What are the beneficial ownership obligations for business?

Corporate structures are often abused to hide the proceeds of crime, which places the onus on the business community in South Africa to understand and meet their beneficial ownership obligations . In other words, when establishing a business relationship with – or conducting a single transaction for – a client who is a legal person, trust or partnership, it is essential to determine the identity of the warm body (that is the natural person), who holds controlling ownership in the company, trust or other corporate vehicle involved. In its 2019 mutual evaluation report of South Africa, the Financial Action Task Force (FATF) – the watchdog that leads international action to combat money laundering and terrorist and proliferation financing – highlighted the need for enhanced beneficial ownership controls to be implemented by the country’s accountable institutions. These controls assist law enforcement and other competent authorities to identify the persons who ultimately own, control and benefit from a company, trust or other corporate vehicle. FATF recommendations 24 and 25 detail the international standard regarding legal persons and arrangements in respect of beneficial ownership. As such, South Africa has introduced reforms on beneficial ownership transparency to bring the country in line with global standards for combating money laundering and countering terrorist and proliferation financing. Among these is the requirement for accountable institutions listed under Schedule 1 of the Financial Intelligence Centre Act (FIC Act) to establish the identity of the beneficial owners of those companies, trusts or other corporate vehicles that are its clients, and take reasonable steps to verify the identity of the beneficial owners. All accountable institutions must comply with the beneficial ownership obligations set out in section 21B of the FIC Act and explained in greater detail in public compliance communication 59 . When dealing with a client who is a legal person, trust or partnership, the accountable institution must gain an understanding of the nature of the client’s business, and the client’s ownership and control structure. Documents such as an organigram, signed trust deed or partnership agreement, may provide information on the ownership and control structure. Accountable institutions should be mindful that the different types of legal persons, trusts and partnerships face varying levels of money laundering, terrorist financing and proliferation financing risks. A beneficial owner is a natural person who either directly or indirectly owns or exercises effective control over a client of the accountable institution (the client could be a legal person, trust or partnership). Often accountable institutions make the mistake of only identifying legal owners who are not natural persons, but juristic persons, which does not fulfil the beneficial ownership requirement. Where the client is a legal person, the accountable institution must follow a process of elimination to determine the beneficial owners. This may include three steps: A natural person is deemed to have a controlling ownership interest where that person can take decisions or influence the resolution, decisions and/or business operations. The FIC recommends that accountable institutions identify the natural person(s), who holds five percent or more of ownership interest in a legal person, as the beneficial owners. If there is no such natural person, or doubt regarding this person, then the accountable institution can proceed to step 2. There are various ways by which a natural person can exercise effective control over a legal person by other means, including as nominee shareholders or directors or power of attorneys and so on. Based on the client’s transaction patterns, accountable institutions should consider whether an external party exercises control over the legal person and apply customer due diligence on that person as a beneficial owner. It may also become app