What Constitutes Beneficial Ownership?
Beneficial Ownership refers to the natural person(s) who ultimately owns or controls a legal entity, including through direct or indirect ownership or controlling interest the legal entity. This term is critical to the fields of finance and law, and is one of increasing importance to the financial services industry.
The legal definition varies by jurisdiction. Under the new United States federal regulation, the term beneficial owner means the natural person(s) who directly or indirectly own or control at least 25 percent of the equity interests of a legal entity, or who exercise substantial control over the entity; an individual with significant responsibility to control, manage, or direct the entity, such as an executive officer or senior manager, or any other individual who regularly performs similar functions; or individuals who otherwise control the entity .
In Europe, the Fourth Anti-Money Laundering Directive requires countries to maintain a register of beneficial owners of companies and other legal entities.
The importance in the context of finance and law is simple but profound: financial institutions are required to identify the beneficial owners of their customers. This may simply be for the purposes of anti-money laundering, or may include additional regulatory contexts, such as resolving beneficial ownership in the context of conflicts of law.
Certificate of Beneficial Owner’s Purpose
Certification for beneficial owners is statutorily required to meet regulatory needs in relation to the prevention of fraudulent activities in the Commonwealth. The purpose of certification is to provide comfort to law enforcement and the wider public that identification of the beneficial owners of legal entities has been undertaken, and that entities are not acting fraudulently. The existence of proper records is imperative to deter fraud and match beneficial ownership information with true individuals. The aim of the regime is to eliminate hurdles for law enforcement and the wider industry when they seek to retrieve information about beneficial owners of legal entities. Certification also creates a paper trail for the accurate and continuous records of beneficial owners of legal entities. The information about the beneficial owners will be more accurate as certification will be imposed by a qualified lawyer, accountant or other specified professional. The laws create a clear process for dealing with changes to beneficial owners (such as the transfer or issue of shares), thereby reducing the scope for confusion, omission and error. Journals are required to be kept for registered and protected legal entities to record transfers of shares and internal events.
Legal Basis for Certification
The legal framework for requirements to certify beneficial owners is a global endeavor. As part of the G7, G20 and the Financial Action Task Force ("FATF"), the United States has become a leader in the international fight against corruption and money laundering. The FATF is an inter-governmental body established to promote policies that combat money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF creates international standards to promote legislative and regulatory change. In 2012, Thailand, the Philippines, and Mexico, three member countries of the Asia/Pacific Group on Money Laundering ("APG"), agreed to conduct an assessment using the FATF’s Assessing Technical Compliance with the FATF Recommendations and the Effectiveness of Anti-Money Laundering and Combating the Financing of Terrorism System ("TC/Effectiveness Methodology") on APG’s member jurisdictions. Each country conducts periodic assessments and countries that have not yet met international standards are publicly reviewed on their compliance progress.
In July 2009, the FATF recommended that member jurisdictions require financial institutions and non-financial businesses and professions to identify, assess, and understand the money laundering and terrorist financing (AML/CFT) risks to which they are vulnerable.
In February 2012, the FATF recommended a risk-based approach for FATF countries requiring them to: On March 10, 2013, the Financial Crimes Enforcement Network ("FinCEN") issued a Final Rule ("Final Rule") amending the regulations of the Bank Secrecy Act ("BSA"). The Final Rule adds to existing recordkeeping and reporting regulation BSA regulations. The rule requires U.S. businesses to report all transactions valued at $10,000 or greater to FinCEN and imposes collection and maintenance obligations on all financial institutions. The Final Rule further expands the definition of a "financial institution" and mandates the imposition of enhanced due diligence requirements against transaction counterparties, including beneficial owners.
The Anti-Money Laundering Act ("AMLA"), is the primary tool used by the United States Treasury Department for collecting intelligence related to suspicious financial transactions within the United States. AMLA authorizes the Secretary of Treasury to prescribe regulations requiring financial institutions to assist government efforts to detect and prevent money laundering, including verifying the identity of individuals seeking to use financial services and monitor suspicious activity. Title III of the AMLA expands coverage under the BSA and optimized AMLA, expanding the authority of the Secretary of the Treasury. FinCEN amends its regulations by expanding the scope of institutions subject to AMLA to include: insurance companies, money services businesses (MSBs), mutual funds, operators of credit card systems and loan processors and sellers, mutual funds, and pawn brokers. The BSA’s implementing regulations were not originally intended to address the risk posed by the ART and other nonfinancial businesses, but amendments of the BSA regulations were implemented by FinCEN in 2006 to require the identification and verification of the beneficial owners of certain who ownership changes in certain circumstances.
