Beneficial Owner

Beneficial Owner

In the complex landscape of Anti-Money Laundering (AML) regulations, understanding the concept of Beneficial Ownership is crucial for compliance and prevention of financial crimes. Our comprehensive guide delves into the nuances of Beneficial Ownership as outlined in the 4th and 5th AML Directives of the EU, as well as the German Money Laundering Act (GwG), supplemented by insights from BaFin’s Interpretation and Application Guidance.

1. The Evolution of Beneficial Ownership in the EU AML-Directives The EU’s 4th AML Directive (Directive (EU) 2015/849) laid the foundation for modern AML practices, introducing stringent requirements for identifying and verifying the Beneficial Owners of legal entities. This directive aimed to enhance transparency in financial transactions, making it harder for illicit activities to go unnoticed. The subsequent 5th AML Directive (Directive (EU) 2018/843) further tightened these regulations, expanding the accessibility of beneficial ownership information to the public and introducing additional criteria for identifying beneficial owners, thus fortifying the EU’s stance against money laundering and terrorist financing.

2. German GwG and Beneficial Ownership In Germany, the GwG aligns closely with EU directives, detailing specific obligations for identifying beneficial owners. It emphasizes the importance of ascertaining whether a contracting party acts on behalf of a beneficial owner and mandates the collection of detailed information such as name, date of birth, and the nature of their interest in the entity. The GwG’s nuanced approach addresses various entity types, including trusts, foundations, and different forms of legal persons, ensuring a comprehensive coverage of potential scenarios.

3. Insights from BaFin’s Interpretation and Application Guidance BaFin’s guidance provides an invaluable resource for understanding and applying the GwG’s provisions on Beneficial Ownership. It clarifies the definition and identification process, stipulates due diligence obligations, and outlines how to address complex ownership structures. This guidance is especially crucial for obliged entities tasked with upholding AML regulations, offering practical advice on compliance and risk assessment.

4. Why Understanding Beneficial Ownership Matters For businesses and financial institutions, grasping the concept of Beneficial Ownership is more than a regulatory requirement; it’s a crucial step in safeguarding the financial system. Adequate identification and verification of beneficial owners are key to preventing money laundering and terrorist financing. It ensures transparency in business operations, thereby maintaining the integrity of financial markets.

4th AMLD

Beneficial Owner

Article 3(6) of Directive (EU) 2015/849 defines „beneficial owner“ in the context of the European Union’s efforts to combat money laundering and terrorist financing. This definition is critical in understanding who ultimately owns or controls a customer, particularly in financial and legal transactions. The directive outlines various scenarios:

  1. Corporate Entities:
    • Direct Ownership: A natural person owning more than 25% of the shares or voting rights in an entity, either directly or indirectly, is considered a beneficial owner. This threshold is an indication of ownership, but member states may opt for a lower percentage.
    • Indirect Ownership: This occurs when a corporate entity controlled by a natural person owns more than 25% of another entity. This arrangement points to the natural person as the beneficial owner.
    • Control Through Other Means: Beyond shareholding, control can be established through other means, as outlined in Directive 2013/34/EU.
  2. If No Direct Beneficial Owner Is Identified:
    • If exhaustive efforts fail to identify a beneficial owner, or there’s doubt about the identified individuals, senior managing officials are considered the beneficial owners. Entities are required to keep records of the identification process.
  3. Trusts:
    • Beneficial owners in trusts include the settlor, trustee(s), protector (if any), beneficiaries, or any class of persons in whose main interest the trust operates. Additionally, any natural person exercising ultimate control over the trust, through either direct or indirect ownership or other means, is also considered a beneficial owner.
  4. Legal Entities Similar to Trusts:
    • For entities like foundations or arrangements similar to trusts, beneficial owners are the natural persons in equivalent or similar positions to those in trusts.

The directive emphasizes the need for transparency in ownership to prevent misuse of entities for illicit purposes. By identifying the actual individuals who own or control entities, the EU aims to create a more transparent financial environment that combats financial crimes.

