The Financial Intelligence Centre (FIC) has issued, for comment, a draft public compliance communication (PCC) on the definition of beneficial ownership and the application of section 21B of the Financial Intelligence Centre Act (FICA).
In addition, Draft PCC 121 highlights the money laundering, terrorist financing, and proliferation financing risks related to beneficial owners.
Section 21B(1) of FICA requires an accountable institution to establish the nature of a client’s business and the ownership and control structure of the client.
The draft PCC has sections that provide guidance on how to establish the beneficial owners of legal persons, trusts, partnerships, and non-governmental organisations.
The General Laws (Anti-Money Laundering and Combating Terrorist Financing) Amendment Act amended the definition of beneficial ownership in FICA and section 21B of the Act, which widened the application of the section.
In a consultation note published on 15 November, the FIC said Draft PCC 121 aims to address concerns highlighted in the Financial Action Task Force’s 2019 Mutual Evaluation final report and the FATF’s “action items” that followed South Africa’s grey-listing in February this year. The shortcomings identified include that supervisory bodies have not provided enough guidance on beneficial ownership.
Draft PCC 121 is also a response to numerous requests from supervisory bodies and accountable institutions for further guidance on the application of section 21B of FICA, the FIC said.
Why beneficial ownership must be established
The FIC said criminals often abuse legal persons, trusts, and partnerships to obscure the ownership or control of funds derived from illegal activities or intended to be used for illegal activities. Criminals do this by creating different levels of ownership, which make it difficult to identity the ultimate beneficial owner of the legal person, trust, and partnership. Certain legal persons, trusts, or partnerships are more vulnerable to being abused by criminals because of how they are structured or because of their characteristics.
Therefore, it is essential that accountable institutions identify the natural person who owns or controls clients that are legal persons, trusts, and partnerships and ultimately benefit from the funds owned or controlled by the legal persons, trusts, and partnerships.
As part of establishing the ownership and control structure of the legal persons, trusts, and partnerships in terms of section 21B(1) of FICA, an accountable institution must determine all the persons who own or have control over the entity. It is from understanding the structure that the accountable institution will be able to determine which natural persons it must identify as the beneficial owners in accordance with section 21B(2), 21B(3), and 21B(4).
In demonstrating that it has established the ownership and control structures of a client, an accountable institution should, as far as possible, rely on reliable and independent third-party sources, the FIC said.
The documentation indicating the ownership and control structures on which accountable institutions rely must provide information on the different types of ownership interest, as well as which persons own the interest – for example, a share certificate that indicates voting rights or no voting, and the names of the holders of the shares.
A natural person must be identified
The definition of a beneficial owner extends to a scenario where the beneficial owner is a natural person who exercises effective control of the client who can be a natural person as well.
Accountable institutions must identify the natural persons who are the beneficial owners as provided for in section 21B. Where the accountable institution does not identify a natural person as a beneficial owner and only identifies a legal person as a beneficial owner, the requirement as set out in section 21B will not have been fulfilled. Identifying the natural person who is the beneficial owner provides the required understanding as to who ultimately receives the benefits from a client.
If more than one natural person ultimately owns or exercises effective control over a client, an accountable institution must identify all the natural persons who ultimately own or exercise effective control over the client.
The fact that a beneficial owner indirectly ultimately owns or indirectly exercises effective control over a legal person through multiple layers of other legal persons, partnerships, or trusts does not affect an accountable institution’s obligation to identify that beneficial owner.
Difference between a legal and a beneficial owner
The FIC said a distinction must be drawn between the beneficial owner and the legal owner.
A natural person may be considered a beneficial owner because he or she is the ultimate owner or controller of a legal person, either through his or her 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 (that is, a shareholder). The legal owner may not always be the beneficial owner.
Deadline to comment
Comments on draft PCC 121 must be submitted via the online link. The deadline to comment is the close of business on Friday, 8 December 2023.
Any questions or requests relating to the draft PCC must be sent to consult@fic.gov.za.
The FIC said it intends to publish a final version of the PCC by 26 January 2024.
