1. Beneficial ownership: Definitions and thresholds

2. Beneficial ownership definitions: Why is it important
Company ownership or control can be exercised in many different ways. The definition will determine whether the natural person(s) who ultimately calls the shots on company decision making, or profits from the companies activities, is identified.
The definition is critical for companies to be able to identify who their beneficial owners are. The definition is likely to affect company response rate and usefulness of the BO data collected.

3. Beneficial ownership definitions: How the EITI Standard defines BO
“A beneficial owner in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity” (#2.5.f.i).
 must be reflected in MSG definition of BO.
“The multi-stakeholder group should agree an
appropriate definition of the term beneficial owner.
The definition should be aligned with (f)(i) above
and take international norms and relevant national
laws into account, and should include ownership
threshold(s). The definition should also specify
reporting obligations for politically exposed persons” (#2.5.f.ii).
The EITI Standard includes a definition of BO that should be reflected in any definition adopted by the MSG. the EITI definition is aligned with international norms.
No size fits all. That is why the MSG has a mandate to further develop their BO definition, looking at international norms and national legislation.

4. Beneficial ownership definitions: Untangling the EITI definition
natural person(s): a human being who owns or controls the company. Never a company, other legal entity, or a nominee/proxy. Often not a director or manager. ownership or control: means of owning or controlling a company, e.g. shares, voting rights, other decision/veto rights, right to profit, contractual associations, joint ownership arrangements. ownership thresholds: a percentage threshold that defines what can be considered control or ownership, e.g. a “BO is a natural person who owns/controls X % of the corporate entity.” politically exposed person: an individual who is or has been entrusted with a prominent public function. Could include close family members and associates.
Talk through the key elements of the EITI definition of BO.

5. Beneficial ownership definitions: Ownership and control
Common ways of owning or controlling a company:
Through ownership arrangements:
Ownership of shares. Example: 25 % of shares.
Ownership of voting rights. Example: 25 % of voting rights.
Other ownership arrangements:
Examples:
Nominees: a natural person that holds an interest in a company on behalf on someone else without controlling or owning that interest.
Joint ownership arrangements: two or more people arrange to exercise their rights jointly.
The concept of “ownership and control” is central to the definition of a BO, and should be defined as part of developing the BO definition.
There are many ways in which an individual can control a company, for example through ownership arrangements or through other means.

6. Beneficial ownership definitions: Ownership and control
Common ways of owning or controlling a company:
Through other means:
The right to appoint/ remove the majority of directors in the company (or equivalent management body).
Personal connections or contractual associations with individuals in management or Board positions.
Example: A company founder who no longer has a significant shareholding in the company he started, but makes recommendations to the other shareholders on how to vote and those recommendations are always or almost always followed.
Right to otherwise exert significant influence on the company’s activities, e.g. decision rights, veto rights, right to profit, etc.

7. Beneficial ownership definitions: Thresholds
MSGs are entitled to set a threshold to define control or ownership. Can make it easier to define and identify the beneficial owners.
Example: “A BO is a natural person who owns/controls X % of the corporate entity.”
FATF, EU, UK: >25%.
EITI pilot: range from ≥5-25%.
A threshold could apply regardless of how ownership or control is exerted (not only limited to shares or voting rights).
Example: Threshold >25%.
BO 1: 30% of shares.
BO 2: 5% of shares but veto right in decision-making.
MSGs are entitled to set a threshold to define control/ownership.
Here are 7 points to consider when considering thresholds.

8. Beneficial ownership definitions: Thresholds
Definition needs to prevent misuse of thresholds.
Example: A threshold of 25% of shares should take into account an individual’s full aggregated equity interest, including indirect ownership.
Consider whether there is a need for different thresholds for different sectors, in particular if BO definition includes concept of profit.
Example Liberia EITI pilot: 5% for hydrocarbons PSAs and mineral development agreements, 10% for other mining permits.