Customer Due Diligence (CDD)

Chapter II, Section 1 of Directive (EU) 2015/849 outlines the general provisions for Customer Due Diligence (CDD), focusing on the identification and verification of beneficial owners in various financial and legal arrangements. The key articles in this section include:

  1. Article 13 (1)(b):
    • Customer Due Diligence Measures: This article requires that due diligence measures include identifying the beneficial owner and verifying their identity. This is to ensure the obliged entity knows who the beneficial owner is. This includes understanding the ownership and control structure of legal persons, trusts, companies, foundations, and similar legal arrangements.
  2. Article 13 (5):
    • Additional Measures for Insurance Business: Member States must ensure that for life or other investment-related insurance businesses, in addition to CDD measures for customers and beneficial owners, there are specific measures for beneficiaries of insurance policies. This includes:
      • Specifically Named Beneficiaries: Taking the name of the person.
      • Class-Designated Beneficiaries: Obtaining sufficient information to establish the beneficiary’s identity at the time of payout.
      • Verification at Payout: Verification of the beneficiaries‘ identity should occur at the time of the payout.
      • Assignment Cases: In cases where the insurance is assigned to a third party, the beneficial owner must be identified at the time of the assignment.
  3. Article 13 (6):
    • Trusts and Similar Arrangements: For beneficiaries of trusts or similar arrangements designated by characteristics or class, sufficient information must be obtained to establish the beneficiary’s identity at the time of payout or when they exercise their vested rights.
  4. Article 14 (1):
    • Verification Timing: Member States are required to ensure that the verification of the identity of the customer and the beneficial owner occurs before establishing a business relationship or carrying out a transaction.
  5. Article 14 (2):
    • Derogation for Business Continuity: There can be a deviation from the above rule if necessary to avoid interrupting the normal conduct of business and where the risk of money laundering or terrorist financing is low. However, the verification should be completed as soon as practicable after the initial contact.

Enhanced Due Diligence (EDD)

Chapter II, Section 3 of Directive (EU) 2015/849 addresses Enhanced Due Diligence (EDD) procedures, particularly in relation to transactions or business relationships with Politically Exposed Persons (PEPs). This section emphasizes the need for additional scrutiny in dealings with PEPs due to their higher risk profile in terms of potential involvement in money laundering and terrorist financing. The key articles here are:

  1. Article 20: Enhanced Measures for Politically Exposed Persons
    • Risk Management Systems: Obliged entities must have appropriate systems to determine if the customer or their beneficial owner is a PEP.
    • Measures for Business Relationships with PEPs: When dealing with PEPs, entities are required to:
      • Obtain senior management approval to establish or continue such relationships.
      • Adequately establish the source of wealth and funds involved in transactions or business relationships with PEPs.
      • Conduct enhanced, ongoing monitoring of these business relationships.
  2. Article 21: Measures for Insurance Policies Involving PEPs
    • Identification of Beneficiaries as PEPs: Obliged entities must take reasonable measures to determine if beneficiaries of life or other investment-related insurance policies, or their beneficial owners, are PEPs. This should be done no later than at the time of payout or when the policy is assigned, in whole or in part.
    • Higher Risk Situations: In cases where higher risks are identified, obliged entities must:
      • Inform senior management before the payout of policy proceeds.
      • Conduct enhanced scrutiny of the entire business relationship with the policyholder.

Customer Due Diligence (CDD) by Third Parties

Section 4 of Directive (EU) 2015/849 deals with the performance of Customer Due Diligence (CDD) obligations by third parties. This section specifically outlines the responsibilities and requirements when obliged entities rely on third parties to perform certain aspects of CDD. The key points in Article 27 are:

  1. Obtaining Information from Third Parties (Article 27(1)):
    • Member States must ensure that obliged entities (such as banks, financial institutions, etc.) obtain the necessary information regarding the customer due diligence requirements from the third party they are relying on. This information pertains to the requirements laid down in points (a), (b), and (c) of Article 13(1), which involve identifying and verifying the identity of the customer and beneficial owner, and understanding the ownership and control structure of the customer.
  2. Providing Identification and Verification Data (Article 27(2)):
    • Member States are also required to ensure that when a customer is referred to obliged entities, these entities must take adequate steps to make sure that the third party provides, immediately upon request, relevant copies of identification and verification data. This also includes other relevant documentation on the identity of the customer or the beneficial owner.

