Guidelines regarding beneficial ownership

Sidebar: G8 update 

There seems to be ongoing questions in the financial industry regarding the issue of what is a “beneficial owner”.  A generally accepted definition of a “beneficial owner” is “someone who has a level of control over or use of funds or assets in an account, or has control of a company, which allows that person to directly or indirectly control or manage the account or company.” However, determining the beneficial owner of these accounts or companies can be a difficult process. 

Regulatory context

Obtaining information on the beneficial ownership of an account or company held at any type of financial institution has become more important recently as regulatory guidelines in most jurisdictions are requiring more detailed ownership information. The Financial Action Task Force has addressed this issue more clearly in its Recommendations, the G8 at its June 2013 meeting addressed this issue, and financial institutions have become more aware of the exposure they have by not knowing who really owns or controls an account or company.

Industry guidelines, business norms, international standards and most financial regulators stress that having information on the ultimate owner or user of an account or company provides a financial institution with the needed information to combat money laundering and terrorist financing, allows the financial institution to assist law enforcement and allows the financial institution to more fully understand the anticipated activity of the customer.

Criminals often hide the beneficial ownership of accounts or companies behind nominal account holders, shell organizations, shelf companies and other constantly evolving ownership structures. These attempts at confusing ultimate ownership allow the true user or owner of the account or company to be concealed through several layers of ownership. This further allows criminals to take advantage of privacy and confidentiality issues to hide behind shell companies and other forms of business structures to conceal the identity of the true user or owner of the account or company. Identifying the beneficial owner can be very difficult based on the type of business structure involved and the location, either international or domestic, of the company.

Issues to consider

The most basic premise of a strong Anti-Money Laundering/Combating the Financing of Terrorism program is that a financial institution has a thorough and detailed know your customer (KYC) process, customer due diligence (CDD) process, and an enhanced due diligence (EDD) process. The financial institution must have comprehensive KYC, CDD, and EDD policies, procedures and processes in place to fully identify and understand the customer and their anticipated activity.

Having a strong and comprehensive KYC, CDD, and EDD program is probably one of the best ways a financial institution can identify suspicious activity.

These programs must, in addition to obtaining basic customer information such as the purpose of the account, the source of the customer’s funds and wealth, the customer’s occupation or type of business, the customers trade area, and a description of the customer’s business operations, consider the following issues regarding beneficial ownership:

Is the customer acting as a trustee? If so, then the financial institution must obtain sufficient information about the trust so that the ownership and structure of the trust is fully understood.

Is the customer a private company? If so, there will be limited public information about the company so the financial institution will have to conduct more thorough KYC and CDD; and possibly expand into EDD to fully understand the ownership structure of the company. EDD should consider verification of ownership, the source and use of funds, and all owner relationships.

Is the customer acting on behalf of someone else? If so, the financial institution must understand on whose behalf the customer is acting and in what role they are acting.

Financial institutions must make a reasonable effort to obtain and verify KYC, CDD and EDD information, especially the beneficial ownership information. Applicants, customers and beneficial owners can mislead and at times misrepresent information during the account opening process and during ongoing account activity.

However, it is the financial institution’s responsibility to have policies, procedures and processes in place to reasonably research and verify the ownership information provided. The financial institution must conduct a detailed and thorough KYC, CDD and EDD review, they must document the entire process, and they must ensure that the information upon which they rely to make the decision to accept the applicant as a customer is true and accurate.

Accounts of special concern

There are several types of accounts where the identification of the beneficial owner is more difficult and where there is more inherent risk. Three of these are especially more risky and specifically require more detailed research and analysis by the financial institution to determine the true beneficial owner.

These are correspondent accounts for foreign financial institutions, private banking accounts and accounts for senior foreign political persons.

The KYC, CDD and EDD process for these types of accounts must determine the source of funds and anticipated use of the account, the location of the customer, the employment status of the customer, the ownership structure of the company, and the nominal and beneficial owners of the account. In addition, in regards to private banking accounts, the financial institution must review the private banking accounts customer data base to determine if any of the accounts are held by senior foreign political persons (PEP), either as a nominal or beneficial owner. These PEP accounts are required to include EDD reviews since they may include transactions that could involve the proceeds of foreign corruption.

Correspondent accounts for foreign financial institutions are especially risky since they often involve payable-through accounts that foreign customers can use to access another countries banking system. These types of accounts require more thorough EDD measures since a local financial institution often does not fully understand or have knowledge of the level of AML/CFT compliance of the foreign jurisdiction or the AML/CFT regulatory regime of the foreign financial institution. Since the local financial institution does not know if they can rely on the AML/CFT process of the foreign financial institution, it is critical that the local financial institution conduct a thorough and detailed EDD of owners and beneficial owners of accounts of foreign financial institutions.

Summary

The importance of a financial institution obtaining appropriate information regarding beneficial owners is best stated by FATF Recommendation 24, which states in part “Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.”

 

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Thomas Nollner

Thomas E. Noller, CAMS, CFE-Tom Nollner is a former National Bank Examiner, who spent the last twenty years of his 30-year career with the Comptroller of the Currency, as an AML/CFT specialist. Thomas is currently the Regional Advisor in Kabul, Afghanistan, for the Economic Crimes Team of the Office of Technical Assistance (OTA), U S Treasury. In this capacity he is the advisor to the AML/CFT Section of the Financial Supervision Department of the Da Afghanistan Central Bank. In addition to mentoring the AML/CFT Section in bank supervision techniques, his responsibilities include developing and implementing AML/CFT examination procedures for the Money Services Providers (Hawalas) and money exchangers. 

Thomas Nollner
International Banking Consultant
Office of Technical Assistance, U S Treasury
740 15th Street NW
4th Floor, Room 4502
Washington,DC 20005
United States

 

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