What's a Beneficial Owner for a Company, and Why Does It Matter?

Increasingly, compliance regulations demand that you know who really owns AND controls a company. Here’s why companies need to figure it out and how they can achieve that transparency more easily.

Assessing beneficial ownership isn’t like looking for a needle in a haystack, it’s like looking for a needle in a pile of other needles. Tracing beneficial ownership to owners is often difficult due to the different disclosure requirements and the status and access levels for beneficial ownership registers in different countries and regions — despite wide recognition of the need for a single view of truth.

So what is beneficial ownership? Why does it matter? And why do companies need to sit up and take notice?

Let’s start at the beginning. A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over the company or its management. Where such an interest is held through a trust, the trustee(s) or anyone who controls the trust will be registered as the beneficial owner(s).

Not everyone wants to be identified as the beneficial owner. Many criminals will deliberately use the opacity of corporate vehicles to hide their identity, the true purpose of the account and the source or use of funds or property associated with the corporate vehicle.

That might be for good old-fashioned tax avoidance purposes. It might be to prevent authorities tracking the proceeds of individual or corporate crime, such as money-laundering or bribery and corruption. Or it might even be done with the aim of pulling a cloak over state-sponsored terrorism activities. Whatever the reason, many individuals, corporates and other business entities are capitalizing on the traditionally lax rules governing beneficial ownership for ill-gain.

Beneficial Ownership — The Authorities Are on the Case

The authorities are fighting back. For example, the Financial Action Task Force (FATF), an international body that sets standards for anti-money laundering and counter-terrorist financing, has issued guidance for countries on beneficial ownership and for regulated entities on implementing a risk-based approach toward handling customers.

The FATF recommendations provide measures that address the transparency and beneficial ownership of legal persons, and it adds a series of recommendations that countries should adopt to prevent the misuse of legal persons from being misused for criminal purposes. These recommendations include:

• Assessing the risks associated with legal persons and legal arrangements;

• Making legal persons and legal arrangements sufficiently transparent; and

• Ensuring that accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion.

Alongside this, the Fourth EU Money Laundering Directive was published in 2015 to crack down on money laundering, tax evasion and terrorist financing — making beneficial ownership a key provision of concern to corporates. Member states were required to implement the Directive in June 2017 and the subsequent 5th and 6th Money Laundering Directives have only built on this impetus to build a beneficial ownership register.

All of this represents a new step towards transparency and the introduction of public registers on the ultimate beneficial ownership of companies and other entities. None of it is easy to implement, though. In fact, establishing beneficial ownership while global organizational structures are becoming more complex is perhaps among the biggest challenges facing companies today.

A lot of those challenges relate to data. There are huge issues surrounding data lineage, such as data quality and the timeliness of the data. Moreover, different countries have different rules. Certain countries and offshore tax havens, for example, have barriers in place to prevent the gathering of data on beneficial ownership — something that criminals are very quick to exploit.

Delivering Ethical Business Growth

Organizations and trusts can adopt two different routes to collecting beneficial ownership data: 1) look at each record manually, or 2) automate the process. The manual approach is prohibitive: too slow, too expensive, and too prone to error. However, a semi-automated beneficial ownership data collection process streamlines the data collection process and delivers the necessary transparency and ethical business growth.

So what action can you take? Ideally, you want to deploy a solution that enables your organization to reach its core data assets relating to global share ownership and significant control more quickly and more efficiently. 

This is why it makes sense to use analysis and research tools to establish those links before you deep-dive into information on those businesses and people during the onboarding phase. This saves you time and money and potentially reduces the number of entities you then have to screen. For example, it enables you to:

• Visualize corporate ownership structures up to and including corporate ownership over 5% or more

• Add individual shareholders to ownership trees and reference your source of information for complete transparency and audit

• Source and maintain full ownership details, type of share ownership, and percentage

With the right systems and processes in place, you can identify that needle among the other needles, meet the compliance regulations surrounding transparency and onboard/manage client relationships more successfully.