Beneficial Ownership Information

Chapter III of Directive (EU) 2015/849 focuses on Beneficial Ownership Information, detailing the requirements for obtaining, holding, and accessing information about the beneficial owners of corporate and other legal entities, as well as trusts and similar legal arrangements. The key articles in this chapter are:

Beneficial Ownership Information of Corporate and Other Legal Entities

Article 30 of Directive (EU) 2015/849 specifies Beneficial Ownership Information of Corporate and Other Legal Entities.

  1. Information Requirements: Entities must obtain and hold adequate, accurate, and current information on their beneficial ownership, including details of the beneficial interests held.
  2. Access to Information: This information must be accessible in a timely manner to competent authorities and Financial Intelligence Units (FIUs).
  3. Central Register: Information on beneficial ownership must be held in a central register, such as a commercial or companies register. Member States must notify the Commission of the characteristics of these national mechanisms.
  4. Accuracy and Currency of Information: Information in the central register must be adequate, accurate, and current.
  5. Access to Beneficial Ownership Information: This information should be accessible to:
    • Competent authorities and FIUs without restriction.
    • Obliged entities for customer due diligence purposes.
    • Persons or organizations with a legitimate interest, subject to certain conditions like data protection rules, online registration, and payment of a fee.
  6. Unrestricted Access for Authorities: The central register must allow timely and unrestricted access by competent authorities and FIUs, without alerting the entity concerned.
  7. Information Sharing: Competent authorities and FIUs should be able to provide beneficial ownership information to their counterparts in other Member States in a timely manner.
  8. Reliance on Central Register: Obliged entities should not exclusively rely on the central register for fulfilling customer due diligence requirements.
  9. Exemptions: Exemptions to access information may be granted in exceptional circumstances to protect the beneficial owner from risks like fraud or violence.
Beneficial Ownership Information of Trusts

Article 31 of Directive (EU) 2015/849 specifies Beneficial Ownership Information of Trusts.

  1. Trustee Information Requirements: Trustees must obtain and hold adequate, accurate, and up-to-date information on beneficial ownership of the trust, including the identity of the settlor, trustee(s), protector, beneficiaries, and others with effective control over the trust.
  2. Disclosure of Trustee Status: Trustees must disclose their status and provide beneficial ownership information to obliged entities when forming a business relationship or carrying out transactions above certain thresholds.
  3. Access to Information for Authorities: Competent authorities and FIUs must have timely access to this information.
  4. Central Register for Trusts: Information must be held in a central register when the trust generates tax consequences. The register should allow timely access by competent authorities, FIUs, and obliged entities.
  5. Accuracy of Information in Central Register: The information in the central register must be accurate and up-to-date.
  6. Reliance on Central Register for CDD: Obliged entities should not solely rely on the central register for fulfilling customer due diligence requirements.
  7. Information Sharing for Trusts: Competent authorities and FIUs should provide trust beneficial ownership information to their counterparts in other Member States as needed.
  8. Applicability to Similar Legal Arrangements: These measures also apply to other legal arrangements similar to trusts.

5th AMLD

Directive (EU) 2018/843, commonly known as the Fifth Anti-Money Laundering Directive, introduced several amendments to Directive (EU) 2015/849 (the Fourth Anti-Money Laundering Directive) to further strengthen the EU’s efforts in preventing money laundering and terrorist financing. Some of the key amendments include:

  1. Amendment to Article 3:
    • Clarification and expansion of the definition of „beneficial owner“ in the case of trusts, specifying who should be considered as beneficial owners (e.g., settlors, trustees, protectors, beneficiaries).
  2. Amendment to Article 13(1):
    • Addition of a requirement for obliged entities to take reasonable measures to verify the identity of the senior managing official when they are identified as the beneficial owner, along with record-keeping of the verification process.
  3. Amendment to Article 14:
    • Obliged entities must collect proof of registration or an excerpt from the register when entering into a new business relationship with entities subject to beneficial ownership registration.
  4. Amendment to Article 27:
    • Modification of requirements related to third parties providing identification and verification data, including the use of electronic identification means and secure processes.
  5. Amendments to Article 30:
    • Enhanced requirements for corporate and other legal entities to obtain and hold information on their beneficial ownership.
    • Introduction of mechanisms to ensure the accuracy and currency of information in central registers, including reporting discrepancies and taking appropriate actions.
    • Expansion of access to beneficial ownership information to the general public, with certain conditions for additional information and data protection considerations.
    • Introduction of exemptions from access in exceptional circumstances where risks to the beneficial owner are identified.
  6. Amendments to Article 31:
    • Extension of obligations to trusts and similar legal arrangements, requiring them to obtain and hold information on beneficial ownership.
    • Establishment of central beneficial ownership registers for trusts and similar legal arrangements.
    • Requirement for trustees to disclose their status and provide beneficial ownership information to obliged entities.
    • Accessibility of beneficial ownership information of trusts to competent authorities, FIUs, and under certain conditions, to the general public and others demonstrating legitimate interest.
    • Introduction of exemptions from access in exceptional circumstances similar to those in Article 30.

German GwG

Beneficial Owner

The Section 3 of the German Anti-Money Laundering Act (GwG) defines the concept of the „beneficial owner“ in various contexts, emphasizing the identification of natural persons who ultimately control or benefit from legal entities or arrangements. This definition is crucial for compliance with AML regulations. The key aspects of Section 3 are as follows:

  1. General Definition (Subsection 1):
    • A beneficial owner is a natural person who ultimately owns or controls the contracting party or the one at whose direction a transaction or business relationship is ultimately carried out.
  2. Legal Persons and Corporate Entities (Subsection 2):
    • For legal persons (other than foundations with legal capacity) and corporate entities not listed on an organized market and not subject to certain transparency requirements, the beneficial owner is:
      • A natural person holding more than 25% of the capital.
      • A natural person controlling more than 25% of the voting rights.
      • A natural person exercising control in a comparable manner.
    • Indirect control is considered, particularly when ownership interests are held through controlled associations.
    • If no beneficial owner is identified after extensive investigations, the legal representative, shareholder-manager, or partner of the contracting party is deemed the beneficial owner.
  3. Foundations and Comparable Legal Constructs (Subsection 3):
    • For foundations with legal capacity and similar legal arrangements, beneficial owners include:
      • Settlors, trustees, or protectors.
      • Members of the board of the foundation.
      • Designated beneficiaries.
      • The group of natural persons intended to benefit from the managed assets, if the beneficiary is not yet designated.
      • Natural persons exercising direct or indirect control over asset management or income distribution.
      • Natural persons with controlling influence on an association, who are board members or beneficiaries of the foundation.
  4. Trading on Instruction (Subsection 4):
    • In cases of trading on instruction, the beneficial owner is the person at whose instruction the transaction is executed.
    • Contracting parties acting as trustees are also considered to be trading on instruction.

These definitions align with international standards for anti-money laundering efforts, aiming to prevent the misuse of legal entities and arrangements for money laundering or terrorist financing. By identifying the real individuals behind transactions and legal entities, the law seeks to increase transparency and accountability in financial and business activities.

Record-keeping and Retention

Section 8 of the German Anti-Money Laundering Act (GwG) outlines the record-keeping and retention requirements for obliged entities. This section ensures that entities maintain detailed and accurate records of their due diligence activities, risk assessments, and decisions related to anti-money laundering (AML) compliance. The key elements of Section 8 are:

  1. Record-Keeping Requirements (Subsection 1):
    • Obliged entities must record and retain:
      • Data and information gathered during the fulfilment of their due diligence obligations regarding:
        • Contracting parties and, if applicable, their representatives.
        • Beneficial owners.
      • Information on business relationships and transactions, including proof of transaction documents.
      • Information about the implementation and results of risk evaluations conducted under Section 10(2), Section 14(1), and Section 15(2), and the suitability of measures taken based on these results.
      • Results of the examination under Section 15(5) no. 1.
      • Reasons and explanations for decisions made concerning reporting obligations under Section 43(1).
  2. Detailed Record-Keeping (Subsection 2):
    • Records must include details on measures taken to identify beneficial owners and to document the ownership and control structure as per Section 11(52) sentence 1.
  3. Verification of Identity (Subsection 3):
    • In cases where persons are deemed beneficial owners as per Section 3(2) sentence 5, records must include:
      • Measures taken to verify their identity as per Section 11(5).
      • Any difficulties encountered during the verification process.

