What is Beneficial Ownership, and why does it matter?
- azakaw
- 6 days ago
- 9 min read
If you’ve ever asked, “What is beneficial ownership?” you’re in the right place. This practical guide explains everything about beneficial ownership and why it underpins AML and tax transparency.
With our expertise and experience, we explain what it is, show exactly how to verify it with the help of software. You’ll also get jurisdiction snapshots, common pitfalls, and red flags.
Key Takeaways about Beneficial Ownership (UBO) |
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What is beneficial ownership?
Beneficial ownership, also known as true or real ownership, is the individual(s) who ultimately own, control, or profit from a company or legal entity, even if the legal ownership is held by another person or entity.
It's about who has the benefits and control, not just who appears on official documents.
What is the difference between the legal owner and the beneficial owner?
The legal owner is the individual or organisation whose name appears on official documents, like a company's shareholder register.
The beneficial owner is the person who ultimately owns or controls the entity or profits from its operations, even if their name is never written on the document.
For example, a business may be registered in the name of a nominee shareholder, but the beneficial owner is the one who keeps the profits.
Who qualifies as a beneficial owner?
For most jurisdictions, a beneficial owner is an individual who ultimately owns or controls a legal entity, typically by directly or indirectly holding at least 25% of the shares, voting rights, or ownership interest.
The natural person at the top of this ownership chain, who ultimately gains advantages or keeps control, is known as the Ultimate Beneficial Owner (UBO).
Note: We need to highlight that some higher-risk sectors use a lower threshold of 10% of shares to be qualified as a beneficial owner.
Examples of beneficial ownership structures
Companies: The UBO is the true owner of a company, even though a corporate shareholder may own shares on behalf of another entity.
Trusts: The settlor, the trustee, or the beneficiary may be regarded as a beneficial owner, depending on the arrangement.
Partnerships: Real owners can be partners or people in charge of voting or allocating profits.
Why does Beneficial Ownership transparency matter?
Beneficial Ownership Transparency (BOT) matters because it combats financial crime, including corruption, money laundering, and tax evasion, by making the true owners of companies visible and harder to hide.
All these factors also promote fairer markets by ensuring accountable and transparent public procurement and preventing illicit activities.
Fighting money laundering and shell companies
Shell and front companies, often used by criminals looking to hide illegal funds, can make it difficult for investigators to track down the source of funds.
Regulators assist financial institutions in identifying suspicious arrangements and submitting Suspicious Activity Reports (SARs) to Financial Intelligence Units (FIUs) by instructing beneficial owner disclosure and verification.
Read also: How to report money laundering
Suppressing tax evasion and illicit finance
Tax havens are frequently used by tax evaders to hide assets or earnings. This is something way more difficult to achieve when there’s beneficial ownership transparency, which supports international initiatives like the Common Reporting Standard (CRS) of the Organisation for Economic Co-operation and Development (OECD).
Tackling corruption and political exposure
Real ownership information is essential for Politically Exposed Persons (PEPs) to identify possible conflicts of interest or bribery, for example.
Increased transparency encourages accountability and reduces opportunities for corruption.
How to identify and verify beneficial ownership in compliance programmes
Ownership thresholds and control indicators
Anyone who owns or controls a certain percentage of an entity, typically 25% or more, must be identified by financial institutions and corporate service providers.
Ownership tracing is a difficult task, but it’s necessary as control can also be indirectly applied through layers of entities or trusts.
Documentation and verification
Institutions usually collect and evaluate documents like:
company registration,
shareholder records,
trust deeds or partnership agreements,
official identification for UBOs,
organisational charts demonstrating ownership or control to confirm true ownership.
When there are still questions, more research or confirmation is frequently needed, especially when working with high-risk organisations or offshore jurisdictions.
CDD, KYC/KYB, and EDD Integration
A key component of Know Your Customer (KYC), Know Your Business (KYB), and Customer Due Diligence (CDD) processes is determining beneficial owners.
Compliance teams must determine who would gain the most from a relationship before onboarding a client.
Enhanced Due Diligence (EDD), which includes background checks and continuous red flag monitoring, is applicable in higher-risk situations.
Companies often use digital KYC software and/or digital KYB solutions to be more effective and efficient in this process.
Related article: The role of KYC in banking
Ongoing monitoring and risk-based approach
Shares exchange hands, new entities emerge, and control changes, meaning ownership structures are dynamic.
AML programmes thus need to adopt a risk-based strategy, updating beneficial ownership data regularly and keeping an eye on any discrepancies.
What are the red flags of beneficial ownership?
Years of work allow us to identify patterns in how people try to hide who owns a business.
These are the moments when something doesn’t quite add up: a name that appears out of nowhere, a company registered in a jurisdiction that makes no sense, or a client who’s suddenly vague about details that should be easy to confirm.
Some of the red flags that often point to problems with beneficial ownership include:
Ownership that changes frequently, without a clear business reason.
Companies set up in offshore locations or secrecy jurisdictions.
Shareholders or directors who seem to have no real connection to the business.
Clients who avoid sharing full ownership details or submit incomplete paperwork.
Someone making key decisions who isn’t listed as an owner on record.
Layers of companies across different countries that don’t seem to serve any purpose.
Funding or transactions that don’t fit the nature or scale of the business.
These are some AML red flags that are not only highlighted by our expert team; regulators like FATF, FinCEN, and the European Banking Authority have pointed to these warning signs in recent reports.
In our own work, it’s rarely a single issue that gives it away; it’s the combination of small inconsistencies that start to build a picture.
Maybe a document takes too long to arrive, or an explanation just feels off. That’s usually the moment when it’s worth taking a second look.
Global regulatory standards and requirements
FATF Recommendations
The global framework for regulating true ownership is established by FATF Recommendation 24 and FATF Recommendation 25.
