When one bank in Tennessee submitted a suspicious activity report over one of its customers’ transactions, you can bet they didn’t know it would lead to drug trafficking arrests. With over $1.2million deposited, usually in $100 bills, the bank’s suspicions were right, with nine people indicted. Suspicious activity reports are paired with beneficial ownership checks to prevent this type of money laundering and criminal financing – with this example a testament to their success. Learn about why compliance is important and how to identify true owners.
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What does beneficial ownership mean?
Ultimate beneficial ownership refers to the individual(s) that ultimately has control over the money in an account. These are the individuals who stand to profit most from a financial transaction, and such transactions occur on behalf of their decision-making authority.
Typically, the beneficial owners of companies tend to include CEOs and board members – the ‘legal’ transparent owners. But on some occasions, beneficial owners could be concealed from the public, and be individuals that want to operate behind the scenes. This may be for an innocent reason, such as to keep a politically exposed person’s affairs secure and private. Or, beneficial owners may be hidden for a ‘business’ to perform money laundering.
Any individual who owns 25% or more of a legal entity will be considered a beneficial owner, alongside any person with significant responsibility to control, manage, or direct. The identity of these persons must be reported to the beneficial ownership register, with the transparency fitting into wider compliance with FinCEN regulations, which will be explored in the next section.
But you might be surprised to know that while the owners and controllers must document and declare themselves, the reporting responsibility is on account providers to verify this information. As part of customer due diligence and knowing suppliers, businesses must put a number of controls in place to validate the information and investigate suspicious findings. Without such regulatory controls, companies could find themselves complicit with money launderers – and experience significant financial and reputational damage. Not to mention the federal enforcement penalties.
What does the US law say about beneficial owners?
Regulated companies must consider both the Customer Due Diligence and Corporate Transparency Acts as they go about daily services and procedures. Moreover, considering how to validate international suppliers and third-party merchants is also important in avoiding fraud, illicit scandals, and unexpected consequences.
Customer Due Diligence
In May 2018, beneficial ownership declaration became a part of the wider regulatory belt of the Bank Secrecy Act. It was the view of the regulators, FinCEN, that the Customer Due Diligence rule (under which this regulation is held) would:
- Improve transparency in finances
- Prevent the misuse of funds through money laundering or terrorist financing
- Protect the integrity and trust in the national and international economic markets
The ownership rule has four key requirements:
- Identify and verify the identity of customer
- Identify and verify the beneficial owners of companies opening accounts
- Develop customer risk profiles based on their relationships and nature
- Conduct ongoing monitoring to report suspicious behavior
The rule applies to financial entities, such as a bank, fund manager, credit union, or lender.
On the other hand,Corporate Transparency Act requires similar reporting requirements but applies to any incorporated business entity registered in the USA. It helps businesses to “Know their Suppliers”, and compliant companies must declare anybody who either:
- Exercises substantial control over the company and its direction
- Has legal ownership of 25% or more
- Receives significant economic benefits from the company’s assets
This rule was introduced in 2021, and regulated companies had until the 1st January 2024 to comply. It required beneficial owners of an institution to give information like their full name and address, date of birth, and government ID number to the regulator (FinCEN).
International Beneficial Ownership
In some financial scenarios, such as foreign exchange, the OECD requires an automatic exchange of account information to identify beneficial owners of any foreign entity.
But in general, there is a lack of specific US laws for working with companies or customers of foreign jurisdictions. That said, it could still be in an organization’s best interest to verify and validate beneficial owners. In particular, this would benefit companies in assessing the risk of fraud, and reducing the chance of money laundering.
Fortunately, platforms like Trustpair automatically collect, validate, and assess beneficial ownership information for domestic and international third parties.
Why does beneficial ownership prevent money laundering?
Finding out who the beneficial owner of a company is is one of the ways to prevent money laundering. Indeed, beneficial ownership reporting enables companies to go into negotiations and transactions with their eyes fully open. Armed with this information, companies can be confident in their due diligence process and sign with new partners, without experiencing unexpected nasty surprises at a later date.
Scenarios like money laundering, terrorist financing, and third-party fraud can all be avoided. That’s because transparency (and trust) around beneficial ownership reveals the relationships and motivation for certain decision-making. These requirements also help financial institutions to monitor and control their deposits and withdrawals.
Moreover, having the means to identify beneficial owners can prevent the concealment of financial resources – complex structures such as shell companies need not be used. For example, the FATF holds a list of ‘black and grey’ lists comprised of suspected shell companies.
Are beneficial ownership checks enough?
The rules aren’t foolproof – with one particular ‘loophole’ in the aforementioned automatic exchange of foreign information receiving widespread criticism. That’s the exclusion of low-income countries. Beneficial owners who wish to conceal their identities could open accounts in countries like the Cook Islands, for example, and would not be required to prove their identities.
That’s why US organizations need to pursue their own beneficial ownership standards and create an enhanced strategy to prevent both fraud and money laundering. Platforms like Trustpair can automate the validation of third-party information, and enable companies to better protect themselves against fraudsters.
Here’s a recap:
Beneficial ownership refers to the individuals who ultimately benefit from company decisions or those with significant ownership of financial accounts. All entities must declare their beneficial owners (for transparency), and certain industries are compelled to also verify this info. Use Trustpair to automate the validation of data and protect against money laundering.