Beneficial ownership is a term in domestic and international commercial law which refers to the natural person or persons "who ultimately own or control a legal entity or arrangement, such as a company, a trust, or a foundation". The legal owner (i.e. the owner on the record) may be described as the "registered owner", and if they are not the beneficial owner they may be described as a "nominee".
According to a March 2019 Inter-American Development Bank (IADB) report, beneficial owners are "always natural persons who ultimately own or control a legal entity or arrangement, such as a company, a trust, a foundation".
The terms ‘ultimately owns or controls’ and ‘ultimate effective control’ refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. The FATF recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.
According to the Vancouver, BC-based Trulioo, the process of identifying UBOs (Ultimate Beneficial Ownership)'s includes acquiring and verifying a company's "accurate company "information regarding register number, company name, address, status, and key management personnel"; analyzing "ownership structure and percentages", "determining the "entities or natural-persons who have an ownership stake, either through direct ownership or through another party"; identifying beneficial owners: and calculating the "total ownership stake, or management control, of any natural-person and determine if it crosses the threshold for UBO reporting" and "perform AML (anti money laundering)/KYC (know your customer) checks for all individuals determined to be a UBO".
Determining beneficial ownership information is a requirement of the 4th AML Directive in Europe and different jurisdictions are passing[when?] enabling laws to enforce reporting requirements. In the US, similar beneficial ownership disclosures are a part of the FinCEN Customer Due Diligence Final Rule effective from May 11, 2018.
The Beneficial Ownership Data Standard (BODS) has been developed to serve as a conceptual and practical framework for collecting and publishing beneficial ownership data, and enabling the resulting data to be interoperable, more easily reused, and higher quality. A beneficial owner of a Company must be an individual at all times. The Standard (BODS) provides a specification for modelling and publishing information on the beneficial ownership and control of companies. It was created by OpenOwnership, and is provided under an open license for re-use. OpenOwnership is supporting the development of the Standard; however, the Standard retains its own independent governance through the working group of international experts.
Financial Action Task Force on Money Laundering (FATF)
The Financial Action Task Force on Money Laundering (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing, that was established in 1989, sets international standards related to beneficial ownership, including how beneficial ownership is defined. The FATF refers to a "beneficial owner" as the natural person(s) who ultimately owns or controls a legal entity and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.
By 2001, FATF had compiled and maintained a "Black List" of non-cooperative countries or territories.
OECD's "Ownership and Control of Ships"
According to the OECD's 2003 December report, entitled "Ownership and Control of Ships", corporate structures are often multi-layered, spread across numerous jurisdictions, and make the beneficial owner "almost impenetrable" to law enforcement officials and taxation. The OECD's Maritime Transport Committee Secretariat had initiated an investigation at its January 2003 meeting. The report concludes that "regardless of the reasons why the cloak of anonymity is made available, if it is provided it will also assist those who may wish to remain hidden because they engage in illegal or criminal activities, including terrorists." The OECD report concludes that the use of bearer shares is "perhaps the single most important (and perhaps the most widely used) mechanism" to protect the anonymity of a ship's beneficial owner. Physically possessing a bearer share accords ownership of the corporation. There is no requirement for reporting the transfer of bearer shares, and not every jurisdiction requires that their serial numbers even be recorded.
Two similar techniques to provide anonymity for a ship's beneficial owner are "nominee shareholders" and "nominee directors."
The 2003 OECD report said that, in some jurisdictions that require shareholder identities to be reported, a loophole may exist where the beneficial owner may appoint a nominee to be the shareholder, and that nominee cannot legally be compelled to reveal the identity of the beneficial owner.
The 2009 OECD report said that, all corporations are required to have at least one director, however many jurisdictions allow this to be a nominee director. A nominee director's name would appear on all corporate paperwork in place of the beneficial owners, and like nominee shareholders, few jurisdictions can compel a nominee director to divulge the identity of beneficial owners. A further hurdle is that some jurisdictions allow a corporation to be named as a director.
The 2003 report clarified that a ship's beneficial owner is legally and financially responsible for the ship and its activities. For any of a number of reasons, some justifiable and some suspicious, shipowners who wish to conceal their ownership may use a number of strategies to achieve that goal.
Gianni wrote in 2008 that, in jurisdictions that permit it, actual owners may establish shell corporations to be the legal owners of their ships,:20 making it difficult, if not impossible, to track who is the beneficial owner of the ship.
Gianni's 2008 paper cited the 2004 Report of the UN Secretary General's Consultative Group on Flag State Implementation which said that, "It is very easy, and comparatively inexpensive, to establish a complex web of corporate entities to provide very effective cover to the identities of beneficial owners who do not want to be known.":19
The OECD's 2011 "Board Practices: Incentives and Governing Risks" report, cited both the Financial Reporting Council's (FRC) 2009 review and the Walker review of the "governance of banks and other financial institutions" which had "found that there were significant concerns about the quantity and effectiveness of engagement between institutional investors and boards of listed companies" and that there was a "need for better engagement between fund managers acting on behalf of their clients as beneficial owners, and the boards of investee companies'. At that time these reports had "recommended that the FRC ratify a "Stewardship Code" based on the Code on the Responsibilities of Institutional Investors, prepared by the Institutional Shareholders' Committee."
According to a 23 February 2018 article in The Diplomat, in the Ablyazov Affair, involving the ex-Kazakh minister Mukhtar Ablyazov, beneficial ownership was used to fraudulently move $6 billion from Kazakhstan's BTA Bank in what is the largest case of financial fraud in history.