The 2019 Amendment to AMLA was adopted to improve U.S. regulatory infrastructure to prevent domestic money laundering. The Amendment extends AMLA by the addition of beneficial ownership reporting requirements and enhances both civil and criminal penalties including anti-identity theft provisions. The 2019 Amendment increases coverage of the BSA to include individuals, institutions, and companies potentially posing risks. AMLA does not apply to public companies registered under the Securities Exchange Act or the SEC or to issuers required to file disclosures under the federal securities laws. AMLA applies to all legal entities and specifically to corporations, limited liability companies, limited partnerships, and other similar entities. Under AMLA, all corporate registrants must submit reports containing the beneficial owners of the corporation. AMLA captures the beneficial ownership information of both existing and new companies.
Attaining Certification
To obtain certification of its beneficial owners, a legal entity must complete the appropriate certified form for its structure, affix the required officer’s signature to the form, and provide the form along with the accompanying set of documents to appropriate DPARC body. The Association for Overseas Mutual Companies (APFIE) is responsible for the certification process for APICs and AMCs, except in relation to insurance captives incorporated in countries outside Malta. The Ministry for Economy, Investment and Small Business is responsible for the certification process for general partnerships, limited partnerships, partnerships en nom collectif and insurance captives incorporated in Malta. The Insurance Special Purpose Vehicles Supervisory Unit (ISPVSU) within the Malta Financial Services Authority (MFSA) is responsible for the certification process for insurance captives incorporated in countries outside Malta.
When submitting a certified Beneficial Ownership form to the relevant DPARC body, legal entities must also submit the following documents, copies of which must be certified by an official from the Company Registry, the MFSA or by a Notary Public: The DPARC bodies will not accept any request for certification without all of the required documentation. Documents submitted to the DPARC bodies must be printed on A4 paper; any documents submitted on A3 paper must be folded to A4. The beneficial ownership form request must include original signatures. Electronic signatures, copies of signatures, or faxes of signatures are not permitted.
Issues & Challenges of Beneficial Ownership
One challenge faced by covered legal entities in certifying beneficial owners is that the ownership structure might be complicated because of the presence of multiple levels or layers of ownership. The regulation provides for two ways in which a legal entity will be deemed to be owned by another person because of (i) majority equity interests or (ii) a majority of the overall economic interests of the legal entity. Some legal entities may face challenges in identifying which persons with ownership interests, alone or with other persons, exercise control over the entity due to a complicated layered structure. Particularly, exerting "control" is not necessarily intuitive in the case of indirect ownership through more than one level of ownership.
The regulation also acknowledges the "difficulties that may arise when owners are living or dead trusts" and similarly makes accommodations for legal entities that are owned by certain types of trusts. Many attorneys address similar difficulties and accommodations that arise in the context of FAU certification.
Another challenge relates to the privacy concerns presented by the requirement that legal entities report the identities of their beneficial owners to FinCEN. The regulation attempts to balance its privacy-related concerns with its purpose of protecting against the illicit use of legal entities to facilitate crimes, such as money laundering and fraud, by limiting access to the beneficial ownership information. The regulation narrows the individuals and entities who may access a legal entity’s beneficial ownership information, but does not exclude those individuals and entities from accessing the information where necessary. Some attorneys might suggest that there should be a separate procedure for permitting access to beneficial ownership information where there is a need to know, rather than simply having a limited disclosure framework.
A further challenge may be related to the various redundant reporting discussed above. In particular, the existence of various reporting requirements, and differing deadlines, may present challenges for attorneys in ensuring that they are meeting their clients’ compliance needs.
Certification-Non Compliance
The implications of non-compliance with the beneficial ownership certification requirements are severe. Corporations could face a fine of up to $10,000 for failing to obtain or update ownership information and up to $500 per day for failing to provide that information to FinCEN within the allotted time frame (which potentially could total in the millions of dollars if a corporation does not obtain and provide the information at all). There is also criminal liability that could potentially result from the corporate officers and LLC managers who files the certificate for an inaccurate or incomplete beneficial ownership certification. As discussed above, the final regulations enhance transparency regarding the beneficial ownership of corporations and limited liability companies by requiring these entities to identify and verify the identity of their beneficial owners , including with respect to senior executives. If an officer, director or any managing person of a corporation knowingly aids and abets the filing of a false or fraudulent beneficial ownership certification, that person is subject to a fine and/or imprisonment and is prohibited from serving as an officer or director of a corporation or as a manager or managing member of an LLC. Penalties for criminal violations include confiscation of property, fines, and imprisonment for terms ranging from one to ten years, depending on the crime. ABS, MBS, CDOs and similar transactions structured through LLCs and Corporations will now be subject to higher fees and penalties for non-compliance with the Final Rules.
