Simone Lawson
Beneficial ownership is a concept that allows individuals to enjoy the benefits of ownership over a property or asset, even though the title is in another name. It can be shared among a group of individuals, and is distinguished from legal ownership. While in most cases, the legal and beneficial owners are the same, there are instances where the beneficial owner may wish to remain anonymous. This can be for legitimate reasons, such as privacy or convenience, but it can also be used for unethical purposes, such as money laundering, tax evasion, or terrorism financing. To prevent misuse, banks are required to verify the beneficial owners of companies or legal entities that open an account. For these purposes, a beneficial owner is generally defined as anyone with more than 25% ownership of a legal entity, or anyone who substantially controls the entity.
| Characteristics | Values |
|---|---|
| Purpose | To prevent money laundering, tax evasion and terrorism financing |
| Beneficial owner | A person who enjoys the benefits of ownership over some form of property, even though the title is in another name |
| Legal owner | The owner whose name appears on the title |
| Types of assets | Publicly traded securities, private companies, real estate |
| Rules for beneficial ownership | Vary by jurisdiction and type of asset |
| Beneficial ownership percentage | More than 5% of a company or entity |
| Beneficial ownership reporting | Required by the U.S. government to prevent illicit activities |
| Control prong | A single individual with significant responsibility to control, manage or direct a legal entity |
| Ownership prong | An individual who owns 25% or more of a legal entity |
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What You'll Learn
Legal ownership vs beneficial ownership
Legal ownership and beneficial ownership are two distinct concepts that are important to understand, especially in the context of estate planning and ownership structures.
Legal ownership refers to the legal right and interest in a property or asset. The legal owner is the person or entity whose name is on the title deed, legally holding the ownership of the property or asset. This ownership gives the legal owner the authority to control, manage, sell, or transfer the property as they see fit. In most cases, the legal owner is also the beneficial owner, enjoying the benefits of ownership.
Beneficial ownership, on the other hand, pertains to the economic benefits and financial value derived from a property or asset. The beneficial owner is entitled to these benefits, including the right to use, reside in, and earn income from the property, regardless of who the legal owner is. In simpler terms, the beneficial owner enjoys the advantages of ownership even though the title may be in someone else's name. This distinction is important, especially in cases where individuals or entities wish to remain anonymous or separate their legal and beneficial ownership for various reasons.
For example, in real estate, a parent may be a legal owner of a property jointly owned with their adult child. The parent's name appears on the title deed to fulfil mortgage requirements, but the child is the beneficial owner, as they are entitled to the financial benefits of the property. Similarly, shell companies or trustees may act as legal owners on behalf of the beneficial owner, who wishes to conceal their identity or manage their assets discreetly.
In the context of securities and shares, beneficial ownership takes on a similar meaning. The beneficial owner of shares is the one who enjoys the commercial benefits, such as rights to capital, dividends, and sometimes voting rights. The legal owner, in this case, simply holds the legal title of the shares without necessarily having any economic or voting rights associated with them.
It is important to note that the distinction between legal and beneficial ownership can vary depending on the type of asset and the jurisdiction. Different rules and regulations, such as tax laws and anti-money laundering measures, also come into play when determining ownership structures. Understanding these nuances is crucial for individuals and entities to recognize their rights, obligations, and reporting requirements, especially when dealing with complex ownership arrangements.
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Beneficial ownership and money laundering
Beneficial ownership refers to the person(s) with ultimate control over funds in an account, whether through ownership or other means. In most cases, the legal and beneficial owners are the same, but they are distinct concepts. For example, a beneficial owner may wish to remain anonymous, in which case a shell company can be used to conceal their identity.
The concept of beneficial ownership is important in anti-money laundering (AML) efforts. Criminals may use complex corporate structures to hide their illicit activities and disguise the movement of money. To prevent this, banks are required to verify the beneficial owners of companies or legal entities that open an account. This is done through Customer Identification Programs (CIP) and Customer Due Diligence (CDD). The Financial Crimes Enforcement Network (FinCEN) in the US has implemented rules for reporting beneficial ownership information, with certain exemptions. FinCEN's rules define a beneficial owner as anyone with more than 25% ownership of a legal entity or anyone who controls the entity.
Internationally, the Financial Action Task Force (FATF) has made tackling the concealment of beneficial ownership a priority. FATF's standards require countries to assess money laundering risks linked to legal arrangements and take mitigating measures. This includes guidance for stakeholders involved in trusts or similar legal arrangements to assess and mitigate money laundering risks.
Overall, the identification and verification of beneficial ownership are crucial tools in the fight against money laundering. By requiring companies to disclose beneficial ownership information, law enforcement can better identify suspicious activity and prevent the use of complex corporate structures for illicit purposes.