9. Beneficial ownership definitions: Thresholds
Consider default criteria if there is no beneficial owner identified when the threshold is applied.
Example Liberia EITI pilot: In the instance where a single individual does not own/control 5% of an oil company, the top five shareholders with the greatest share of ownership will be requested to disclose their beneficial owners.
Example DRC EITI pilot: Definition includes 3 criteria for who can be considered beneficial owners + a default criteria stating that: “if it cannot be ascertained that the persons referred to above are the beneficial owners, then the natural person(s) who exercise control over the management of the legal entity through other means or processes would be considered the beneficial owners.”

10. Beneficial ownership definitions: Thresholds
Consider whether PEPs should be subject to different threshold policies.
Example Tajikistan EITI pilot: If the beneficial owner is a politically exposed person, his share is subject to compulsory disclosure irrespective of the shareholding.
Understanding the ownership structure of the companies in your country, can help establish an appropriate threshold.

11. Beneficial ownership definitions: Direct vs indirect ownership
Ownership can be direct or indirect:
1: 50% direct ownership.
2: 100% indirect ownership.
3: 20% direct ownership, 80% indirect ownership.
Also applies to ownership and control through other means than shares/voting rights.
Example 1: Direct
Example 2: Indirect
Example 3: Direct and indirect

12. Beneficial ownership definitions: DRC case study
Beneficial owner refers to any individual person who, directly or indirectly, by any means, including through artificial means which are legally accepted:
performs the ultimate effective control over a company, or
holds an interest in or derives a substantial financial benefit from the company at the expense of other shareholders or partners.
Effective control means:
the individual person who ultimately owns or controls directly or indirectly a sufficient percentage of shares or voting rights in the legal entity', including through bearer shares, other than those of a company listed on a regulated market that is subject to disclosure requirements in line with equivalent international standards. A percentage of 25% plus one share is a proof of ownership or controlling interest, which applies to any level of direct or indirect shareholding;
the individual person or persons who ultimately, without having at their possession a sufficient percentage of shares or voting rights in that legal entity, have direct or indirect control of the company through ownership of priority shares, preference shares and / or shares with dual or multiple voting rights;
if it cannot be ascertained that the persons referred to above are the beneficial owners, then the natural person(s) who exercise control over management of the legal entity through other means or processes, would be considered as beneficial owners.

13. Beneficial ownership definitions: DRC case study
Untangling this definition, there are 4 criteria for who can be considered a beneficial owner:
Any individual that hold 25% + one share directly or indirectly.
Any individual that have less than 25% + 1 shares, but direct or indirect control of the company through ownership of priority shares, preference shares and / or shares with dual or multiple voting rights.
Any individual that… derives a substantial financial benefit from the company at the expense of other shareholders or partners.
If none of the above apply, then any individual who exercise control over management of the company would be considered a beneficial owner.

14. Beneficial ownership definitions: DRC case study
Example using data from DRCs 2013 EITI Report.
To understand who is a beneficial owner in this structure, there is a need to understand the definition agreed by DRC. According to DRC’s BO definition, the following individuals would be a beneficial owner:
Any individual that hold 25% + one share directly or indirectly.
Any individual that have less than 25% + 1 shares, but direct or indirect control of the company through ownership of priority shares, preference shares and / or shares with dual or multiple voting rights.
Any individual that holds an interest in or derives a substantial financial benefit from the company at the expense of other shareholders or partners:
- If none of the above apply, then any individual who exercise control over management of the company would be considered a beneficial owners.
According to this definition, Congo Dongfang International Mining reported three beneficial owners:
1. Mr Weitong, indirectly controlling 34.2 % of shares in Congo Dongfang.
2. Mr Chen + Mrs Qiujinhua. Given their family association, they collectively control 24 % of shares in Congo Dongfang. The report does not provide further detail on why these two individuals are considered BO (e.g. which of the other criteria they meet).
Criteria 2, 3, 4 ?:
Family association. Indirect ownership of 24 % shares.
Criteria 1: Indirect ownership of 34.2 % shares.