Steps to Take to Remain Compliant
The certification of beneficial ownership under the new rules is an ongoing process. In order to make your job easier if and when an examination occurs, we recommend that you develop internal controls for maintaining records, preparing new certifications, updating certifications, and de-certifying individuals. If your entity has a formal records management policy, it may provide guidance on record keeping that should be followed for this new obligation. If the entity generally just maintains corporate books and can readily access records, the memo summarizing the "Reasonable Rely" basis for the certification should be kept with the books and records. If books and records are kept on a software platform or other electronic means, appropriate access rights should be granted to persons responsible for making new certifications, updating certifications, and de-certifying individuals. Investment advisers will want to carry out their new duties regarding certifications and reconciliation of their lists at least quarterly, according to the new rule. Keep the list current and make sure you revisit it if there are changes in ownership or the type of investments made. If your list is up to date, you may be able to complete new certifications on the same day you receive a notice, given the second grace period provided under the final regulations. The final rules do provide a statutory one year of grace period. This is subject to the old adage "ignorance is no excuse." Fines and penalties and other consequences may be a result of failing to update your list. It is just a matter of time before examiners will ask if you have your certification list done. Moreover, without the statutory grace periods your ability to rely on any exemptions could be jeopardized. The industry has received a number of comments on the final rules from the AML Committee on how to move forward in this new area of compliance for FINRA members. The types of suggestions include At the end of the day, each legal entity will have to develop their own plan that suits their business model. The key here is to have a plan that is documented and can be adhered to and revisited periodically as circumstances change.
Bank’s Responsibility
Financial institutions such as banks and other providers of financial services hold a critical role in the beneficial ownership landscape. It is common that financial institutions will assist legal entities in this certification process by requiring the company to certify as part of a contractual agreement and attaching the certificate to the contract.
As companies seek to apply the final rule, they can expect inquiries from their financial institutions about their certification status. To ensure consistency in the beneficial ownership information collected, the final rule provides a uniform training framework for new and existing financial institutions. The CDD FAQs provides that financial institutions generally may not rely on a company’s written certification unless (i) the company has signed the form; (ii) the signature is notarized; (iii) the financial institution has independently verified the accuracy of the identification information provided on the certificate; and (iv) such verification is consistent with reasonable standards and procedures. According to FinCEN, a financial institution "may permit a company to provide a copy of a certification form (on paper or electronically)." The financial institution should consider whether the authenticity of the form can be verified using an appropriate risk-based method. Such authentication could include (i) verifying that the certification is signed by each of the authorized individuals set forth on the certification form; (ii) reviewing the driver’s licenses or other forms of government issued identification of the individuals signing the certificate; or (iii) checking the signatures of signatories against exemplars of their known signatures.
Trends in Certificate of Beneficial Owner
As technology continues to evolve and expand, it is highly likely that entities involved in the certification of beneficial ownership will continue to improve upon the traditional certifications of the past. As entities work towards complying with these recent requirements under the CDD Rule and/or the current state regulations, industry groups have also started conducting national and state-focused data studies on beneficial ownership. Some of this work will likely include a more thorough examination of the vulnerability of different industries, assess the viability of different approaches to compliance, and promote a broader understanding of anti-money laundering and beneficial ownership issues.
As noted in a recent article, regulators are optimistic about entrepreneurs and innovation being key players in the digital currency economy. This article further described how nearly half of the supervisory authorities were actively working with companies who seek licenses to operate in their jurisdictions. Blockchain technology—and the benefits that it can provide with respect to identification and tracking—may be considered advantageous as companies move towards adapting to their new regulations and certifications. For example , one company, SupraFin, has developed software for companies to directly and securely upload copies of actual customer identification documents to the Financial Crimes Enforcement Network ("FinCEN"). His firm is currently in the process of integrating with companies in order to help facilitate large pools of data to help make financial transactions more secure. Similarly, the Financial Sector Sandbox Initiative (FSSI) is working to promote firms that develop innovative and disruptive technologies in the financial services industry. As part of its mission, the FSSI acts as a platform to test new products, notify regulators or stimulate research.
There are several questions that remain unanswered as we look forward: In sum, the article makes a good point. Because the regulators are hopeful that technology and growth will "make figuring out who actually owns and runs certain business a lot easier in the long run," the ongoing regulatory scrutiny on beneficial ownership registration may very well pave the way for future developments and technological advancements that will allow entities to better track and monitor their beneficial owners.