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Identifying beneficial owners
To identify beneficial owners, it is important to understand the two prongs of beneficial ownership: the control prong and the ownership prong. Under the control prong, the beneficial owner is an individual with significant responsibility to control, manage, or direct a legal entity customer. This includes executives, senior managers, or any other individuals with similar functions within the organization. On the other hand, the ownership prong defines a beneficial owner as an individual who owns 25% or more of the equity interests of a legal entity customer. If a trust owns 25% or more of the equity interests, the trustee is considered the beneficial owner.
Banks play a crucial role in identifying beneficial owners by establishing and maintaining written procedures to verify the beneficial owners of legal entity customers. This is particularly important for anti-money laundering compliance, as it helps law enforcement identify suspected criminals who use legal entities to conceal their illicit activities and assets. Additionally, regulatory authorities require beneficial ownership disclosure as part of anti-money laundering, counter-terrorism financing, and know-your-customer regulations. By knowing the beneficial owners, authorities can monitor and investigate suspicious activities and ensure compliance with legal and regulatory requirements.
The identification of beneficial owners is also crucial for taxation purposes, as it enables tax authorities to accurately assess and collect taxes. Additionally, businesses and financial institutions can utilize beneficial ownership information to evaluate and manage risks associated with their counterparties, customers, and business relationships. Overall, transparency in beneficial ownership helps promote financial integrity, prevent illicit activities, and enhance trust and confidence in the global economy.
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Beneficial ownership and shell companies
A beneficial owner is a person who enjoys the benefits of ownership over some form of property, even though the title is in another name. Beneficial ownership is distinguished from legal ownership, although in most cases, the legal and beneficial owners are one and the same. In some cases, a beneficial owner may wish to remain anonymous. For example, wealthy individuals often list their assets under a trust while they remain the beneficial owner.
In shadier circumstances, beneficial ownership may be used to withhold the actual owner of a property or security. This is where shell companies come in. A shell company is a legal entity that is typically used to conceal the identity of the beneficial owner for unethical purposes. While shell companies are not inherently illegal, they are sometimes used to keep the owner's financial assets a secret. For example, stockholders can control their shares and receive dividends without registering them in their name.
Shell companies can be used as a conduit for transferring the proceeds of criminal conduct. They can be used to disguise the proceeds of crimes such as Medicare and Medicaid fraud, trade-based money laundering, and drug trafficking. This is achieved by obscuring the identity of who controls and benefits from the company, i.e. the beneficial owner. The extent to which a shell company can disguise the real beneficial owner depends on the sophistication of the intermediaries who assist with the disguise and the jurisdiction in which the company operates.
To combat the misuse of shell companies, the U.S. government passed the Corporate Transparency Act (CTA) as part of the broader Anti-Money Laundering Act of 2020 (the “AML Act”). The CTA requires reporting companies to file reports with FinCEN that identify the beneficial owners of the entity and the company applicants of the entity. FinCEN is also working to establish rules for who may access beneficial ownership information and what safeguards will be required to ensure that the information is secure and protected.
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Beneficial ownership rules
A beneficial owner is an individual or entity that enjoys the benefits of owning an asset, such as stocks, bonds, real estate, or other investments, even though the legal title or formal ownership may be in another name. Beneficial ownership is distinguished from legal ownership, although in most cases, the legal and beneficial owners are the same.
The rules for beneficial ownership vary depending on the type of asset and jurisdiction. For example, publicly traded securities are often registered in the name of a broker, while real estate registries typically show the names of property owners. In some cases, beneficial owners may wish to remain anonymous, and trustees or other entities act as legal owners.
In the United States, the Financial Crimes Enforcement Network (FinCEN) has implemented rules and reporting requirements for beneficial ownership information. FinCEN's rules define a beneficial owner as an individual who either exercises substantial control over a reporting company or owns/controls at least 25% of the ownership interests. FinCEN's rules aim to close loopholes that allow anonymous shell companies and opaque ownership structures.
To summarize, beneficial ownership rules are essential for maintaining financial integrity, preventing illicit activities, and ensuring compliance with legal and regulatory requirements. These rules vary depending on the asset type and jurisdiction but ultimately aim to identify the individuals or entities that benefit from owning an asset.
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Frequently asked questions
Beneficial ownership is when a person enjoys the benefits of owning a property, even though the title is in another name. It can also refer to a group of individuals who have the power to vote or influence transaction decisions regarding a security, such as shares in a company.
There are legitimate reasons for keeping beneficial ownership anonymous, such as privacy or security concerns. However, it can also be used to conceal unethical or illegal activities, such as money laundering or tax evasion.
A group of beneficial owners can include any number of individuals who have a direct or indirect influence on transaction decisions or voting power. This can include shareholders, executives, or trustees, among others.
In most cases, the legal and beneficial owners are the same. However, beneficial ownership is about the benefits and rights associated with ownership, while legal ownership is about the registered title of the property or asset.
While this can vary by jurisdiction and type of asset, generally, beneficial ownership is considered to be when an individual or group owns or controls at least 25% of the ownership interests of a company or entity.
