By Brandon Cole (18 June 2024)
Introduction
On 14 June 2024, the South African Financial Intelligence Centre (FIC) issued draft public compliance communication 121A (PCC 121A) for a second round of consultation. This draft aims to provide comprehensive guidance on the definition of beneficial ownership and the practical application of section 21B of the Financial Intelligence Centre Act, 2001 (FIC Act). Additionally, it highlights the risks related to money laundering, terrorist financing, and proliferation financing associated with beneficial owners.
Purpose and Context
The primary goal of Draft PCC 121A is to enhance the understanding and application of beneficial ownerships rules, in line with the requirements of the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2022 (“GLA Act”). PCC 121A is part of the broader effort to update and align Guidance Note 7’s reference to identification of, legal persons, trusts and partnerships.
Accountable institutions are required to identify the natural persons who ultimately own or control clients that are legal persons, trusts, and partnerships, as well as those who benefit from the funds controlled by these entities (“UBO”). Accountable institutions must ascertain all natural persons who hold ownership or exert control over such entities. This comprehensive understanding of the ownership and control structure is crucial for these institutions to effectively perform their regulatory and compliance obligations in terms of the FIC and GLA Acts and regulations.
Background
The FIC Act defines a legal person and beneficial owner as:
- A legal person: refers to any entity other than a natural person that engages in business relationships or transactions with an accountable institution. This includes entities incorporated as companies, close corporations, foreign companies, or any other corporate arrangements or associations, but explicitly excludes trusts, partnerships, and sole proprietors.
- Beneficial Owner means: any natural person who ultimately owns or controls a client of an accountable institution, whether directly or indirectly. This includes those who exercise control over legal persons, partnerships, or trusts.
Institutions must identify and verify UBO’s using reliable, independent third-party sources, adhering to a systematic approach. Accountable institutions must understand and document the ownership and control structures of their clients, ensuring they can identify all natural persons who have control over or benefit from legal entities, trusts, or partnerships. Institutions are required to assess and manage the risks of money laundering, terrorist financing, and proliferation financing. Enhanced due diligence is necessary for high-risk clients and sectors.
The draft proceeds to outline in detail the process for establishing UBO’s of legal persons, trusts and partnerships each of which will be briefly discussed below.
- Legal Persons
- Establishing Beneficial Owners: Institutions must identify the natural persons with controlling ownership interests, those exercising control through other means, and those controlling the management of legal persons. This involves a process of elimination to ensure all potential beneficial owners are identified.
- Process of Elimination: The identification process involves a systematic approach:
- Step 1: Identify natural persons with controlling ownership interests (generally defined as holding 5% or more of ownership interest).
- Step 2: Identify those who exercise control through other means, such as nominee shareholders or control through debt instruments.
- Step 3: Identify natural persons who control the management of the legal person, such as directors or managers, when no controlling ownership or other means of control are identified.
- Trusts
- Identifying Linked Persons: Institutions must identify all natural persons linked to the trust, including founders, trustees, and named beneficiaries. This requirement recognizes that trustees, founders, and beneficiaries can all exert influence over a trust’s operations.
- Complex Structures: In cases where trusts have complex structures, such as foreign trusts or those with multiple layers of ownership, institutions must apply similar diligence as with legal persons. This includes identifying all relevant natural persons who control or benefit from the trust.
- Partnerships
- Identifying Partners: Institutions must identify and verify each partner within a partnership, regardless of the ownership percentage each partner holds. This includes identifying legal persons acting as partners and their beneficial owners.
- Partnership Agreements: Institutions should obtain partnership agreements to understand the roles and control exerted by each partner, ensuring comprehensive identification of beneficial owners.
- Non-Profit Organizations
- Similar Approach to Trusts: Institutions should apply a similar approach to non-profit organizations (NPOs) as with trusts. This involves identifying founders, management, and named beneficiaries, or the process by which beneficiaries are determined if not named.
Adequate, Accurate, and Up-to-Date Information
Accountable institutions must obtain and maintain accurate, adequate, and up-to-date beneficial ownership information. This requires verifying information through multiple sources and ensuring records are regularly updated to reflect any changes. Institutions should:
- Ensure Adequate Information: Gather sufficient information to understand who the beneficial owners are and how they exercise control.
- Verify Accuracy: Cross-reference beneficial ownership information against reliable, independent third-party sources to ensure accuracy. Avoid sole reliance on self-declared information without verification.
- Maintain Up-to-Date Records: Regularly update beneficial ownership records to reflect any changes in ownership or control.
Implementation and Compliance Steps
To comply with Draft PCC 121A, accountable institutions should:
- Review and Update Internal Policies: Ensure that internal policies and procedures align with the new guidelines on beneficial ownership.
- Conduct Staff Training: Train staff on the updated requirements and the importance of accurately identifying and verifying beneficial owners.
- Enhance Due Diligence Processes: Implement enhanced due diligence measures for high-risk clients and sectors, ensuring thorough scrutiny of beneficial ownership information.
- Engage with Clients: Communicate with clients to gather and verify the necessary information on beneficial ownership, ensuring transparency and compliance.
- Monitor and Report: Regularly monitor client information and transactions, and report any suspicious activities as required under the FIC Act.
Conclusion
Draft PCC 121A takes a significant step towards enhancing financial transparency and security. By understanding these draft guidelines, accountable institutions can effectively identify and mitigate risks associated with UBO’s. Compliance with these guidelines will contribute to a more secure and transparent financial system, helping to combat money laundering, terrorist financing, and proliferation financing.
Business needs to monitor closely the changing requirements relating to the identification of UBO’s and ensure compliance with updated FIC guidelines which will require diligence and cooperation between clients and accountable institutions. By taking the necessary steps now, clients can position themselves to meet the new requirements efficiently and effectively when they come into operation.
