Beneficial ownership identification: a complex task, yet extremely crucial
Financial institutions such as banks and insurance companies, are the main parties responsible for the financial system security. They are conscientious and active in establishing a robust mechanism to prevent financial crimes basically using KYC (know-your-customer) and AML (anti-money-laundering) systems and policies.
Financial institutions must do their best to keep their integrity and to refrain from non-compliance and harsh penalties.
Currently, the question is: how do we carry out effective and advanced KYC and AML systems?
Besides integrating sophisticated systems and platforms and adopting the risk assessment approach, updated regulations require to identify the beneficial owner.
Unfortunately, the availability of beneficial ownership information is not always insured. Moreover, the anonymity of the beneficial owners can cause several hidden illegal activities and can also complicate the revelation of the true identity of the customer.
Over the past two years, the Financial Action Task Force on Money Laundering (FATF) has focused on the guidance of local authorities in this field. Best practices recommend to automatically identify the beneficial owner during the onboarding process or throughout the business relationship.
Who are the Beneficial Owners?
According to The FATF, the “beneficial owner refers to the natural person(s) who ultimately own(s) or control(s) a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement”.
Financial institutions have to determine the real person(s) who exercise important influence on the company. This individual has 25% or more of the shares or voting rights in the legal entity, whether directly or indirectly.
Why is the Beneficial Owners’ identification so complicated?
In general, beneficial owner identification depends on the structure layer of the company and the countries regulations concerning company registrations.
Basic methods to determine the Beneficial Owner
The essential FATF Recommendations related to this scope are the guidance on transparency and beneficial ownership: recommendations 24 & 25 .
The main recommendations consist of:
- Assigning and evaluating the risks related to legal persons and legal arrangements
- Ensuring a minimum level of transparency of legal persons and legal arrangements
- Having available, accurate and up-to-date beneficial ownership information to authorities
The Money Laundering Regulations 2017 (MLR2017) in the U.K. and the Customer Due Diligence (CDD) Requirements for Financial Institutions in the U.S. give instructions to take reasonable measures to verify the identity of the beneficial owners.
To do so, financial institutions must be able to determine different forms of direct and indirect ownership that may be one of the following list:
- Ownership of shares or voting rights
- The ability to influence the corporate rights such as veto or decision rights
- Management Control, etc…
The Tunisian government decree N° 54-2019 of January 21st, 2019 emphasizes basic compliance policies to identify the beneficial owners holding 20% or more of the voting rights or the share capital. Financial institutions have to identify, check, and keep documents maintaining the name, date of birth, address, and the ID number.
It is advantageous for financial institutions to catch extra information.
If the entity is a corporation, it is fundamental to determine the identity of all the directors, shareholders and beneficial owners and in the case of trust funds, the founder of the legal arrangement, the trustee(s) and the guardian have to be identified.
In addition, financial institutions have to take reasonable measures to obtain accurate information and also preserve records.
How can we obtain information related to the Beneficial Owners?
To gather the actual beneficial ownership information, the concerned entity must provide to the financial institutions:
- Legal status of the company
- Verbal statement
- Written document provided by the entity.
Revolutionized method to determine Beneficial Owners
The main limits behind the ineffective current compliance systems are the limited availability, accuracy and timeliness and automated mechanism to determine the beneficial owner identity data.
Financial institutions have two choices: either identify the beneficial owner or assume and face the consequences.
As an example of beneficial ownership registers, Tunisia offers accessible and relevant information through technology-powered national agency. Actually, centralized beneficial ownership data is henceforth reachable via the following URL: http://www.beneficiaire-effectif.tn/dashboard.
This online register is a great achievement but must be consolidated by policies and procedures ensuring a customer due diligence (CDD) or even the enhanced due diligence (EDD) for example in the case of trust structures.
To meet this challenge, accessible data and risk level integrated in the KYC are the key elements to faster and efficiently identify beneficial owners.
Four steps to have FULL HD KYC
1. Beneficial Ownership Risk Assessment
To avoid the complicated ownership structure, it is crucial to assign a risk level to the beneficial owners of the company.
2. Use the official beneficial owners register
This will lead to keep an up to date information during the relationship with the customer.
3. Applying and taking reasonable measures to check the reliability of information
Determining directors, persons that own more than 20% of the voting rights or the share capital and the trustees. This depends on the compliance procedures defined by the organization.
4. Save the documents
Records can be used to prove the investigation done to identify the beneficial owner.
Compliance experts expect that financial institutions will reach more transparency in identifying beneficial owner. It is considered as a challenging task that includes serious non-compliance risks.
Henceforth, by integrating an automated process to identify the real persons controlling an entity, organizations can considerably decrease the time, cost and risk and also highlight their rigorous compliance system.
By Z. DHOUIOUI, Risk & Compliance Consultant at Vneuron