Beneficial Ownership and Source of Wealth Simon Kingsbury & Scott Currin

The Importance of Establishing Beneficial Ownership A ‘Beneficial Owner’ is normally an individual who ultimately owns or controls the customer or on whose behalf a transaction or activity is being conducted In order to really understand your client and gain comfort that the assets with which your are dealing are legitimate, ultimate beneficial ownership needs to be established. Questions to ask Is the beneficial owners source of wealth transparent and does it appear legitimate? Is the beneficial owner a Politically Exposed Person? Has the beneficial owner been the subject of any negative news which would give cause for suspicion of money laundering / terrorist financing? Determining ultimate beneficial ownership will also ensure international sanctions can be complied with effectively, by screening the person(s) against lists of sanctioned individuals

Beneficial Ownership – an Introduction International standards and best practice require the identification of beneficial owners (“BOs”) when opening bank accounts or other banking relationships. Regulators in different jurisdictions have varied definitions of what constitutes a beneficial owner. Several International Bodies have opined and offered guidance on identifying beneficial owners. Identification of beneficial owners is an absolutely essential step in truly Knowing Your Customer (KYC).

“Ultimate Beneficial Ownership” The ultimate beneficial owner is understood to mean the underlying individual(s) behind a corporate or trust structure. The goal is to “drill down” to a individual or group of individuals who are the source of the funds in an account. For the purpose of this presentation, the terms “beneficial owner” and “ultimate beneficial owner” will be used interchangeably.

International Standards & Guidance Several International Organizations have contributed to the International Standards regarding Beneficial Ownership, including: Financial Action Task Force (FATF) Bank for International Settlements (BIS)/Basel Committee European Union Wolfsberg Group

Financial Action Task Force Recommendation 5 on Customer Due Diligence and Record-Keeping (Interpretive Notes) refers to “the natural persons who comprise the mind and management of the legal person or arrangement”. From the FATF Reference Guide on Corruption: “When establishing business relationships or conducting transactions on behalf of customers, designated private sector institutions must verify the identity of the customer, any natural person on whose behalf a customer is acting, and any individuals who ultimately own or control customers that are legal persons (such as companies) or legal arrangements (such as trusts).”

Bank for International Settlements / Basel Committee The BIS Guidance on Customer Due Diligence defines the Beneficial Owner as “the person or entity that maintains an account with the bank or those on whose behalf an account is maintained.” “The inadequacy or absence of KYC standards can subject banks to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks.” “Banks need to be vigilant in preventing corporate business entities from being used by natural persons as a method of operating anonymous accounts.”

European Union The EU’s First Directive on Anti-Money Laundering (1991) stipulates that “In the event of doubt as to whether the customers referred to in the above paragraphs are acting on their own behalf, or where it is certain that they are not acting on their own behalf, the credit and financial institutions shall take reasonable measures to obtain information as to the real identity of the persons on whose behalf those customers are acting.”

Wolfsberg Group Natural persons: when the account is in the name of an individual, the private banker must establish whether the client is acting on his/her own behalf. Legal entities: where the client is a company, such as a private investment company, the private banker will understand the structure of the company sufficiently to determine the provider of funds, principal owner(s) of the shares and those who have control over the funds. Trusts: where the client is a trustee, the private banker will understand the structure of the trust

Beneficial Ownership - Key Themes The Beneficial Owner, or Ultimate Beneficial Owner, is generally the natural person with whom a financial institution is directly or indirectly doing business. An legal entity is not generally a beneficial owner in retail or private banking. Customer Due Diligence and KYC procedures should seek to identify the natural person from whom funds have come. Nominees or Corporate Directors are not beneficial owners.