Customer Due Diligence (CDD)

Part 3 of the German Anti-Money Laundering Act (GwG) sets out the customer due diligence requirements for obliged entities. These requirements are essential for identifying and verifying the identity of contracting parties and beneficial owners, and for understanding the nature of business relationships to prevent money laundering and terrorist financing. Key sections include:

  1. General Due Diligence Requirements (Section 10):
    • Section 10 (1) No. 2: Obliged entities must clarify if the contracting party is acting on behalf of a beneficial owner and identify this beneficial owner as per Section 11(5).
    • Section 10 (1) No. 4: Establish procedures to determine if the contracting party or beneficial owner is a politically exposed person (PEP), a family member of a PEP, or a known close associate of a PEP.
    • Section 10 (1) No. 5: Continuously monitor business relationships and transactions to ensure consistency with available information on the contracting party and beneficial owner.
    • Section 10 (3) No. 4: Fulfill due diligence requirements when there is doubt about the veracity of collected information on identities.
    • Section 10 (3a) No. 2: Obliged entities must fulfill due diligence requirements for all new customers and on a risk-sensitive basis for existing business relationships.
  2. Identification (Section 11):
    • Obliged entities must identify contracting parties and beneficial owners before establishing a business relationship or executing a transaction. This may be completed during the establishment of the business relationship under certain conditions (low risk, avoiding business interruption).
    • Specific provisions for real estate transactions are also included, detailing when identification should occur.
  3. Identification of Beneficial Owner (Section 11(5)):
    • Obliged entities must at least establish the name of the beneficial owner and collect further identifying information based on the risk of money laundering or terrorist financing.
  4. Enhanced Due Diligence (Section 15):
    • Enhanced due diligence is required in higher-risk situations, such as when a contracting party or beneficial owner is a PEP. This includes obtaining senior management approval, establishing the source of funds, and enhanced ongoing monitoring of the business relationship.
  5. Performance of Due Diligence by Third Parties (Section 17):
    • Details the conditions under which obliged entities can engage third parties for due diligence purposes, including compliance with GwG provisions and ensuring timely transmission of necessary information and documents.

Transparency Register

Information on the Beneficial Owner

Part 4 of the German Anti-Money Laundering Act (GwG), specifically Section 19, deals with the Transparency Register and the information it must contain about the beneficial owners of various associations and legal arrangements. This section ensures transparency in the ownership structures of entities to prevent money laundering and terrorist financing. Key points include:

  1. Accessible Information via the Transparency Register (Subsection 1):
    • For associations and legal arrangements, the Transparency Register must provide access to the following information about beneficial owners:
      • First name and surname.
      • Date of birth.
      • Place of residence.
      • Nature and extent of the beneficial interest.
      • Nationality.
  2. Determining the Beneficial Owner (Subsection 2):
    • For associations (excluding foundations with legal capacity), the determination of the beneficial owner follows Section 3 (1) and (2).
    • For legal arrangements under Section 21 and foundations with legal capacity, the determination follows Section 3 (1) and (3).
  3. Information on the Nature and Extent of the Beneficial Interest (Subsection 3):
    • This subsection specifies what constitutes the nature and extent of the beneficial interest, which indicates the reason for a person’s status as a beneficial owner. This includes:
      • For associations (excluding foundations with legal capacity):
        • Ownership interests in the association.
        • Control exercised by other means.
        • Roles like legal representative, managing partner, or partner.
      • For legal arrangements under Section 21 and foundations with legal capacity, roles as specified in Section 3 (3).
Inspection of the Transparency Register

Section 23(1) No. 2 of the German Anti-Money Laundering Act (GwG) relates to the inspection of the transparency register, specifically for obliged entities such as financial institutions, lawyers, and accountants. This section outlines the conditions under which these entities can access information in the transparency register. Key points include:

  1. Permitted Inspection for Obliged Entities:
    • Obliged entities are allowed to inspect the transparency register in the context of associations as per Section 20(1) sentence 1 and legal arrangements under Section 21.
  2. Condition for Inspection:
    • The inspection is permitted provided that the obliged entities demonstrate to the registrar entity that the inspection is being carried out to fulfill their due diligence obligations. These obligations are specified in the various cases set out in Section 10(3) of the GwG.
  3. Purpose of Inspection:
    • The purpose of allowing such inspection is to enable obliged entities to carry out their customer due diligence responsibilities. This is part of the broader effort to prevent money laundering and terrorist financing by ensuring that entities have access to necessary information about the beneficial owners of the associations and legal arrangements they are dealing with.
Reporting discrepancies to the registrar entity

Section 23a(1) of the German Anti-Money Laundering Act (GwG) addresses the obligation of obliged entities to report discrepancies to the registrar entity regarding beneficial ownership information. This section is crucial for maintaining the accuracy and reliability of the Transparency Register. The key aspects are:

  1. Reporting Obligation for Obliged Entities:
    • Obliged entities, as defined under Section 23(1) sentence 1 no. 2, are required to report without undue delay any discrepancies they find between the beneficial ownership information in the Transparency Register and the information and knowledge available to them.
  2. Application of Section 43(2):
    • The provisions of Section 43(2) apply to these reports, with necessary modifications. Section 43(2) generally deals with the obligations regarding the reporting of suspicious transactions.
  3. Obligation Applicable to Competent Authorities:
    • This obligation to report discrepancies also applies to competent authorities under Section 23(1) sentence 1 no. 1 (a) and (b), provided that it does not interfere with their functions.
  4. Criteria for a Discrepancy:
    • A discrepancy exists if:
      • There are missing entries as required under Sections 20(1) and (2), and Section 21(1) and (2).
      • There are discrepancies about individual details of the beneficial owners as per Section 19(1).
      • Different beneficial owners are identified than those listed in the Transparency Register.
  5. Compliance with Section 3 for Identification:
    • The identification of beneficial owners underlying the discrepancy report must comply with the requirements of Section 3, which defines who is considered a beneficial owner.

BaFin-Interpretation and Application Guidance on the German GwG

The „BaFin-Interpretation and Application Guidance on the German Money Laundering Act (October 2021)“ provides detailed guidelines on customer due diligence obligations, particularly regarding the identification and verification of beneficial owners as required by Section 10 (1) no. 2 of the GwG (German Money Laundering Act).

Clarification of Beneficial Owner Existence and Identification

Obliged entities must ascertain if a contracting party is acting on behalf of a beneficial owner and identify this owner following Sections 11 (5) and 12 (3) of the GwG. Trust structures cannot be used to avoid this requirement.

Definition of Beneficial Owners – Basic Principles

Beneficial owners are natural persons with ownership/control over a legal entity, or who ultimately instruct transactions/business relationships (Section 3 (1) GwG). It does not automatically include beneficiaries of life insurance or building savings contracts. In public-owned undertakings or homeowner associations, identifying beneficial owners may not be straightforward.

Specific Statutory Examples
Legal Persons and Other Companies

Applies to private law entities (like GmbH, AG) and excludes publicly traded companies and their subsidiaries unless there’s another beneficial owner as per Section 3 (1) GwG. Beneficial owners are those with over 25% capital stock, voting rights, or similar control.

Notional Beneficial Owners

If no natural person qualifies as a beneficial owner, legal representatives or managing partners are considered notional beneficial owners. This determination isn’t affected by the existence of a natural person or the entity’s complex structure.

Foundations and Similar Legal Structures

Includes trustors, trustees, protectors, management board members, designated beneficiaries, and persons with influence over the foundation or trust.

Due Diligence Obligations
Clarification Obligation

Obliged entities must investigate if there are beneficial owners associated with a contracting party. This usually involves questioning the party, but further verification is required.

Identification Obligation

Obliged entities must identify beneficial owners, considering the ownership/control structure of the contracting party. Verification includes collecting names and other information based on risk assessment. The information from the transparency register is used for verification but requires additional checks if risks are apparent.

Ownership and Control Structure

Entities must thoroughly understand the contracting party’s ownership and control structure, going beyond checking for shareholders with significant stakes. This process involves documenting the ownership and control structure, particularly in complex or high-risk scenarios. For new relationships with legal structures under sections 20 or 21 of the GwG, proof from the transparency register is required.

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