Public Compliance Communications 37: PCC 59 - Beneficial ownership

2.3. Section 21B(1) of the FIC Act requires that accountable institutions establish (a) the nature of the client's business, as well as (b) the ownership and control structure of the client.

2.4. The accountable institution is to obtain information on the ownership and control structures of its clients, understand the ownership and control structure of its clients and take reasonable steps to verify the ownership and control structure information. For the verification of information obtained, reliance should be placed, as far as possible, on reliable and independent third-party sources.

2.5. Documentation indicating the ownership and control structures, which the accountable institutions rely on, should provide information on the different types of ownership interest, as well as which persons own the interest. Accountable institutions have the flexibility to choose the type of information by means of which it will establish clients' identities and also the means of verification of clients' identities.

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**Ownership and control structures**

Examples of documentation that may provide information on the client's ownership and control structure include, but are not limited to:

A share certificate (which indicates voting rights or no voting rights, names of the holders of the shares), an organogram approved or signed by the board, director(s) or senior management, an approved prospectus, signed trust deed, signed partnership agreement, signed shareholder agreement, signed constitution document, share register, signed letter from auditors outlining the shareholding structure, memorandum of incorporation etc.

Further examples may include: a signed beneficial ownership declaration.; signed board resolutions which include details in relation to the ownership and control; any official certificate by the registrar of company of the respective jurisdiction which may indicate the shareholders/owners, notarised declarations (official documents notarised by a public notary that attest to the ownership and control structure), regulatory filings, annual reports; independent external entity search tools for listed entities and signed joint venture agreement

These examples do not constitute a complete list.

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Hybrid approach to determining controlling ownership interest includes a threshold approach and an overall assessment of ownership influence

2.18. The percentage of total ownership interest is a good indicator of controlling ownership over a legal person, as a person who holds sufficient percentage of ownership interest in most instances exercises influence or control over a legal person and benefits from that legal person. In this context the Centre is of the view that holding five percent or more of ownership interest in a legal person is usually sufficient to exercise a controlling ownership interest in the legal person. The Centre strongly recommends that accountable institutions identify the persons who hold five percent or more of ownership interest in a legal person, which persons can be regarded as beneficial owners for purposes of section 21B(2) of the FIC Act.

2.19. The threshold of five percent was determined with reference to the following factors:

2.19.1. Through alignment to other legislative requirements, including regulation 32A to the Companies Act, 2008 (Act 71 of 2008) which requires affected companies to establish and maintain a register of persons (both natural and juristic) who hold beneficial interest equal to or in excess of five percent of the total number of securities or class of that securities¹.

2.19.2. Risk assessments conducted on various sectors has highlighted the risk of legal person structures being abused by criminals who are beneficial owners.

2.19.3. Emerging risks and media reports highlighting the abuse of the public procurement process, using illegitimate companies with criminal beneficial owners. There are numerous instances in South Africa that highlight the concealment of criminal beneficial owners which have enabled corrupt activities using complex legal structures. The abuse of legal persons within South Africa is concerning where beneficial owners deliberately use legal entities to evade detection. The recommended percentage threshold is therefore set sufficiently low to identify beneficial owners.

¹ https://www.cipc.co.za/wp-content/uploads/2023/08/USER-GUIDELINES-BO-LEGISLATIVE-REQUIREMENTS_Aug-23.pdf

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persons, either through formal or informal contracts.

2.31.11. Use of formal or informal nominee arrangements.

2.31.12. The right to appoint or remove more than half of the members of the board or similar officers of the corporate entity.

2.31.13. The ability to exert a significant influence on the decisions taken by the corporate entity, including veto rights, decision rights and any decisions regarding profit distributions or leading to a shift in assets. Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances.

2.31.14. Control, whether shared or not, through formal or informal agreements with owners, members or corporate entities, provisions in the articles of association, partnership agreements, syndication agreements, or equivalent documents, depending on the specific characteristics of the legal person, as well as voting arrangements.

2.31.15. Usufruct – where a beneficial owner gives a legal right to someone else to use or consume benefits from the beneficial owner's property.

2.31.16. Ability to exercise control through immediate family members or known close associates. Control through informal means. Control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. When an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.

