The Financial Intelligence Centre (FIC) released Draft Public Compliance Communication 121 guidance on beneficial ownership and the application of section 21B of the Financial Intelligence Act (FICA), 38 of 2001 (Draft PCC 121), on 15 November 2023.
The FIC invites the public to submit written comments on the Draft Public Compliance Communication 121 guidance by 8 December 2023, with the aim to publish the final version by 26 January 2024.
The Draft PCC121 sets out the FIC's guidance on accountable institutions' obligations to establish the beneficial ownership of their clients. The FIC notes that accountable institutions must determine all natural persons who own or have control over a client. Specifically, the beneficial owner who ultimately directly or indirectly owns or exercises effective control of the client. The Draft PCC 121 comprises of five parts:
- Part A – Legal Persons
- Part B – Trusts
- Part C – Partnerships
- Part D – Non-profit organisations
- Part E – Adequate, accurate and up-to-date information.
Establishing the beneficial owner of a client
The Draft PCC 121 sets out a three-step process of elimination for establishing the beneficial ownership of a client. The process of elimination an accountable institution is as follows:
- Identify the natural person who independently or together with another person, has a controlling ownership interest in the legal person;
- If in doubt, whether a natural person owns a controlling ownership interest or no natural person owns a controlling ownership interest, identify the natural person/s who exercises control by other means, including through his or her ownership or control of other legal persons, partnerships, or trusts; or
- Identify the natural person/s who exercises control over the management of the legal person.
As part of this consultative process, accountable institutions are requested to provide the FIC with what their understanding of "control over the management" and " effective control" entails.
Distinction between legal owner and beneficial owner
The FIC draws a distinction between the beneficial owner and the legal owner and notes that the legal owner may not always be the beneficial owner. A natural person may be considered a beneficial owner on the basis that they are the ultimate owner or controller of a legal person, either through their ownership interests or through exercising ultimate effective control through other means. Legal ownership means the natural or legal persons who, according to the respective jurisdiction's legal provisions, own the legal person (i.e., a shareholder).
Different types of clients
In light of the different types of clients an accountable institution may encounter the Draft PCC 121 sets out that accountable institutions are required to provide for the manner and the processes by which they conduct additional due diligence measures in respect of their clients. For example, the processes and procedures to be followed when establishing the beneficial ownership of a public entity or government department.
The FIC sets out different forms of legal persons and classes of beneficial owners and therefore requests accountable institutions to indicate the different types of legal persons, trusts or partnerships that they might establish business relationships with or conduct single transactions on behalf of.
As part of this consultative process, accountable institutions are requested to provide examples of different types of legal persons, trusts, and partnerships that the accountable institution might establish a business relationship with or a single transaction.
Establishing the beneficial owners of legal persons
Accountable institutions are required in terms of section 21B(2) of the FICA to establish the identity of the beneficial owners of clients that are legal persons and take reasonable steps to verify the identity of the beneficial owners.
The FIC has indicated that a hybrid approach should be adopted in determining the controlling ownership interest which includes a threshold approach. A percentage of total ownership is a good indicator of controlling ownership over a legal person. In determining a threshold figure the FIC has stated that accountable institutions must identify the person who holds five percent or more of ownership interest in a legal person.
The FIC requires accountable institutions to conduct a holistic ownership assessment. Where a client forms part of a complex structure with multiple layers it is important for the accountable institution to gain a full understanding of the legal person's ownership structure.
The FIC notes that it is possible for a natural person to not have any ownership interest but still be regarded as a beneficial owner due to the fact that that person ultimately benefits from the business relationship between the client and the accountable institution.
In regard to listed companies on exchanges, the FIC is of the view that accountable institutions are still required to follow the process of elimination when identifying beneficial owners of exchange-listed companies.
Different types of legal persons and forms of ownership interest
The FIC notes that based on the different types of legal persons, the forms of ownership interest would differ. Where an accountable institution doubts whether a natural person has controlling ownership interest, or no natural person has controlling ownership interest in the legal person, the accountable institution must establish the identity of the natural person(s) who exercises control of the legal person through other means. This includes through the person's ownership or control of other legal persons, partnerships, or trusts.
As part of this consultative process, accountable institutions are requested to provide the FIC with examples of what "through other means" entails based on their understanding.
Establishing the beneficial owners of trusts
Accountable institutions must identify all the natural persons linked to the trust. This includes identifying the trustees, founders and beneficiaries or categories of beneficiaries The FIC notes situations where persons can exercise undue influence over and/or extract benefit from a trust without a legal link to the trust but rather through virtue of affiliation to the trustee, founder or beneficiary.
Establishing the beneficial owners of partnerships
Accountable institutions must not only identify the beneficial owners of partnerships but also take reasonable steps to verify each partner within a partnership, regardless of the threshold percentage of ownership that the partner owns. This includes identifying every member of a partnership en commandite, an anonymous partnership or a similar partnership.
Establishing the beneficial owners of non-profit organisations
Accountable institutions should identify all the founders of the non-profit organisations (NPO) as well as the management of the NPO.
Adequate, accurate and up-to-date beneficial ownership information
The FIC notes that an accountable institution must be satisfied that it knows "Who" the beneficial owner is, and "Why" or "How" the person is a beneficial owner.
Accountable institutions must have all the relevant information when verifying the beneficial owner. Such information should be adequate and up to date.
As part of this consultative process, the FIC requests accountable institutions to provide the sources that they rely upon to verify beneficial ownership information.
Inability to identify and verify
In the event that an accountable institution is unable to identify and take reasonable steps to verify a beneficial owner, it must not establish a business relationship or single transaction and must consider filing a suspicious and unusual transaction report.
Annexure A of Draft PCC 121 provides examples of complex structures and the manner in which beneficial ownership should be determined. Annexure B sets out the risks associated with beneficial owners.
Accountable institutions are encouraged to respond to the consultative process and provide comments to the FIC on Draft PCC 121 by 8 December 2023.
Read the Draft Public Compliance Communication 121.