Beneficial ownership by country
The Canadian federal Department of Finance—Finance Canada (FC)—February 2018 discussion paper, "Reviewing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime", was prepared in preparation for the FC's legislative Parliamentary Review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which is the federal legal framework for regulating AML/ATF. The February paper called for "stakeholders' views on how to improve the Canadian Anti-Money Laundering (AML) and Anti-Terrorist Financing regime. FC requested input on "corporate ownership transparency and mechanisms" that would "improve timely access to beneficial ownership information by authorities while maintaining the ease of doing business in Canada." The resulting November 2018 Standing Committee on Finance report, recommended the creation of a "pan-Canadian beneficial ownership registry for all legal persons and entities, including trusts, who have significant control which is defined as those having at least 25% of total share ownership or voting rights" that would "include details such as names, addresses, dates of birth and nationalities of individuals with significant control". While the registry "should not be publicly accessible", it could be "accessed by certain law enforcement authorities", the Canada Revenue Agency, Canadian Border Services Agency, FINTRAC, "authorized reporting entities and other public authorities.":1
The Innovation, Science and Economic Development Canada 13 February 2020 report, entitled "Strengthening Corporate Beneficial Ownership Transparency in Canada", said that the 2016 Panama Papers and Bahamas Leaks and the 2017 Paradise Papers highlighted the "scale and ease of use of corporations and other legal entities to evade or avoid taxes and facilitate criminal activities such as money laundering, terrorist financing, and corruption."
The Canada Business Corporations Act (CBCA) requires that certain corporations collect information on "individuals with significant control". The CBCA says that individuals with significant control refer to "anyone with direct or indirect ownership or control over a significant number of shares of a corporation (i.e., 25% of the voting rights or fair market value of the outstanding shares), or who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, among other circumstances". This is in line with "international standards governing the definition of beneficial ownership, including those set out by the Financial Action Task Force (FATF)."
- A Beneficial Ownership Implementation Toolkit. Inter-American Development Bank (IADB) and Organisation for Economic Co-operation and Development (OECD) (Report). March 2019. p. 51. Retrieved 15 April 2020.
- "17 CFR § 240.13d-3 - Determination of beneficial owner". Legal Information Institute (LII). 1998. Retrieved 15 April 2020.
Electronic Code of Federal Regulations (e-CFR), Title 17. Commodity and Securities Exchanges, Chapter II. Securities and Exchange Commission Part 240. General rules and regulations, Securities Exchange Act of 1934, Section 240.13d-3. Determination of beneficial owner.
- "Rule 13d-3 -- Determination of Beneficial Ownership". University of Cincinnati College of Law. Securities Lawyer's Deskbook. February 1998. Archived from the original on 31 May 2007. Retrieved 15 April 2020.
Promulgated under the Securities Exchange Act of 1934CS1 maint: discouraged parameter (link)
- "Getting to grips with the challenge of beneficial ownership | Bureau van Dijk". bvd. Retrieved September 16, 2019. CS1 maint: discouraged parameter (link)
- "UBO: Ultimate Beneficial Ownership Guide". Trulioo: Global Identity Verification. Vancouver, British Columbia, Canada. 5 October 2017. Retrieved 15 April 2020.
- "The Beneficial Ownership Data Standard". OpenOwnership. 2018-08-17. Retrieved 2020-05-14.
- Chohan, Usman W. (14 March 2019). "The FATF in the Global Financial Architecture: Challenges and Implications". Rochester, NY: Social Science Research Network (SSRN). SSRN 3362167. Cite journal requires
- Government of Canada, Innovation, Science and Economic Development Canada (13 February 2020). Strengthening Corporate Beneficial Ownership Transparency in Canada (Report). Retrieved 15 April 2020.
- Stessens, Guy (March 2001). "The FATF 'Black List' of Non-Cooperative Countries or Territories". Leiden Journal of International Law. 14 (1): 199–207. doi:10.1017/S0922156501000097. ISSN 1478-9698. Retrieved 15 April 2020.
- "Ownership and Control of Ships", OECD, Maritime Security, 17 December 2003, retrieved 15 April 2020
- Gianni, Matthew (2008). Real and Present Danger: Flag State Failure and Maritime Security and Safety. International Transport Workers' Federation (Report). p. 36. Retrieved 15 April 2020.
- Organisation for Economic Co-operation and Development, "Ownership and Control of Ships", OECD 2003, p. 8.
- OECD 2003, pp. 8–9.
- OECD 2009, p. 9.
- OECD 2003, p. 4.
- OECD (2 August 2011). Board Practices: Incentives and Governing Risks (Report). Corporate Governance. OECD. ISBN 978-92-64-11351-0. Retrieved 15 April 2020.
- Bland, Stephen M. (23 February 2018). "The Ablyazov Affair: 'Fraud on an Epic Scale'". The Diplomat. Retrieved 15 April 2020.
New rounds of litigation add to the opaque case of fugitive ex-Kazakh minister Mukhtar Ablyazov.
- Reviewing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime. Department of Finance (Report). 7 February 2018. p. 48. Retrieved 15 April 2020.
- "Anti-money laundering and other illegal and unethical conduct". Chartered Professional Accountants Canada (CPA). 2019. Retrieved 15 April 2020.
- Easter, Wayne (November 2018). Confronting Money Laundering and Terrorist Financing: Moving Canada Forward (PDF). Standing Committee on Finance - House of Parliament (Report). p. 90. Retrieved 15 April 2020.