THE POWER BEHIND THE STRUCTURE: WHY UBO IDENTIFICATION MATTERS

HAWA OSMAN | COMPLIANCE ASSISTANT 

Who really owns the companies we do business with? The answer is often more complicated than it appears. To close the gaps criminals exploit, the Financial Intelligence Centre (FIC) has issued updated guidance on Ultimate Beneficial Ownership (UBO), prescribing a threshold of 5%.

 

This change, outlined in Public Compliance Communication 59 (PCC59), marks an important shift in strengthening the country’s approach to combating money laundering, corruption and other financial crimes.

 

It was generally accepted that a 25% shareholding was sufficient to establish ownership or control of a company. However, as financial crime has become more sophisticated, criminals increasingly use complex ownership structures and multiple smaller shareholdings to obscure their true control over legal entities.

 

Compliance is not just about ticking regulatory boxes. It is about creating a financial system that shuts out criminals while remaining open to legitimate businesses.

 

Understanding Beneficial Ownership

 

A beneficial owner is the natural person who ultimately owns or exercises effective control over a legal person, partnership, non-profit organisation, or trust, whether directly or indirectly.

 

Accountable institutions are required to take reasonable steps to identify and verify the identities of beneficial owners. They must also maintain appropriate records demonstrating that these steps were taken to establish and confirm the beneficial ownership of their clients.

 

Legal Entity

 

A legal person is an entity, such as a company, close corporation, trust, or partnership, that has a legal existence separate and distinct from the natural persons who own, control, or manage it.

 

Identifying the natural person who is the beneficial owner of a legal person involves a structured three-step approach.

 

 

The Three-Step Approach to Identifying a Beneficial Owner

 

Step 1 – Ownership

 

Identify all individuals who hold a 5% or greater ownership or shareholding interest in the legal entity.

 

While PCC59 describes the 5% threshold as a strong recommendation, it is widely expected within the industry to become the de facto standard for identifying beneficial ownership.

 

Step 2 – Control Through Other Means

 

If no natural person can be identified, accountable institutions must look for individuals who exercise control through other arrangements such as nominee shareholders, powers of attorney or informal agreements.

 

Step 3 – Management Control

 

If neither ownership nor other forms of control reveal the beneficial owner, the final step is to identify individuals responsible for managing the organisation, such as executives or directors.

 

Identifying Beneficial Owners in Other Structures

 

Trusts

 

When dealing with a trust, accountable institutions must identify all key individuals involved, including the founder, trustees and beneficiaries.

 

Where the founder, trustee, or beneficiary is a legal person, the accountable institution must identify and verify that legal entity in the same manner as any other legal person. This process ensures that the ultimate natural persons who own or exercise control over the trust structure are properly identified and assessed for risk.

 

Non-Profit Organisations (NPOs)

 

When identifying UBOs, non-profit organisations should be treated in a manner similar to trusts. This requires the accountable institution to identify and verify all key individuals associated with the organisation, including its founders and the members of its management or governing body, as these individuals exercise control over the organisation.

 

Where beneficiaries are specifically named, those beneficiaries must also be identified and verified. However, if beneficiaries are not explicitly named, the accountable institution must instead establish the process or criteria used to determine or select beneficiaries.

 

Partnerships

 

When dealing with a partnership, the accountable institution must identify and take reasonable steps to verify the identity of every partner, regardless of their percentage of ownership. This applies to all partnership types, including partnerships en commandite and anonymous partnerships.

 

Identifying and verifying every partner ensures transparency in the partnership structure and enables the institution to properly assess the individuals who ultimately exercise ownership, control, or influence over the partnership.

 

Why UBO Transparency Matters

 

The accountable institution must be satisfied that it clearly understands who the beneficial owner is, and why or how the person qualifies as a beneficial owner. This ensures that the accountable institution has a complete and reliable understanding of the ownership and control structures of its clients.

 

Non-compliance with FICA can have serious consequences, ranging from regulatory warnings to significant financial penalties.

 

In a post-greylisting environment, where South Africa is subject to increased international scrutiny, the importance of robust compliance has never been greater.

 

While the path to full compliance may seem daunting, it is a necessary step that requires collaboration across all sectors. Businesses, regulators, and technology providers must work together to develop innovative solutions that make UBO verification and overall KYC processes more efficient and effective.

 

Strengthening UBO transparency makes it far harder for criminals to hide behind corporate structures. In the long run, stronger compliance does more than protect the financial system, it helps build a fairer and more trustworthy economy for everyone.

 

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