Recently the FSCA has requested information regarding certain FSPs’ ownership and more specifically “beneficial ownership”.[1] This highlights the importance of understanding who owns or controls a legal person.
The Financial Intelligence Centre (FIC) released the first national assessment on the terror financing risks facing South Africa, during April 2022.[2] It identified that South Africa has the potential to be a haven, hub, destination and/or launch point for acts of terror. This is due to a wide array of means and options to raise funds through the financial and non-financial system in South Africa and due to the ease of movement of money across borders.
Money laundering activities can finance terrorism or other criminal activities. A general misconception is that money laundering can only be a potential risk if your business handles cash, but money laundering schemes can be much more sophisticated. These sophisticated schemes often include complex legal structures and are ideally transnational in nature, making it difficult and expensive for investigating authorities to detect and trace the proceeds.[3]
Where does beneficial ownership fit into this picture and why is it important to establish who the beneficial owners are?
Ensuring that the correct ownership information is on record with the FSCA (or other appropriate regulator depending on the type of accountable institution) is one of the mechanisms that assists in preventing money laundering and terrorism financing within the financial sector. Once submitted, an accountable institution should retain the beneficial ownership information pertaining to an entity in order to review and note any changes that may occur in respect to the ownership structure.
FICA defines a “beneficial owner” in respect of a legal person as the natural person who, independently or together with another person, owns the legal person or exercises effective control of the legal person. Determining beneficial ownership is not always simple. Consider the following scenario, where one of your clients is company A, which is owned by another company B, which in turn is owned by a trust. In this scenario, the beneficial owner (the trust) may not even be your client. In this scenario, company B may have 50% shareholding in company A, and the trust may have 50% shareholding in company B. This would essentially mean that company A, is 25% owned by the (unknown) trust.
Section 21B(2) of FICA provides for a process of elimination which accountable institutions must follow to determine the beneficial ownership of a legal person:[4]
- The process starts with determining who the natural person is who, independently or together with another person, has a controlling ownership interest in the legal person. The percentage of shareholding with voting rights is a good indicator of control over a legal person. In this context ownership of 25 percent or more of the shares with voting rights in a legal person is usually sufficient to exercise control.
- If the ownership interests do not indicate a beneficial owner, the accountable institution must establish who the natural person is who exercises control of the legal person through other means, for example, persons exercising control through voting rights attaching to different classes of shares.
- If no natural person can be identified who exercises control through other means, the accountable institution must determine who the natural person is who exercises control over the management of the legal person, for example, a director.
In many instances, a company’s directors and shareholders are the same natural persons. However, there are certain instances where this is not the case and where particular care should be taken to establish the actual beneficial ownership. Shareholders are not reflected in official CIPC documentation and are recorded in shareholder certificates. This information is not available from public records and can be relatively easily amended to reflect changes in shareholding. Accountable institutions should, therefore, ensure that effective ongoing due diligence is done on all clients.
FICA prescribes additional due diligence measures relating to legal persons, trusts and partnerships.
For example, in the case of a trust, Section 21B(4) of FICA requires an accountable institution to establish:[5]
- The identity of the founder;
- The identities of each trustee and each natural person who purports to be authorised to enter into a single transaction or establish a business relationship with the accountable institution on behalf of the trust;
- The identities of each beneficiary referred to by name in the trust deed or other founding instrument in terms of which the trust is created; or
- If beneficiaries are not referred to by name in the trust deed or other founding instrument in terms of which the trust is created, the particulars of how the beneficiaries of the trust are determined.
Money laundering activities and the financing of terrorism are global problems that equally affect South Africa. Accountable Institutions can play a part in the prevention of money laundering and terrorist financing by understanding and fulfilling the beneficial ownership obligations imposed by legislation. Ensure that you comply and are part of the solution by taking all reasonable steps to identify your clients, including establishing who are the beneficial owners of a specific entity. Risk rate all your clients in accordance with your own Risk Management and Compliance Programme and ensure that your internal systems and procedures are updated continuously to keep up with a constantly changing environment and criminal world.
[1] FSCA Information Request 6 of 2022 – Request for information relating to ownership of certain financial institutions.
[2] FIC Media Release – 12 April 2022 – South Africa’s Inherent Risk and Vulnerabilities to terror financing risk identified
[3] Money Laundering and Terror Financing: Law and compliance in South Africa 2010; L De Koker; M Basson; J Symington & P Smit; Lexis Nexis @ 2018; page 6- 7
[4] Money Laundering and Terror Financing: Law and compliance in South Africa 2010; L De Koker; M Basson; J Symington & P Smit; Lexis Nexis @ 2018; page 350 -351
[5] Money Laundering and Terror Financing: Law and compliance in South Africa 2010; L De Koker; M Basson; J Symington & P Smit; Lexis Nexis @ 2018; page 561