As part of the anti-money laundering and combating financing of terrorism (AML/CFT), the core lies in identifying the origin of the illegal proceeds and beneficial owners of such funds. Thus, identifying beneficial ownership is an essential element of the overall AML/CFT Program of all the regulated entities, including those regulated by IFSCA (International Financial Service Centre Authority).
In the IFSCA (AML, CFT, and KYC) Guidelines, 2022, the authorities mandate the regulated entities operating in IFSC to implement adequate measures and procedures for identifying and verifying the identity of the beneficial owners.
Let’s explore the concept of beneficial ownership, who can qualify as Beneficial Owner (BO) of a legal person or legal arrangement, and the significance of the BO identification to mitigate the financial crime risks.
Who Would Qualify as a Beneficial Owner under IFSC AML Guidelines?
The general understanding of the beneficial owner is the person who ultimately controls or owns the legal person (corporate, partnership firm, etc.) or a legal arrangement (trust or foundation), either by way of ownership interest (shareholding) or controlling right.
The IFSCA AML Guidelines define different criteria to identify the BO depending on the nature of the legal structure.
As per IFSCA AML Guidelines, for a company, the beneficial owner is the natural person who owns or is entitled to more than 10% of the company’s share capital or profits or has the controlling rights by way of appointment of a majority of the directors or overall control over the management.
In the case of a partnership firm, the BO is the natural person owning or entitled to more than 10% of the firm’s capital or profits. Similar is the case for an unincorporated association or body of individuals, where the BO is the person who has rights over more than 15% of the organization’s property, or capital, or profits.
Where the beneficial owners cannot be determined based on the ownership or controlling rights, the senior management official shall be construed as the BO.
For a legal arrangement like a trust, the IFSCA AML Guidelines provide that the BO would be the person who is the author of the trust, a trustee/beneficiary with 10% or more interest in the trust, or a person exercising ultimate effective control over the trust.
Thus, beneficial ownership is all about the natural person holding a significant share in an entity, exercising voting rights, or having a controlling interest by way of power to appoint or dismiss the majority of senior managerial personnel.
Why is the identification of Beneficial Ownership significant under the AML program?
In today’s world, where the creation of companies or any other legal arrangement has become so easy, the instances of it being exploited by criminals are also growing. The various types of legal structures are set up to intentionally complicate the network to evade taxes, avoid regulatory disclosures, special vehicles to protect the assets, etc., with the sole purpose of hiding the nature or origin of the wealth, association with criminals’ activities and obscure the identity of such criminals.
BO identification is essential to promote transparency in the business relationship, enabling the regulated entities to prevent money laundering or other financial crimes.
Identifying the actual beneficial owners and understanding the legal structure is essential for the effectiveness of the Customer Due Diligence process and, in turn, the overall AML program. With clarity around the beneficial owners, the regulated entities can assess the potential risk a customer can pose to the business and deploy adequate risk mitigation measures.
Navigating through the controlling and ownership pyramid would enable the regulated entities to understand the nature of the customer’s activities and determine whether the legal person with whom the business relationship is proposed to be set is a genuine customer or a mere veil set up to conceal the identity of the true owners having ill-intentions. This understanding allows the regulated entities to develop a comprehensive risk profile for each customer, enabling more effective ongoing monitoring of the transactions and business relationships. Further, BO identification also allows the regulated entities to identify the red flags indicating involvement in financial crime, making the timely reporting and prevention of suspicious transactions possible.
The clarity around the natural person with whom the business transactions are to be conducted boosts the regulated entities’ AML measures – minimizing the risk of being exploited by the launderers under the guise of legal arrangement and preventing the criminals from penetrating the financial system.
Not identifying the beneficial owners or misidentifying the BOs results in incorrect customer risk assessment and, thus, the gap in applying the required risk mitigation measures. This opens the door for the launderers and other financial criminals to infiltrate the IFSC entities’ business, resulting in non-compliance penalties, loss of reputation, and customer trust.
