This article relates to accountable institutions listed in Schedule 1 to the Financial Intelligence Centre Act 38 of 2001 (FIC Act) and examines (i) beneficial ownership and (ii) whether an accountable institution must terminate a relationship with a client if the client has a beneficial owner in a sanctioned jurisdiction.
Establishing beneficial ownership
On 29 December 2022, the President of South Africa signed the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022. The main objective of these amendments was to provide the relevant authorities with the necessary information to reduce the risk of money laundering, financial crimes, and reputational damage.
The FIC Act is South Africa's primary legislation aimed at combatting money laundering, terrorist financing, and proliferation financing. The FIC Act defines a 'beneficial owner' in respect of a legal person as the natural person who, independently or together with another person, owns the legal person or exercises effective control of the legal person.
Previously, there was little clarity on the specific shareholding thresholds for identifying beneficial ownership in private or public companies, although the Financial Intelligence Centre (FIC) has long required the identification of Ultimate Beneficial Owners (UBOs) under Section 21B of the FIC Act as part of the due diligence process. The Financial Action Task Force's guidance on establishing and identifying beneficial owners of clients recommended identifying shareholders with a 25% interest or more.
On 4 August 2024, the FIC issued Public Compliance Communication 59 (PCC59), which reaffirms the need to identify UBOs through an elimination process of ownership and control but introduces a significant change.
According to the FIC, a good indicator of controlling ownership over a legal person is the percentage of total ownership interest, as a person who holds a sufficient percentage of ownership interest usually exercises influence or control over a legal person and benefits from that legal person. The FIC views that the holding five percent or more of ownership interest in a legal person is 'usually' sufficient to exercise a controlling ownership interest in the legal person.
The FIC strongly recommends that an accountable institution identifies persons who hold five percent or more of ownership interest in a legal person, as these persons can be regarded as beneficial owners for purposes of section 21B(2) of the FIC Act.
The term 'controlling ownership interest' as used in section 21B(2)(a)(i) of the FIC Act is not defined in the Act. The FIC interprets 'controlling ownership interest' to mean: "the ability of a natural person, by virtue of ownership interest in a legal person, to control and/or to take decisions regarding or influence the resolution, decisions and/or business operations of that legal person".[1]
PCC59 further explains that where a natural person can exercise decisive influence directly or indirectly over the decisions of the legal person and/or the legal person's operations due to their ownership interest, then that natural person owns a controlling ownership interest in that legal person.
Broadly, the identification of beneficial ownership occurs through a three-step process. Each step must only be followed if the previous step cannot determine beneficial ownership. In summary, the elimination steps include:
- Step 1: Identifying the controlling ownership interest of a client.
- Step 2: Determining whether control is exercised through other means.
- Step 3: Determining whether control is exercised over management.
It is worth noting that the third step can be applied only in exceptional cases, as the identification of natural persons who exercise control over management should not supersede the identification of the beneficial owners. The identification process also differs based on the nature of the client.
Sanctioned entities vs. Sanctioned jurisdictions
If a client's UBO is located in a sanctioned jurisdiction, this may trigger particular events under contractual arrangements, which can grant an aggrieved contracting party certain rights and/or remedies, such as early termination or prepayment.
A client with a UBO in a sanctioned jurisdiction increases the geographical risk of the client. From an accountable institution perspective, the client must be flagged as high-risk. An accountable institution will need to assess the risk exposure to the business based on its risk-based approach. This may result in proceeding with the relationship by taking enhanced due diligence measures or terminating the relationship (and/or declining the relationship at the onboarding stage).
Public Compliance Communication 44A requires accountable institutions to continuously screen against the United Nations Security Council resolutions, domestically known as the Targeted Financial Sanctions (TFS) list, freeze assets of designated persons or entities immediately, and file reports with the FIC.
No person may enter into a relationship with a sanctioned person or entity (ie, a person or entity appearing on the TFS list). The FIC Act prohibits
any person from directly or indirectly dealing with a sanctioned person or entity and/or property associated with such person or entity.
If a client's UBO is a sanctioned entity or person, this relationship must be terminated immediately and reported to the FIC in accordance with the FIC Act.
