Who qualifies as a beneficial owner for AML purposes?
Confusion often arises as to who might qualify as being a beneficial owner and the degree of checking that is then required of them under anti-money laundering controls if they are identified as being such. This has become much more so since the amendments made to the Legal Sector Affinity Group AML Guidance Note (LSAG) in July 2022 in the light of the feedback provided by HM Treasury to the draft LSAG guidance note from the year beforehand.
The general approach to the issue of how much checking needs to be undertaken on beneficial owners has in the past been that it can be to a lower level than is required for the client as such. This, however, was thrown into question last year by the changes to the LSAG Guidance required by HM Treasury in which they stated that the degree of checking on beneficial owners should be to the same degree as would be required for all clients who are individuals. This caused a good deal of confusion at the time, however, as the degree of checking on individual clients is itself stated to be risk-based. Furthermore, although viewing the client’s passport or photo driving licence, along with recent third party address evidence, is widespread practice this is not stipulated to be mandatory as such by the MLR 2017 or by the LSAG guidance itself.
Individuals as beneficial owners
With this in mind the main terms of the amended requirements as now set out in the LSAG Guidance Note at section 6.16, and as amended last year, state as follows:
“Beneficial Owners must be identified, and reasonable measures must be taken to verify their identities so that you are satisfied you know who the beneficial owner is and that they are in fact the beneficial owner in question.
These reasonable measures to verify a beneficial owner, may differ to those you may use to verify the identity of a client that is a natural person. For example, you may not require passports or driving licences in these circumstances, but EID&V may present an effective way to verify the identities of beneficial owners.”
It is also provided in this same part of the guidance note that “it is for your practice to determine a tailored and risk sensitive approach that is appropriate to ensure you are satisfied you know who a beneficial owner is and that you fully understand their relationship with the non-natural person.”
This can therefore be seen to have something of a “back to the future” air about it, in that despite the Treasury’s requirement that a greater degree of checking would be required on those who can be identified as being beneficial owners little change might have actually occurred. It will normally remain valid for those concerned to be subject to CDD processes much as before, and so by the conduct of a simple e-verification check in cases where no other suspicious circumstances are thought to be present.
Identifying beneficial owners
A more fundamental issue is ensuring that those qualifying as beneficial owners can be reliably identified as such. For the most part this can be a simple enough issue, especially where no doubts arise as to the instructions and background facts that are being provided by the company representative concerned. In most cases, therefore, simply asking who the beneficial owners are will meet the required standard of needing to employ the “reasonable measures” referred to in section 6.16 as set out above. If there any doubts however, including as to whether the director or other representative might be confused or unsure of the company’s structure, or of any changes that might have been made of late, the same section of the guidance note suggest that the issue might be checked further by obtaining:
- shareholder details from a reputable online registry or commercial provider;
- a copy of a detailed structure chart; and
- a copy of the trust deed, partnership agreement or other such document.
A further factor is that it does not necessarily follow that those who have been identified as the beneficial owners might actually be in control of the company’s activities in the manner that can usually be presumed to be the case. It may well be that there is another individual who “exercises ultimate control over the management of the body corporate” under r.5(1)(a) MLR 2017, such as the company’s chief executive officer or company president, or another member of the executive team who has the main responsibility for the day-to-day functioning of the client company’s business affairs.
Where this might be the case the degree of checking concerned should probably be seen to go beyond the mere issue of identifying the beneficial owners and instead be part of the need to understand the company’s “ownership and control structure of that legal person” more generally, as required by r.3A MLR 2017.
In simple terms the need if acting for a company or other such structure is to understand and record the company’s constitution and structure as set out at r.28(3) MLR 2017; the full names of all of its current directors, and to have taken “reasonable measures” to have identified its beneficial owners and also its ownership and control structure.
It should also be borne in mind, however, that the need to conduct CDD on listed companies is limited to checking simply its basic name, registration number and address, and also as a matter of risk management that the person instructing the firm is duly authorised to do so (MLR 2017 r.28(5)).
The ultimate beneficial owner (UBO)
Another issue causing common confusion is that relating to the ultimate beneficial owner, on which there is surprisingly little official guidance. A UBO, however, can be regarded as being someone who has ultimate control or ownership of the company and on whose behalf the transaction is being conducted. It might therefore be anyone who has the ultimate effective control over the company. A UBO will always be an individual, and so a natural person, but may nonetheless be difficult to identify as such. It should also be noted that this term is only ever used in the singular and it does not appear to be envisaged that there may be two or more such people who might qualify as such.
In relation to such an individual r.26(7) MLR 2017 provides that where a firm has exhausted all reasonable means to identify the individual who has ultimate control over a company but has not succeeded in doing so, they may proceed on the basis that the individual providing the instructions can be taken to be such. This legal fiction is certainly to be used with great caution, however, and if at all. Full records will need to be made of the actions taken to date, and it would be advisable to add to these details information of why all such attempts have failed. The records should also state why it is felt to be reasonable to proceed despite not having been able to identify with any degree of confidence the details of who is in overall control of the client now being represented.
In all such cases the best advice would be to insist on being provided with the fuller instructions required and not to proceed if these are not forthcoming, and so not then pass go or collect the £200 or more that might be on offer if choosing to do so.
Revised guidance
Finally, there is a helpful Government document factsheet on the issue of beneficial ownership which has just been updated as of the 18th January and which covers further changes which are currently in the Government statutory pipeline at: https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-beneficial-ownership.