2.31.17. While the above list exists in law through statute or legal form, it is possible for natural persons that neither hold voting rights nor hold any of the roles in the aforementioned list, to still impact decisions taken in respect of the client of the accountable institution and further benefit from this. This is usually a form of undue influence, which presents heightened ML, TF and PF risk. Where it becomes apparent that a legal person has taken a decision or

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PART B

3. ESTABLISHING THE BENEFICIAL OWNERS OF TRUSTS

3.1. It is important for accountable institutions to understand that when establishing a business relationship with or conducting a single transaction on behalf of a trust, that the accountable institution must identify all the natural persons linked to the trust. This requirement applies because decision-making power within a trust lies with the trustee (in terms of law). However, in practice the trustees, founders or donors, settlors, protectors and/or beneficiaries or categories of beneficiaries (including direct or indirect beneficiaries), as well as any other persons exercising effective control over the trust can all exercise influence over the decisions or operations of a trust.

3.2. Beneficiaries are not the only persons who gain benefit from the trust. The trustees and founders also have the capacity to gain from a trust, depending on the manner in which the trust is set up and the purposes for which the trust is operated. Accountable institutions must therefore identify all natural persons who are linked to the trust.

3.3. Founders often use trusts as a vehicle to di-vest assets from the founder on paper and set up the beneficiary structure in such a manner that the founder ultimately can still gain the benefits through the trust. Criminals exploit this structure, as they are aware that trusts may be abused for ML, TF and PF purposes.

3.4. When dealing with trusts it must also be noted that there are scenarios where external persons are able to exercise undue influence over and/or extract benefit from a trust without a legal link to the trust (not a trustee, founder or beneficiary) but rather through virtue of affiliation to the trustee, founder or beneficiary. Accountable institutions should remain aware of this risk and monitor the trust's transactions or activities to determine such undue influence.

3.5. In order to mitigate the ML, TF and PF risks, accountable institutions must identify the natural persons who are the founders, trustees and named beneficiaries of a trust in terms of section 21B(4) of the FIC Act.

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3.6. Where a trustee is a legal person, such a trustee has nominal trustees who are the natural persons acting on behalf of the trustee, similar to an authorised representative. The accountable institution must identify the trustee as it would any other legal person in terms of section 21B(1) of the FIC Act. This includes identifying the authorised person who acts on behalf of that legal person trustee as the nominal trustee, the legal person trustee, as well as the beneficial owners of that legal person trustee through the process of elimination. The type of legal person holding the position as trustee will determine who to identify as the beneficial owner.

3.7. The same applies where a founder and/or beneficiary is a legal person. The accountable institution must identify the founder and/or beneficiary as it would any other legal person in terms of section 21B(1) of the FIC Act. That includes identifying the authorised representative, the legal person, as well as the beneficial owners of the legal person by following the process of elimination.

3.8. When seeking to identify the beneficial owner of a foreign trust, the accountable institution must understand the ownership and control structure requirements and apply CDD measures in a similar manner as it would with domestic trusts. In complex cases, trust company services providers and administrators may be involved and additional engagement with respective trust and company service providers may be required to obtain the beneficial ownership information required.

3.9. Where an entity is structured and functions in a manner similar to a trust (apart from the establishment thereof), the same principles of CDD apply as for a trust, which include identifying all the natural persons linked to the entity. For example, certain private foundations, although not registered as trusts, function in a similar manner.

3.10. Refer to South African Reserve Bank (SARB) Directive to all insurers conducting life insurance business falling under the supervision of the Prudential Authority in terms of section 45 and item 8 of Schedule 1 read with Schedule 2 of the FIC Act which sets out the accountable institution's obligation to conduct CDD when a life insurance beneficiary benefit accrues.

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Example 6. Multi-Level Indirect Shareholding (formal nominee arrangements)

![img-6.jpeg]([37] 2024 08 01 PCC 59 – Beneficial ownership.assets/page-0033-image-00-img-6.jpeg)

Natural Person 1 (50% * 93% = 46.5%)

and Natural Person 3 (50% * 93% = 46.5%)

are beneficial owners, as they both own more than 5% of Legal Entity 1.

Natural Person 4 (50% * 7% + 50% * 7% = 3.5% + 3.5% = 7%), is also the beneficial owner as Natural Person 2 is acting as a nominee on behalf of Natural Person 4.