They order that nations make sure entities keep thorough records and that authorities have access to updated and accurate ownership data.
EU directives
Real ownership regulations have been gradually reinforced by the EU's fourth, fifth, and sixth Anti-Money Laundering Directives (AMLDs):
Beneficial ownership registers were introduced by 4AMLD,
5AMLD increased public access to these registers,
6AMLD expanded definitions of money laundering and increased criminal liability.
The new EU AML Package connects ownership registers throughout the bloc and harmonises regulations among member states.
United Kingdom: PSC Register
By creating a Persons with Significant Control (PSC) Register that requires businesses to reveal those with significant ownership or control, the UK was one of the first countries to take action. Since then, the PSC framework has emerged as a worldwide model for transparency.
United States: Corporate Transparency Act
The majority of U.S. businesses are required to notify the federal government of their beneficial owners under the Corporate Transparency Act (CTA), which the Financial Crimes Enforcement Network (FinCEN) implemented.
Long-standing gaps in U.S. corporate transparency have been filled by the Beneficial Ownership Information (BOI) Rule, which mandates disclosure of those who directly or indirectly own or control an entity.
Other jurisdictions: UAE and Singapore
Strong real ownership frameworks have been established by the Monetary Authority of Singapore (MAS) and the Dubai Financial Services Authority (DFSA), guaranteeing that financial institutions keep and provide regulators with accurate UBO information.
What are Beneficial Ownership Registers?
Beneficial ownership registers are public or accessible databases containing information on the natural persons who ultimately own or control legal entities, such as companies.
Frequently overseen by FIUs, they promote international collaboration, tax compliance, and AML enforcement.
Public vs. private access
Public access remains a contentious issue. The EU's 5AMLD initially required open access, but a 2022 European Court of Justice decision limited this because of privacy concerns.
Several jurisdictions are now investigating well-balanced models that protect personal information while maintaining openness for journalists and regulators.
Challenges and data accuracy
It's challenging to keep accurate current registers. Outdated filings, inaccurate information, and a lack of resources for verification are usual problems.
New technologies are emerging to help bridge these gaps, such as blockchain-based registries and digital ID verification.
Common structures used to hide ownership
Shell and front companies
A technique to launder money, shell and front companies blur ownership, which naturally frustrates investigators, who frequently have no actual operations or assets to investigate.
Nominee directors and shareholders
Nominee arrangements (which are like proxy arrangements) can be legal, but they’re often used to disguise who really controls a company.
Trusts and bearer shares
Bearer shares, which are now mostly eliminated, allowed complete anonymity at some point, and trusts can separate control from benefit.
Multi-layered corporate structures
Creating a complex ownership chain across multiple jurisdictions makes it difficult to trace the true beneficial owner.
For example, a company in one country might be owned by a trust in another, which is controlled by an entity in a third.
Circular ownership
This involves a network of companies where each company owns shares in another, creating a loop.
This makes it difficult to identify the UBO, as the ownership can be indirect.
Case studies and lessons learned
Panama Papers and Paradise Papers
The rich and powerful used complex corporate networks to hide assets and avoid taxes, as the historic Panama Papers and Paradise Papers exposed.
Global compliance standards were changed due to numerous reforms, ranging from the establishment of beneficial ownership registers to strict disclosure regulations.
Major enforcement actions
Regulators around the world have fined institutions massively for failing to spot suspicious structures or identify UBOs. These situations demonstrate the importance of proactive compliance, cross-border collaboration, and careful due diligence.
FAQs
How do I know if someone is a beneficial owner?
A beneficial owner is any natural person (not a company or trust) who owns or controls a legal entity.
There’s direct ownership, for example, holding shares in their own name, or indirect ownership, such as owning shares through another company, or through an arrangement that gives them control.
Is a director always a beneficial owner?
Not necessarily. A director is responsible for managing or overseeing the operations of a company, but that doesn’t automatically make them a beneficial owner, because they may not own any shares or even have a financial interest in the entity.
In some cases, directors can also be beneficial owners if they meet the criteria (for example, if they hold significant shares).
What is the U.S. Corporate Transparency Act?
The U.S. Corporate Transparency Act (CTA) is a federal law designed to increase corporate transparency and fight illicit financial activity, such as money laundering or tax evasion.
This law requires certain U.S. companies (including LLCs and corporations) to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The information collected helps authorities identify the individuals behind companies.
Can a trust have a beneficial owner?
Yes. In the case of a trust, true ownership can extend to several parties, depending on how the trust is structured:
The settlor (the person who created or funded the trust),
The trustee(s) (those who manage the trust assets),
The beneficiaries (those who receive the benefits of the trust).
Each of these individuals might be considered a beneficial owner if they exercise control or receive benefits from the trust’s assets (or from the entities the trust owns).
What information must be reported?
Regulations often require reporting the personal information of each beneficial owner, such as:
Full legal name,
Date of birth,
Nationality or citizenship,
Residential address (not a P.O. box),
Identification number (from a passport or national ID).
In some jurisdictions, the nature and extent of ownership must be disclosed as well. This guarantees that regulators can accurately identify who is behind a company or entity.
What happens if ownership isn’t disclosed?
Not disclosing real ownership information can have serious consequences, depending on the jurisdiction.
For example, it can lead to high fines, criminal charges for false or missing information, and deregistration/dissolution of the company, among others.
The future of beneficial ownership transparency
Real-time verification and interconnected registries are becoming more and more important as regulations develop and data-sharing evolves.
Finding the Ultimate Beneficial Owner is essential to stopping financial crime and guaranteeing corporate accountability.
The next generation of corporate governance and AML compliance will be characterised by robust policies and trustworthy data management, as well as ongoing monitoring.
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