What is the process for the identification of Beneficial Owners?
Identifying the beneficial ownership structure also covers verifying the identified BOs and assessing the overall customer risk, keeping in mind the ownership structure and the complexities involved.
As a first step to determining the beneficial owners, the regulated entities must understand the customer’s legal structure. Corporate documents such as a Memorandum of Association, Partnership Deed, Trust Deed, Shareholders’ Register, etc., must be sought. A thorough analysis of these documents would assist the regulated entities in understanding the ownership and control structure of the legal person and determine the natural person who is the real beneficiary of this proposed business relationship.
Once the BOs are determined, the regulated entities must obtain specific details about them, such as their nationality, identity document, association with a Politically Exposed Person, etc. Verifying the identity using reliable, independent sources and critically evaluating the obtained information will enable the regulated entity to assess the potential financial crime vulnerabilities to which the legal customer and their BOs can be exposed. This helps create the customer’s overall risk profile and determine the nature of due diligence measures to be deployed.
Identifying and verifying the beneficial ownership will allow the regulated entities to strengthen their AML program, appropriately manage the financial crime risk, and stay compliant with the regulatory requirements prescribed under the IFSCA AML Guidelines.
What are the key challenges in identifying the Beneficial Ownership?
Identification of BO can be a little challenging in the case of a complex legal structure, wherein multiple layers of entities or trusts are created to obscure the identity of the real owners or where the nominee shareholders are appointed.
In an attempt to conceal the identity of the true beneficiaries or masterminds of the criminal activities, the criminals form a network of entities spread out across multiple jurisdictions (involving various offshore companies, shell companies, holding, and subsidiaries). Generally, in such a setup, an entity is owned by another legal person whose parent company is located in some tax haven country or country with lax regulatory disclosure requirements. The regulated entities often face difficulties reaching the actual owner by cutting through these various tiers of legal structure.
The other fundamental problem in the identification of BO is the involvement of nominee arrangements, where a third party is named as the shareholder holder on behalf of the actual owner of the company. The nominee acts as a placeholder for the ultimate beneficiaries. This practice adds a layer of complexity, making it difficult for the regulated entities to uncover the true UBO.
Further, the unavailability of information about corporate structure in reliable data sources makes the BO identification process cumbersome, specifically when offshore and foreign-based entities are involved. In such a case, the accuracy of the identified beneficial ownership is questionable.
To overcome these challenges, the regulated entities must ensure that the compliance team is well-trained on the entities’ AML policies and procedures around Customer Due Diligence, explicitly focusing on decoding corporate customers’ ownership or controlling structure or legal arrangements like trust. Further, the regulated entities must ensure that no legal person is onboarded or a business relationship is established where even one of the BOs remains unidentified.
These controls would ensure that the entities’ ML/FT risk associated with beneficial owners of the customers is maintained within the risk appetite.
Let AML India strengthen your AML measures by developing a “Beneficial Ownership” identification program!
Identifying and verifying the identity of the beneficial owners is an integral part of the AML measures to manage the potential exploitation by the launderers and to comply with the IFSCA AML guidelines. With a robust BO identification policy and procedures, the regulated entities effectively comply with the Customer Due Diligence process by going to the base of the financial crime – minds driving the money laundering or terrorism financing activities. AML India’s expertise and international experience can assist you in fostering your AML measures by overcoming the challenges associated with identifying beneficial ownership.
About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti is a Chartered Accountant and Certified Anti-Money Laundering Specialist (CAMS) with over 7 years of experience in regulatory compliance, policymaking, risk management, RegTech solution consultancy, and implementation. With an understanding of the different jurisdictional AML regulations, including PMLA, 2002 and IFSCA (AML, CFT, and KYC) Guidelines, has been closely working with clients to implement Anti-Money Laundering measures, including conducting Enterprise-Wide Risk Assessments, imparting AML training, etc.