There are no other nominee arrangements and other persons who could have an indirect influence on Natural Persons mentioned in the diagram.

We are in jurisdiction that uses 5% threshold.

This is another example of multi-level-indirect shareholding.

Natural Person 1 is the beneficial owner of Legal Entity 1, as it indirectly owns shareholding in the Legal Entity 1 through Legal Entity 2, with shareholding of 46.5 percent.

The percentage of ownership is calculated using the formula (50% * 93% = 46.5%).

Natural Person 3 is also the beneficial owner of Legal Entity 1, as it indirectly owns shareholding in Legal Entity 1 through Legal Entity 3. The percentage of ownership of 46.5 percent is calculated using the formula (50% * 93% = 46.5%).

Natural Person 2 who, indirectly through Legal Entity 2, owns 3.5 percent (50%* 7% = 3.5%) of Legal Entity 1 is a formal nominee acting on behalf of Natural Person 4.

Natural Person 4, indirectly, through Legal Entity 3, owns 20 percent (50% * 7% = 3.5%) of Legal Entity 1. He also indirectly, through Natural Person 2, owns/controls another 3.5 percent of Legal Entity 1 through Legal Entity 2. In total he indirectly owns/controls seven percent of Legal Entity 1. Natural Person 4 is the beneficial owner of the Legal Entity 1.

It is important to emphasise that Natural Person 1, Natural Person 3 and Natural Person 4 are not the intermediaries, agents or nominal owners and there are no other persons who could have an indirect influence on the company's activities.

PCC 59 - Beneficial ownership

Relationships in

Document

Relationships out

Linked legislation

PUBLIC COMPLIANCE COMMUNICATION

1. INTRODUCTION

2. ESTABLISHING THE OWNERSHIP AND CONTROL STRUCTURE TO DETERMINE THE BENEFICIAL OWNER OF A CLIENT

2.1. A legal person is defined in the FIC Act as:

2.2. In terms of the FIC Act beneficial owner:

Beneficial owner

Legal ownership versus beneficial ownership

PART A

ESTABLISHING THE BENEFICIAL OWNERS OF LEGAL PERSONS

SECTION 21B – BENEFICIAL OWNER PROCESS OF ELIMINATION

Step 1 – Controlling ownership interest

Controlling ownership interest

Example – External persons exercising undue influence over legal person

Step 3 – Exercises control over the management

Legal persons – Companies listed on exchanges

Foreign created legal persons

Legal persons – state owned entities

Evidence that the process of elimination was followed

Scope of beneficial owner information

PART C

4. ESTABLISHING THE BENEFICIAL OWNERS OF PARTNERSHIPS

PART D

5. ESTABLISHING THE BENEFICIAL OWNERS OF NON-PROFIT ORGANISATIONS

PART E

6. ADEQUATE, ACCURATE AND UP TO DATE BENEFICIAL OWNERSHIP INFORMATION

Sources of beneficial ownership information

Inability to identify and verify

Obligation to scrutinise client information

Public procurement

7. GUIDANCE OF IMMEDIATE EFFECT AND SUPERVISORY APPROACH

8. COMMUNICATION WITH THE CENTRE

ANNEXURE A

EXAMPLES OF OWNERSHIP STRUCTURES

Example 3. Aggregate shareholding (trust)

Example 5. Multi-Level Indirect Shareholding

Example 6. Multi-Level Indirect Shareholding (formal nominee arrangements)

Example 7. Looping Relationships and multi-level indirect shareholding

Example 8. "Football team" (informal nominee arrangements)

Example 9. Joint-Stock company

Example 10. Multi-Level Indirect Shareholding (Trust)

Example 11. Multi-Level Indirect Shareholding (Investment Fund).

Example 12. Trust and Investment Fund

For the trust:

For the investment fund:

Example 13. Trust (established by legal persons)

Example 14. Trust (Trustee is another Trust)

Example 15. Investment Fund (owned by legal persons)

Example 16. Investment Fund (owned by another Investment Fund)

ANNEXURE B

9. RISKS ASSOCIATED WITH THE BENEFICIAL OWNER

Indicators of ML, TF and PF risk

ANNEXURE C

Sources of South African securities exchanges*