What is a Beneficial Owner?
Beneficial ownership is distinguished from legal ownership, though in most cases, the legal and beneficial owners are one and the same. Legally, an ownership can be classified into two; (1) legal and (2) beneficial ownership. A legal owner is someone who holds the legal title under their name, alternatively, a beneficial owner is someone who enjoys the benefits of ownership even though the title is in another name. Learn more about the separation of legal and beneficial owners here.
Any individual benefitting from, or who receives a positive impact from a company, is deemed a beneficial owner. This is even if they are not formally named as the owner of the business. Beneficial ownership may be shared among a group of individuals. A beneficial owner is a person with a beneficiary of at least 25% of a company’s capital gains, company shares or voting rights, giving them significant control and a related interest in the business. Such control would include the right to remove most of the directors on the Board.
“The concept of beneficial ownership exists because the direct legal owner of an asset is not necessarily the person who actually controls and benefits from it. For example, the registered legal owner of a residential property may be a company registered overseas, which is controlled by an individual.”UK Parliament
What is an Ultimate Beneficial Owner?
There can be multiple beneficial owners in one company, but, the Ultimate Beneficial Owner (UBO) is the person, or entity, that is the ultimate beneficiary when an institution initiates a transaction. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. They are the person who benefits the most from all beneficial owners. This will often mean that they have a beneficiary of 25% or more of a company’s gains, rights and control.
An Ultimate Beneficial Owner of a legal entity or person could be:
- Anyone that has direct/indirect control
- Power of Attorney
- Guardian for minors
Not everyone wants to be publicly identified as the beneficial owner. Wealthy individuals at risk of lawsuits often use trusts to act as the legal property owner. The ultimate beneficial owner is often the natural person who ultimately owns or manages a company, however this person does not have to be known directly as the owner. Although it is not illegal, this method is often used for covert criminal activities and frauds.
Many criminals may also 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.
Beneficial ownership verification and ongoing monitoring is now an essential component of the KYC onboarding and anti-financial crime procedures. However, peeling back the complex legal structures designed to conceal Ultimate Beneficial Ownership (UBO) represents a significant challenge. You are expected to know exactly which partners you do business with in order to prevent them from doing business with criminal parties.
Why is it Important to Identify Beneficial Owners?
Serious crime is on the increase, including money laundering, terrorist financing, transacting with Politically Exposed Persons (PEPs) and sanctioned individuals. Obviously not all individuals that have a controlling interest are criminals. However, they may be an individual that has a sanction against them or is using the organisation to launder money.
Identifying the beneficial owner is extremely important in detailed risk assessment practices before a company enters into a new relationship/transaction with another. Screening the Ultimate Beneficial Owners of an entity allows businesses to identify the bad actors and prevent them from having a negative impact on their business.
Carrying out these checks thoroughly, allows businesses to not only comply with regulation, but also reduce the exposure to hefty fines and protect against reputational damage.
The scale of the threat is becoming more complex, as criminals adapt to our response and exploit advances in technology to hide themselves in plain sight. So, your business needs a solution that is agile and can deal with the demands of not just today’s bad actors, but also those in the future.
Talk to NorthRow to learn how we can support your business with UBO screening.