According to the fourth EU Money Laundering Directive (MLD4), a beneficial owner is the individual who controls or owns a relevant entity. Also, “beneficial owner” refers to an individual or group of individuals that have the power to influence transaction decisions in a relevant entity. (A “relevant entity” is a legal or corporate entity, such as a bank or financial institution.)
In this article, we take a closer look at the meaning behind “beneficial owner” and why this term is so important for financial institutions in the fight to prevent money laundering.
What is beneficial ownership exactly?
Beneficial ownership is not the same as legal ownership. There are some circumstances in which the beneficial owner may wish to remain anonymous. That said, this most often refers to the same individual/s who will reap the benefits of ownership, even though they might not hold the title to a security or asset. For instance, when a customer has shares in a mutual fund, the customer is the beneficial owner, in spite of the fact that a bank or broker might hold the actual title.
However, it should be said that not every company or entity is able to identify a specific beneficial owner. In this case, the company registrar must list the directors, CEO, and senior management. What’s more, this company must outline any steps taken to identify the beneficial owner/s, and form the above mentioned list on the registrar.
But why do we place so much importance on the clarity of beneficial owner/s?
Know Your Customer and Customer Due Diligence
“Know Your Customer” is a process in which financial institutions will obtain data regarding the address and identity of customers. Simply put, this effort helps to protect against the misuse of bank services by nefarious individuals or groups. As an example, to open a bank account, customers need to submit a recent photograph and enrollment number as proof of identity and address. Without this information, a legal entity is unable to guarantee the legitimacy of those who wish to transact with the institution.
With this in mind, accurate information is essential in terms of customer due diligence (CDD) and compliance within the European Union. CDD is a process that collects and evaluates data to protect against any risks associated with money laundering and terrorist financing. For this reason, the accuracy of data is essential for protecting corporate structures from being used as a shield for criminal activity. After all, nefarious individuals/groups will often try to use legitimate business operations to launder money and conceal their identity. In fact, various legislation ensures transparency and compliance with regard to the above matters.
MLD4: The Fourth EU Money Laundering Directive
Simply put, the EU Money Laundering Directive (MLD4) clarifies legislation surrounding Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF).
As part of this rule, any individual with more than 25% of control or shares in a relevant entity can be a beneficial owner. Alternatively, any CEO or director who does not have any beneficial or legal interest in the shares of an entity can be a beneficial owner.
The Bank Secrecy Act (BSA)
Also known as the Currency and Foreign Transactions Reporting Act, the Bank Secrecy Act requires that financial institutions assist the United States government when it comes to suspected fraud or money laundering. Here are the four components of the act that form the foundation of an anti-money laundering program:
Compliance Officer – Each organization must have a designated compliance officer who ensures compliance with the Bank Secrecy Act. More specifically, this individual must be fully trained and authorized to carry out any relevant tasks.
Policy and Procedure Development – Written policies and procedures must outline all risks to the business associated with money laundering and fraud. Moreover, these documents should adhere to all obligations related to customer identification, suspicious activity reporting, transaction activity documentation, etc.
Ongoing Training – Companies must provide employees with sufficient training in order to implement these policies and procedures. Also, the Bank Secrecy Act officer must ensure the company carries out this training and documents it at least once per year.
Independent Review and Testing – An independent test and review should be carried out by someone with sufficient knowledge of the Bank Secrecy Act. However, this individual cannot be the BSA officer or the individual in charge of BSA compliance.
An independent party carries out the above review and testing. However, this party can be any qualified individual such as a relative or friend or even another employee of the company.
The importance of establishing a beneficial owner
It’s important to establish a beneficial owner or owners in order to prove who actually controls a particular entity. After all, without clarification, any terrorist or criminal group can make financial transactions under the guise of a legitimate business. For similar reasons, beneficial ownership can protect an institution against bribery or corruption, while ensuring the entity is not exposed to substantial fines or worse.
The truth is, an entirely legitimate contract can become tainted by corruption. Financial institutions will sometimes discover rogue executives who steal or overcharge for their own personal benefit. Nefarious groups and individuals target honest businesses and try to use these organizations to launder money. Some businesses knowingly participate in such financial crime and use this leverage to undercut the competition. In fact, money laundering is an entire industry. And studies show that more than $500 billion is laundered every year in the financial system.
As for the consequences, financial institutions face heavy fines for failing to implement sufficient policies to protect against money laundering and criminal activity. On the other hand, there is also a moral responsibility for beneficial owners to comply with the law, while serving the customer with honesty and transparency at all times.
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