Identifying the beneficial owner and ultimate beneficial owner is a critical part of your anti-money laundering (AML) compliance program. These entities are important to your financial security and are subject to strict laws. Moreover, many international agreements are signed and ratified that call for beneficial ownership disclosures.
Identifying the Beneficial Owner
Identifying the beneficial owner and ultimate beneficial owner is essential for preventing financial crimes. The purpose of establishing the beneficial owner is to prevent money laundering and terrorist financing. It is also useful for detecting a potential risk to your business.
Typically, the ultimate beneficial owner is an individual who owns at least 25% of a company. This person can exercise significant control over the organization and reaps the rewards of the business.
The definition of the ultimate beneficial owner varies by district. In most countries, which defines an individual who owns at minimum 10% of the capital or shares.
While it is not illegal to establish a registry of beneficial owners, it is resource intensive and time-consuming. Fortunately, automated solutions have emerged to help streamline the process.
These solutions make it possible for companies to identify the ultimate beneficial owner and verify its details. They provide a comprehensive overview of clients and enable the company to manage client data throughout the lifecycle.
EU Anti-Money Laundering Directive
Identifying the beneficial owner of a legal entity is a vital component of any company’s compliance requirements. The new EU Anti-Money Laundering Directive (AMLD) will require companies incorporated in the member states to keep records of who owns them.
For those who do not know, the beneficial owner of a legal entity is the person who controls the company. A natural person, who owns more than 25 percent of the voting rights and shares of a legal entity, is referred to as the Ultimate Beneficial Owner.
The Fifth Anti-Money Laundering Directive will expand the requirements for identifying the Ultimate Beneficial Owner. The directive includes new requirements for the reporting of beneficial owners in central registers. These changes will affect companies that do business in the EU and non-EU countries that operate in the EU.
To identify the Ultimate Beneficial Owner of a legal entity, companies will have to provide information about the person who knows the money laundering risk of the company or its activities. Usually, this person is a member of the board of directors or the company’s anti-money laundering compliance officer.
Counter Fraud Laws
Obtaining a comprehensive list of beneficial owners and their ilk is a top priority for regulators. Financial institutions like banks and currency exchange officers need to obtain this information. The ultimate beneficial owner of a particular business is the individual who is the most advantageous to the institution. This person is referred to as the best man or the best woman.
Millions of entities start businesses in the United States each year. These legal entities play a key role in the US economy. Nonetheless, some legal entities function to facilitate illicit activity, such as money laundering and terrorist financing. They may also facilitate corrupt activities, such as voter fraud or narcotics trafficking.
The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has released a new regulation, the Customer Due Diligence Rule, which strengthens customer due diligence requirements for U.S. financial institutions. In particular, the CDD Rule requires covered financial institutions to identify the beneficial owners of legal entity customers. This may sound like an easy decision, but few jurisdictions require disclosure of persons forming legal entities.
International agreements call for beneficial ownership disclosures
Several EU member states have signed on to the Extractive Industries Transparency Initiative (EITI), committing to the public disclosure of beneficial ownership for extractive companies. However, several countries have not yet joined, including the United Kingdom, France, and Spain. In addition, some member states are preparing to become EITI members. These countries will need support in reform efforts to achieve the required beneficial ownership disclosure.