Beneficial Ownership of Legal Persons: What Lawyers Need to Know?

FATF’s Recommendation 24 related to “transparency and beneficial ownership of legal persons” recommends that countries take measures to prevent the misuse of legal persons for money laundering or terrorist financing and to 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.

In particular, countries that have legal persons that are able to issue bearer shares should take effective measures to ensure that they are not misused for money laundering or terrorist financing.

It recommends countries to consider measures to facilitate access to beneficial ownership and control information by lawyers undertaking customer due diligence as required by Recommendations 10 and 22.

Transparent identification mechanisms
Transparent identification mechanisms should be able to:

  1. identify and describe the different types, forms and basic features of legal persons in the country;
  2. identify and describe the processes for the creation of those legal persons and the obtaining and recording of basic and beneficial ownership information;
  3. make the above information publicly available; and
  4. assess the money laundering and terrorist financing risks associated with different types of legal persons created in the country.

Registration of basic information
In order to determine who the beneficial owners of a company are, certain basic information about the company are required, which, at a minimum, would include information about the legal ownership and control structure of the company. This would include information about the status and powers of the company, its shareholders and its directors.

All created companies should be registered in a company registry (This refers to a register in the country of companies incorporated or licensed in the country and normally maintained by or for the incorporating authority. It does not refer to information held by or for the company itself).

Whichever combination of mechanisms is used to obtain and record beneficial ownership information, there is a set of basic information on a company that needs to be obtained and recorded by the company itself or by a third person under the company’s responsibility as a necessary prerequisite. The minimum basic information to be obtained and recorded by a company should be:

  1. company name, proof of incorporation, legal form and status, the address of the registered office, basic regulating powers (e.g. articles of association), a list of directors; and
  2. a register of its shareholders or members, containing the names of the shareholders and members and number of shares held by each shareholder (applicable to the nominal owner of all registered shares) and categories of shares (including the nature of the associated voting rights).

The company registry should record all the basic information set out above and the company should maintain the basic information set out above within the country, either at its registered office or at another location notified to the company registry.

Beneficial ownership information
Beneficial ownership information for legal persons may be obtained by identifying:

(i.i) The identity of the natural persons who ultimately have a controlling ownership interest (if any – as ownership interests can be so diversified that there are no natural persons (whether acting alone or together) exercising control of the legal person through ownership). The percentage of a controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 20%) in a legal person; and

(i.ii) To the extent that there is doubt under (i.i) as to whether the person(s) with the controlling ownership interest are the beneficial owner(s) or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person through other means (e.g. a shareholders agreement).

(i.iii) Where no natural person is identified under (i.i) or (i.ii) above, the identity of the relevant natural person who holds the position of senior managing official.

FATF recommends that information on the beneficial ownership of a company should be obtained by that company and available at a specified location in their country or that there should be mechanisms in place so that the beneficial ownership of a company can be determined in a timely manner by a competent authority. For that second purpose, one or more of the following mechanisms may be used:

  1. Requiring companies or company registries to obtain and hold up-to-date information on the companies’ beneficial ownership;
  2. Requiring companies to take reasonable measures, proportionate to the level of risk or complexity induced by the ownership structure of the company or the nature of the controlling shareholders, to obtain and hold up-to-date information on the companies’ beneficial ownership;
  3. Using existing information, including:
  • non-confidential information obtained by lawyers, auditors, accountants and notaries;
  • information held by other competent authorities on the legal and beneficial ownership of companies (e.g. tax authorities or regulators);
  • information held by the company; and
  • available information on companies listed on a stock exchange, where disclosure requirements (either by stock exchange rules or through law or enforceable means) impose requirements to ensure adequate transparency of beneficial ownership.

Regardless of which of the above mechanisms is used, the cooperation of companies with competent authorities to the fullest extent possible in determining the beneficial owner is key and should include:

  1. Requiring that one or more natural person(s) resident in the country is authorised by the company (e.g. members of the company’s board or senior management), and accountable to competent authorities, for providing all basic information and available beneficial ownership information, and giving further assistance to the authorities; and/or
  2. Requiring that a lawyer or auditor in the country is authorised by the company, and accountable to competent authorities, for providing all basic information and available beneficial ownership information, and giving further assistance to the authorities; and/or
  3. Other comparable measures which can effectively ensure cooperation.

Information and records referred to above should be kept safe for at least five years after the date on which the company is dissolved or otherwise ceases to exist.

Timely access to information
FATF recommends that local competent authorities should be able to obtain, or have access in a timely fashion to, adequate, accurate and current information (updated within a reasonable period following any change) on the beneficial ownership and control of companies and other legal persons that are created in the country.

Bearer shares
Bearer shares are a major obstacle to identifying the beneficial owners. FATF recommends that a country takes one of the following steps in this regard:

  1. prohibiting them;
  2. converting them into registered shares;
  3. immobilising them by requiring them to be held with a regulated financial institution or professional intermediary; or
  4. requiring shareholders with a controlling interest to notify the company, and the company to record their identity.

 

Source: FATF.

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