15. Beneficial ownership definitions: UK case study
4 key conditions for who can be considered a BO (PSC)
Conditions
Means of identifying the BO
1. Directly or indirectly hold more than 25% of shares.
Consult shareholder register, articles of association and statement of capital
2. Directly or indirectly hold more than 25% of voting rights.
Consult shareholder register and articles of association.
Identify shareholder agreements.
Review voting patterns.
3. Directly or indirectly hold the right to appoint or remove a majority of the directors.
Review articles of association and other agreements which concern appointment/removal.
4. Right to exercise significant influence or control.
Identify any individual who does not meet criteria 1-3, but who influences how the company is run. Consult definition of “significant influence.”

16. Beneficial ownership definitions: UK case study

17. Beneficial ownership definitions: UK case study

18. Beneficial ownership definitions: Ukraine case study
The beneficial owner of the legal entity is an individual who regardless of formal ownership is able to exercise a decisive influence over the management or operations of the company, directly or through third parties, carried out in particular through:
realization of right of ownership or use of all assets or their significant share;
right of decisive influence to the composition, voting results, and any juristic actions which enable to determine the conditions of economic activity;
[right of decisive influence] to give obligatory instructions or serve as the governing body; or
that has the ability to influence through direct or indirect (through another natural or legal person) ownership alone or together with related individuals and/or legal entities of legal entity’s share in the amount 25 or more percent of the share capital or voting rights in a legal entity.
Physical person who is an agent, nominal owner or intermediary cannot be final beneficiary of legal entity.

19. Beneficial ownership definitions: Ukraine case study
Link to register

20. Beneficial ownership definitions: Other international examples
Financial Action Task Force (FATF) Beneficial owner refers to the natural person(s) who ultimately owns or controls* a customer 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. *Reference to “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.

21. Beneficial ownership definitions: Other international examples
Financial Action Task Force (FATF) Beneficial owner refers to the natural person(s) who ultimately owns or controls* a customer 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. *Reference to “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.
beneficial-ownership.pdf

22. Beneficial ownership definitions: Other international examples
European Union 4th anti-money laundering directive
‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least (…):
(i)the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information.
A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownership. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3);
(ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point;

23. Beneficial ownership definitions: Lessons learnt from the BO pilot
Lessons learnt from BO pilot
Lack of understanding of BO definitions was a key challenge in obtaining useful BO data.
No country had an existing BO definition that was considered appropriate by the MSG.
Many MSGs agreed a minimum threshold of ownership/control necessary to be considered a BO, ranging from 5-25% ownership of shares, ownership of voting rights, or ownership/control through other means.
Many MSGs used the definition in the 4th EU Anti-Money Laundering Directive.
Further information:

24. Beneficial ownership definitions: Discussion
Is there an existing BO definition in your country? Consult company law, AML legislation etc.
Assess the definition:
Does the definition recognise key concepts such as
natural person
concepts of indirect and direct ownership and control
Does the definition include other criteria for who can be considered a beneficial owner, such as e.g.
Ownership thresholds for shares or voting rights
Other means of control, such as significant influence, economic profit, other ownership arrangements
Does the definition include “default criteria” for who can be considered a beneficial owner?
Does the definition address politically exposed persons?
Study the international examples in the handout. Underline the elements that you like about these definitions, and would like to see included in your country’s definition.
Based on the assessment of any existing BO definitions and your discussion of international examples, what would be the key components of your country’s BO definition? Note that in accordance with the EITI Standard, the basic definition outlined in requirement 2.5.f.i should be the point of departure.
If there is no prior knowledge of point 1 and 2, or such definitions do not exist, then recommend starting the exercise on point 3. Presenter should do some homework and investigate point 1 and 2.

25. Author: Dyveke Rogan
Date: January 2017
- Telephone:
Address: EITI International Secretariat, Ruseløkkveien 26, 0251 Oslo, Norway