’s activities and the client’s ownership and control structure.

Documents such as an organizational chart, a signed trust deed, or a partnership agreement can provide information about the ownership and control structure.

Responsible institutions should be aware that different types of legal entities, trusts and partnerships face different levels of money laundering, terrorist financing and proliferation financing risks.

Ultimate beneficial owners are natural persons

A beneficial owner is a natural person who directly or indirectly owns or exercises effective control over a client of the responsible institution (the client may be a legal entity, trust or company).

Often responsible institutions make the mistake of identifying only legal owners who are not natural persons, but legal entities, which does not meet the requirement of beneficial ownership.

Elimination process to identify beneficial owners for clients that are legal entities

When the client is a legal entity, the responsible institution must follow an elimination process to determine the ultimate beneficial owners.

This may involve three steps:

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

A natural person is considered to have a controlling ownership interest when that person can make decisions or influence the settlement, decisions and/or business operations.

The FIC strongly recommends that responsible institutions designate as beneficial owners the natural person(s) holding 5% or more of the ownership interest in a legal entity.

Only if there is no such natural person or there is doubt about this person, the responsible body can proceed to step 2.

Step 2: Identify the natural person(s) exercising control in another way

There are various ways in which a natural person can exercise effective control over a legal entity in other ways, for example as nominee shareholders or directors, as a proxy, and so on.

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

The client’s transaction patterns may also indicate that family members are ultimate beneficiaries as they exercise control over the legal entity.

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

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

This step should only be applied if the first and second elimination steps have been exhausted.

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

Evidence that the elimination process was followed

Responsible institutions must have proof that they have followed the process of elimination in identifying the beneficial owner(s) of a client who is a legal entity.

The responsible institution can identify the final beneficiary at all three levels in terms of its own risk-based approach.

Identifying beneficial owners of trusts

When dealing with a client who is a trust, the responsible institution must identify all natural persons associated with the trust.

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

A similar approach should be taken when dealing with clients who are nonprofit organizations.

Identifying beneficial owners of partnerships

The responsible institution must identify every partner within a company, including silent partners.

If the partner is a legal entity, the responsible institution must follow the elimination process to identify the ultimate beneficial owner(s).

Risk management and compliance program

All information collected on beneficial owners must be accurate, adequate and current.

The responsible institution’s risk management and compliance program should provide for the manner in which it will comply with beneficial ownership obligations, including the maintenance of records thereof.

More information and guidelines for responsible institutions can be found at FIC website. You can also contact the FIC Compliance Contact Center on 012 641 6000 or register an online compliance query.

This article was sponsored by the FIC.