Daixia Bank FAQs on Beneficial Ownership – Daixia

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Daixia Bank FAQs on Beneficial Ownership

The Wolfsberg AML Principles:

These principles form part of broad based and on going industry efforts to define standards for the control of AML risks associated with trade finance activities.

Frequently Asked Questions with Regard to Beneficial Ownership in the Context of Private Banking

Questions sometimes arise with regard to the term “beneficial ownership” as used in the Anti-Money Laundering Principles (AML) for Private Banking (the “Principles”). Some of these questions, as well as answers, are noted below.

1. What does “beneficial ownership” mean for AML purposes?

The term “beneficial ownership,” when used to refer to beneficial ownership of an account in an AML context (such as the Principles), is conventionally understood as equating to ultimate control over funds in such account, whether through ownership or other means. “Control” in this sense is to be distinguished from mere signature authority or legal title.

The term reflects a recognition that a person in whose name an account is opened with a bank is not necessarily the person who ultimately controls such funds. This distinction is important because the focus of AML efforts – and this is fundamental to the Principles – needs to be on the person who has this ultimate level of control. Placing the emphasis on this person is typically a necessary step in determining the source of wealth.

Generally, the process of determining who should be viewed as the beneficial owner does not pose any particular challenges. For example, as noted in the answer to Question 3 below, it is readily apparent that an individual who establishes a personal investment company (“PIC”), transfers his own assets into the company, and is the sole shareholder, should be viewed as the beneficial owner. There may be situations, however, in which determining what “beneficial ownership” is for AML purposes may not be as straightforward as a conceptual matter. To accommodate these situations, beneficial owners should, for money laundering purposes, be broadly conceived of as including the individuals (i) who generally have ultimate control over such funds through ownership or other means and/or (ii) who are the ultimate source of funds for the account and whose source of wealth should be subject to due diligence.1 An example of the application of this framework to the different roles involved in the creation and management of trusts is discussed below in the answers to Questions 4 to 4C.

What “beneficial ownership” is intended to mean for purposes of the Principles should therefore be seen as dependent on the circumstances of the account involved. The Principles, consequently, do not seek to define the term “beneficial ownership” in the abstract; rather, the focus in the Principles is on identifying persons, in particular circumstances, who should be viewed as having the requisite “beneficial ownership.”

Accordingly, Paragraph 1.2.3 of the Principles begins with the general statement that beneficial ownership must be established for all accounts, sets forth general characteristics of beneficial owners (as per (i) and (ii) in the prior paragraph), but then qualifies these general principles by elaborating, in the particular contexts of (i) natural persons, (ii) legal entities, (iii) trusts and (iv) unincorporated associations, what the private banker should seek to understand so that he is in a position to determine the persons who warrant due diligence.

In the context of private banking relationships – which is what the Principles address – it should be noted that in circumstances in which the account holder is not a natural person, the general objective is to establish the identity of the natural person(s) who, ultimately, has the requisite beneficial ownership. In other contexts – e.g. lines of business of the bank in which the clients are operating corporate entities with many shareholders – this objective, of course, would not make sense.

Generally, for purposes of the Principles, it would be inappropriate to equate “beneficial owner” with “beneficiary” or “holder of any beneficial interest.” To define the term “beneficial ownership” in this manner would yield a result that is too inclusive. See Questions 2-5 for a more concrete, practical approach.

These FAQs focus on beneficial ownership of accountholder assets in the typical private banking contexts (e.g. when the accountholder is a PIC or a trust). These situations are to be distinguished from those situations, not addressed in these FAQs, in which the accountholder is (i) a legal entity that is an operating company or (ii) an intermediary (e.g. an investment manager) acting on behalf of its clients. For a more detailed consideration of intermediaries in the context of private banking, see the Wolfsberg Frequently Asked Questions with Regard to Intermediaries and Holders of Powers of Attorney/Authorised Signers in the Context of Private Banking.

2. What does the term “beneficial ownership” mean in the context of natural persons?

When a natural person seeks to open an account in his/her own name, the private banker should inquire whether such person is acting on his own behalf. If such person responds affirmatively, then, in the ordinary case, it is reasonable to presume that he/she is the beneficial owner.

There are circumstances, however, when this presumption may no longer be reasonable, that is, when “doubt exists” as to whether the apparent account holder is acting on his own behalf. In the client acceptance process, for example, such doubt could arise if there are inconsistencies in the information gathered in the due diligence process. For example, if a prospective client’s explanation as to the sources of his/her wealth does not, on its face, make sense, further due diligence would be appropriate.

Moreover, after the account has been opened, subsequent activity in the account may become inconsistent with the originally anticipated account activity, in which event, it may be reasonable to revisit the initial presumption that the account holder was acting on his/her own behalf. For example, if it is anticipated that the client, after the account is opened, will have occasional transfers of US $100,000, and there are suddenly frequent transfers substantially in excess of that amount, further due diligence may be warranted, including further inquiry as to beneficial ownership.

3. What does “beneficial ownership” mean in the context of a legal entity, such as a Personal Investment Company (PIC)?

There are situations in which the client (i.e. the accountholder) is a legal entity, but in which it is appropriate, for due diligence purposes, to understand the identity of the beneficial owners of the entity. In the event an individual wishes to hold assets through a PIC, the PIC is the client, and the individual is the beneficial owner of such company and appropriate due diligence would be done, including, for example, ascertaining the ownership and control structure, database checks and inquiring as to the beneficial owner’s source of wealth. If appropriate, the banker should consider verifying the identity of the beneficial owner by reference to official identity papers or other reliable, independent source documents, data, or information.

The case of a PIC is to be distinguished from that of a corporate entity that is a typical operating company with many shareholders, with regard to which it would make no sense to do due diligence on the shareholders. Indeed, this type of entity would not ordinarily have a relationship with a private bank because such a client is institutional or commercial in nature and would presumably have relationships with other business units of the bank.

There may be situations where there is more than one beneficial owner. For instance, a successful entrepreneur may organise a private holding company in which he and his spouse are the shareholders, but in which he is the provider of funds. In this situation, due diligence as to the source of funds and wealth should be done on him, not his spouse. It may, however, be appropriate to engage in some due diligence with respect to the spouse’s background and reputation.

It is appropriate for the private banker to develop an understanding of the company’s structure. In the event, for example, there are shareholders owning a substantial amount of shares who are not related to the apparent provider of funds, the private banker should seek to understand why this is so. Similarly, if there are individuals who are in a position to exert control over the funds held by the company (e.g.