Financial Action Task Force (FATF) – Beneficial Ownership of Legal Persons

FATF’s Origin and Mandate

The Financial Action Task Force (FATF) is an independent inter-governmental body established in 1989 that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction.[1] The FATF explains its role:

The mandate of the FATF is to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system. In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.[2]

The FATF Recommendations (International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation)[3] are recognized as the global anti-money laundering and counter-terrorist financing standard. The FATF describes their scope:

The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances. The FATF Recommendations set out the essential measures that countries should have in place to:

• identify the risks, and develop policies and domestic coordination;
• pursue money laundering, terrorist financing and the financing of proliferation;
• apply preventive measures for the financial sector and other designated sectors;
• establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures;
• enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and
• facilitate international cooperation.[4]

The huge significance of the FATF in the context of ownership and transparency is that when reference is made in transparency initiatives to “accepted international beneficial ownership standards” (or words to that effect), it is to FATF guidance.

FATF 40 Recommendations (2012, amended February 2023)

The heart of the matter is contained in FATF Recommendations 24 and 25:

24. Transparency and beneficial ownership of legal persons

Countries should assess the risks of misuse of legal persons for money laundering or terrorist financing, and take measures to prevent their misuse. Countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities, through either a register of beneficial ownership or an alternative mechanism. Countries should not permit legal persons to issue new bearer shares or bearer share warrants, and take measures to prevent the misuse of existing bearer shares and bearer share warrants. Countries should take effective measures to ensure that nominee shareholders and directors are not misused for money laundering or terrorist financing. Countries should consider facilitating access to beneficial ownership and control information by financial institutions and DNFBPs [Designated Non-Financial Business or Profession] undertaking the requirements set out in Recommendations 10 [Customer Due Diligence] and 22 [DNFBP customer due diligence].

25. Transparency and beneficial ownership of legal arrangements

Countries should assess the risks of the misuse of legal arrangements for money laundering or terrorist financing and take measures to prevent their misuse. In particular, countries should ensure that there is adequate, accurate and timely information on express trusts and other similar legal arrangements including information on the settlor(s), trustee(s) and beneficiary(ies), that can be obtained or accessed in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and DNFBPs undertaking the requirements set out in Recommendations 10 and 22.

The FATF’s definition of “beneficial owner” is found in the Glossary to the FATF Recommendations:[5]

In the context of legal persons, beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person. In the context of legal arrangements, beneficial owner includes: (i) the settlor(s); (ii) the trustee(s); (iii) the protector(s) (if any); (iv) each beneficiary, or where applicable, the class of beneficiaries and objects of a power; and (v) any other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above. When the trustee and any other party to the legal arrangement is a legal person, the beneficial owner of that legal person should be identified.

The definition of “beneficial owner” is further expanded in footnotes.[6] Reference to “customer” opens up the possibility of extended debate as to its meaning, but in its 2023 revision the FATF adds some clarity, commenting: “This definition should also apply to beneficial owner of a beneficiary under a life or other investment linked insurance policy.” Further:

• Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.
• The ultimate beneficial owner is always one or more natural persons. As set out in R.10, in the context of CDD it may not be possible to verify the identity of such persons through reasonable measures, and, to the extent that there is doubt about whether a person with a controlling ownership interest in a legal person is the ultimate beneficial owner, or where no natural person exerts control through ownership interests, the identity should be determined of the natural persons (if any) exercising control of the legal person through other means. Where no natural person is identified in that role, the natural person who holds the position of senior managing official should be identified and recorded as holding this position. This provision of R.10 does not amend or supersede the definition of who the beneficial owner is, but only sets out how CDD should be conducted in situations where the beneficial owner cannot be identified.
• Reference to “ultimate effective control” over trusts or similar legal arrangements includes situations in which ownership/control is exercised through a chain of ownership/control.

The FATF in its Interpretive Note to Recommendation 10 provides a seemingly innocuous suggestion in a footnote:

A controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25%).[7]

This illustrative example of a 25% threshold has taken on a life of its own, and has become the globally accepted threshold below which a person is not considered to be a “beneficial owner” of a company. The difficulty in light of the 2023 revisions to Recommendation 24 which considerably expand the definition of “beneficial owner” is that although the 25% threshold refers to “controlling ownership” its has been elided universally to be a stand-alone test for determining beneficial ownership. It is however just the work of a moment for an offshore lawyer or wealth manager to make sure that no-one owns more than 24.99% of any structure, thereby eliminating registration requirements altogether.[8]

Guidance on Beneficial Ownership of Legal Persons (March 2023)

A decade on, and the FATF’s thinking has evolved, recognising that control is an indication of beneficial ownership equally determinative to mere “ownership” itself. In March 2023 it introduced its Guidance on Beneficial Ownership of Legal Persons.[9] The FATF recognises the breadth of the means by which beneficial ownership may be obscured:

