Beneficial ownership

Beneficial ownership is a term in domestic and international commercial law that refers to anyone who enjoys the benefits of ownership of a security or property, without being on the record as being the owner. Webster's defines a beneficial owner as "one who enjoys the benefit of a property of which another is the legal owner."[1] The legal owner (ie., 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".

In United States securities law, a beneficial owner of a security includes any person who, directly or indirectly, has or shares voting or investment power.[2]

According to 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, the term beneficial owner refers to 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.

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.[3]

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.[4]

Determining beneficial ownership information is a requirement of the 4th AML Directive in Europe and different jurisdictions are passing enabling laws to enforce reporting requirements. In the US, similar beneficial ownership disclosures are a part of the FinCEN Customer Due Diligence Final Rule, which takes effect May 11, 2018.

Generally, there are four steps required to determine the beneficial ownership:

  • Identify and verify an accurate company record such as information regarding register number, company name, address, status, and key management personnel
  • Determine the entities or natural persons who have an ownership stake, either through direct ownership or through another party
  • Calculate the total ownership stake, or management control, of any natural-person and determine if it crosses the threshold for UBO (ultimate beneficial owner) reporting
  • For all individuals that are determined to be a UBO, perform AML/KYC checks.[5]

Concealing ship ownership

A ship's beneficial owner is legally and financially responsible for the ship and its activities.[6] 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.

In jurisdictions that permit it, actual owners may establish shell corporations to be the legal owners of their ships,[7] making it difficult, if not impossible, to track who is the beneficial owner of the ship. The 2004 Report of the UN Secretary General’s Consultative Group on Flag State Implementation reported 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."[8]

According to a 2003 report by the Organisation for Economic Co-operation and Development (OECD) report entitled "Ownership and Control of Ships", these corporate structures are often multi-layered, spread across numerous jurisdictions, and make the beneficial owner "almost impenetrable" to law enforcement officials and taxation.[7] 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."[7] 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.[9] Physically possessing a bearer share accords ownership of the corporation.[9] There is no requirement for reporting the transfer of bearer shares, and not every jurisdiction requires that their serial numbers even be recorded.[9]

Two similar techniques to provide anonymity for a ship's beneficial owner are "nominee shareholders" and "nominee directors." 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.[10] All corporations are required to have at least one director, however many jurisdictions allow this to be a nominee director.[11] 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.[11] A further hurdle is that some jurisdictions allow a corporation to be named as a director.[11]

References

  1. ↑ "Beneficial Owner". Merriam-Webster's Dictionary of Law. Merriam-Webster's Inc. 1996. Retrieved 2010-06-24.
  2. ↑ "Archived copy". Archived from the original on 2007-05-31. Retrieved 2007-05-24.
  3. ↑ http://www.bvdinfo.com/en-gb/about-us/white-papers/getting-to-grips-with-the-challenge-of-beneficial
  4. ↑ "The Ablyazov Affair: 'Fraud on an Epic Scale'". The Diplomat.
  5. ↑ https://www.trulioo.com/blog/ubo
  6. ↑ OECD 2003, p. 4.
  7. 1 2 3 Gianni 2008, p. 20.
  8. ↑ Gianni 2008, p. 19.
  9. 1 2 3 Organisation for Economic Co-operation and Development, "Ownership and Control of Ships", OECD 2003, p. 8.
  10. ↑ OECD 2003, pp. 8–9.
  11. 1 2 3 OECD 2009, p. 9.
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