3. Beneficial ownership information can be obscured through, for example, shell companies, complex ownership and control structures involving many layers of shares registered in the name of other legal persons, bearer shares and bearer share warrants, unrestricted use of legal persons as directors, formal nominee shareholders and directors where the identity of the nominator is undisclosed, informal nominee shareholders and directors, such as close associates and family.[10]

The FATF now gives equal weight to “ownership” and “control” in determining beneficial ownership:

35. Legal ownership and beneficial ownership over a legal person are two separate concepts. A natural person may be considered a beneficial owner on the basis that he/she is the ultimate owner/controller of a legal person, either through his/her ownership interests or through exercising ultimate effective control through other means. While legal ownership and beneficial ownership can overlap, the legal title or controlling shareholding of a company may be in the name of an individual or a legal person other than the beneficial owner who ultimately controls the entity, directly or indirectly. Accordingly, individuals who exercise ultimate control over a legal person should be identified as beneficial owners, regardless of whether they own shares above any specified minimum ownership threshold.
36. Countries should consider various types of ownership interests and ways to exercise control over a legal person that exists within their jurisdiction, pursuant to commercial and administrative law, including voting rights, economic rights, convertible stock or outstanding debt that is convertible into voting equity. They should also consider ownership interests and ways to exercise control as the two aspects may have evolved in practice.[11]

Specifically, the FATF acknowledges that a simple 25% ownership threshold as a test to determine beneficial ownership is inadequate, and that although 25% should be regarded as a maximum threshold, not excluding lower percentages if felt to be more effective:

37. Countries may use an ownership threshold to determine beneficial ownership based on ownership interests, e.g., any natural persons whose direct or indirect ownership reaches a certain percentage of shares in a company. Such a threshold should not exceed a maximum of 25%. Countries may consider combined ownership interests (e.g., shareholders working together). […]
38. Sometimes, ownership interests can be so diversified that there is no single shareholder, whether acting alone or together with other shareholders, who exercises control of the legal person through ownership. For example, if a threshold of 20% is adopted (based on the jurisdiction’s assessment of risk), a company with as few as six shareholders can have no shareholder owning a share above the minimum threshold, then no shareholder would fall under the reporting requirements based only on the application of an ownership threshold.[12]

Control by means other than direct ownership is also explored in the Guidance:

• Weighted voting rights may be given to certain classes of shares which allows them to control a company even though their percentage of ownership of the company is below the 25% threshold.
• An individual may be given power to appoint senior company management (people whom they therefore may influence).
• A lender to the company may have the right on the occurrence of some future event or at a given time to convert that loan into shares, those shares then giving them control of the company – a kind of beneficial owner in waiting.
• Where a shareholder is itself a company, the management of that corporate shareholder has indirect influence over the company in which it holds shares.
• Simple close personal relations, connections to relatives or associates must all not be discounted – influencing someone who in turn can influence the company is control at one remove.

The FATF understands nevertheless that:

these cases are harder to detect and will in practice be less relevant with routine collection of beneficial ownership information by a registry, agency, or other body. [13]

To what extent legislation introduced worldwide in response to its 25% threshold test will now itself be amended on a country-by-country basis to include, independently, control as a litmus test remains to be seen. The ease with which a 25% threshold can be avoided, thereby rendering public disclosure of beneficial ownership unnecessary, may prove to be a powerful disincentive to reform.

[1] Financial Action Task Force <https://www.fatf-gafi.org/about/> (accessed 11 September 2023)

[2] The FATF Recommendations (2012, as amended February 2023) Introduction 7 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[3] The FATF Recommendations (2012, as amended February 2023) <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[4] The FATF Recommendations (2012, as amended February 2023) Introduction 7 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[5] The FATF Recommendations (2012, as amended February 2023) Glossary 120-121 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[6] The FATF Recommendations (2012, as amended February 2023) Glossary 120-121 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[7] Interpretive Note to Recommendation 10 (Customer Due Diligence), The FATF Recommendations (2012, as amended February 2023) 65 fn 35 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[8] This issue has now been acknowledged by the FATF in its guidance Beneficial Ownership of Legal Persons (March 2023) discussed below.

[9] Guidance on Beneficial Ownership of Legal Persons (March 2023) <https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html> (accessed 11 September 2023)

[10] Guidance on Be Copyright © FATF/OECD. All rights reserved neficial Ownership of Legal Persons (March 2023) para 3 4 <https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[11] Guidance on Beneficial Ownership of Legal Persons (March 2023) paras 35 and 36 16 <https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[12] Guidance on Beneficial Ownership of Legal Persons (March 2023) paras 37 and 42 16, 18 <https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

[13] Guidance on Beneficial Ownership of Legal Persons (March 2023) para 45 18-19 <https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html> (accessed 11 September 2023) Copyright © FATF/OECD. All rights reserved

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Article “Beneficial Ownership of Legal Persons” posted on 11 September 2023 | Written by Paul Beckett