Beneficial Owner : PMLA 2002
Significance of Beneficial Owners in Business
Beneficial Ownership find applications in Business Arrangements, Satisfying Tender Qualifications, Safeguard the trust in Investments and establishment of Wholly Owned subsidiary for various business needs. Especially in meeting tender requirements, Networth and Technical capabilities are very crucial.
However opportunities exist for manipulation.
Share application money used for illegitimate purpose hiding the identity of the people for crimes like Frauds, Criminal conspiracy, Cheating ,Amount spent in CSR activities, Issue bearer shares for illegal activities such as Tax evasion and Money laundering.
For purposes of AML/CFT, beneficial owners are always natural persons who ultimately own or control a legal entity or arrangement, such as a company, a trust, a foundation, etc. A simple example (depicted in Figure below) demonstrates how the use of a legal entity or arrangement can obscure the identity of a beneficial owner. When an individual is the sole shareholder of a company and controls it directly, that individual is the BO of the company. However, there may be more layers involved in the ownership structure, perhaps a chain of entities between a legal vehicle and its BO. In Figure given below, the example on the right side shows an additional layer – the limited liability company (LLC) – between the legal vehicle (the Joint Stock Company) and its beneficial owner. The LLC, as the shareholder of the Joint Stock Company, is its direct legal owner, while the beneficial owner indirectly controls the joint stock company through the LLC.
Significance
of identification BO
Anonymity
enables many illegal activities to take place hidden from law enforcement
authorities, such as tax evasion, corruption, money laundering, and financing
of terrorism. For example, money laundering can involve complex operations and
transactions to make money from illicit sources, such as drug trafficking or
tax evasion, appear legal. A drug trafficker, for instance, could set up a
night club in order to appear to have legal sources of income from the sale of
tickets and alcohol, while in reality the money is from the sale of drugs. In a
business setting, it is therefore important to know the BOs of legal entities
and arrangements to prevent misuse. That is why the FATF, and later the Global
Forum, have included beneficial ownership requirements in their standards and
conduct assessments across jurisdictions on availability of beneficial
ownership information in their systems. Determining whether the countries have
access to information on the BOs of legal entities and arrangements is
important in combatting tax evasion, corruption, money laundering, and the
financing of terrorism. Imagine an individual, John Smith, who wants to evade
taxation in his country A. If Smith owns several properties in country A, and
holds bank accounts and investments there, all in his own name, it would be
very easy for country A’s authorities to detect that Smith is not paying taxes.
The authorities would be aware of all his assets (for example, through
systematic crosschecks with the agency responsible for the registration of real
estate), that they have not been declared, and that the related taxes on wealth
and income have not been paid. But if Smith wants to obscure his income or
property ownership, he can easily create corporate structures across various
jurisdictions to make it much more difficult to identify his ownership.
The longer the chain of entities between a legal vehicle (in our example, Company A and its BO, John Smith), and the more jurisdictions the entities span, the harder it is to identify the BO, given the need to determine who controls each of the layers. Another factor that makes it difficult to identify a BO is nominees. The use of nominees, whereby an entity allows its name to appear as a shareholder or owner in the name of someone else (whose identity remains concealed), is prohibited in some countries but legal in others. In some cases, nominee shareholders mask the real BO.
Bearer shares and bearer share warrants can also be used to hinder identification of a company’s BO. If an entity issues bearer shares, the shareholder or owner of that entity is any person who holds the shares (on paper) at any given time. Dividends are paid against the presentation of paper shares, but the identity of the BO is not necessarily revealed. Bearer shares allow the transfer of ownership by simply handing the shares to another person. If the BO controls an entity through bearer shares, it is very difficult to determine his or her identity because the authorities would have to discover who holds the paper shares at any given time (and the shares can be held anywhere: in a safe deposit box, a bank, and so on). Some countries prohibit bearer shares and warrants and others require that they be immobilised in a custodial arrangement, but a few countries still allow them to be used freely and these countries should take measures to address the risks from bearer shares immediately.
These barriers can be combined, as shown in above. To make it even more difficult to identify the BO, the chain of ownership can expand geographically, with each layer created in a different country. Investigators therefore have to obtain information from each country in order to find out who controls each layer. If one country in the chain does not exchange information with others, or if it does not even have the information, it is more challenging to identify the ultimate BO.
If all countries held information about BOs in every case, the strategy of hiding behind a chain of legal vehicles would be less effective where an EOI relationship exists. In our example, this would mean that the authorities would know that the building and the bank account belong to a limited company, but they would also know that the BO is John Smith. By contrast, if countries lack information on a BO, they must attempt to identify every layer in the chain of legal vehicles and understand the control structure in each layer until they reach the BO – a much more difficult, time consuming, and sometimes impossible task.
Identifying Beneficial Owner PMLA 2002
Prevention of Money Laundering (Maintenance of Records)
Rules, 2005 Second Amendment Rules: Sept 04, 2023
The Prevention of Money Laundering
Act (PMLA) of 2002 defines a beneficial owner as someone who has a controlling
interest in an entity, even if they don't own more than a certain percentage of
its capital or profits:
·
Companies: Anyone with a 10%stake or less in a company who controls the entity.
· Partnerships: Anyone who owns more than 10% of the capital or profits, or who exercises control through other means, such as controlling management or policy decisions
· Trusts: identification of the author of the trust, the trustee, the beneficiaries with 10 percent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership
· Unincorporated Body of Individuals/Associations: Anyone who has a controlling interest in more than 15% of
the property or profits
The PMLA's beneficial owner rules have been tightened to prevent shell companies and benami activities. Reporting entities must maintain records of beneficial owners for five years after a business relationship ends, and they can appoint a "principal officer" to report suspicious transactions to the Financial Intelligence Unit (FIU).
Moreover, the beneficial owner would also
be considered a person “who exercises control through other means”, where
“control” shall include the right to control the management or policy
decision. Therefore, the amended definition will include even those
shareholders who have an ownership of ten percent or less of the capital or
profits, but exercise control through other means.
Strict compliance and monitoring
of client identity and records:
To enhance transparency of clients of reporting entities such as banks and financial institutions, Rule 10 was also amended, which provides that the reporting entity must determine whether a client is acting on behalf of a beneficial owner and must check the identity of the beneficial owner at the time of commencement of an account-based relationship with such client
When it comes to Trusts, the reporting entities would be required to make sure that the trustees disclose their status at the time of commencement of an account-based relationship or when carrying out transactions of an amount equal to or exceeding INR 50,000, or any international money transfer operations.
The records of the identity of clients must be maintained by the reporting entities, including the “result of any analysis undertaken” as per client due diligence (under Rule 9) or maintenance of transaction records (under Rule 3).
Meaning of Beneficial Owner
Case 1: Real Estate
Investments
For Example, a wealthy individual, Mr. X, who wants to
invest in real estate properties without revealing his identity publicly. To
maintain confidentiality, he establishes a shell company (a legal entity often
used for anonymity) called ABC Real Estate Holdings LLC. On paper, the company
is the legal owner of the properties, holding the titles and handling
transactions. However, Mr. X is the beneficial owner. He decides which
properties to buy or sell, collects rental income, and benefits from the
properties' appreciation over time. This arrangement allows Mr. X to keep his
real estate investments private while legally complying with ownership
regulations.
Case 2: Offshore Investments and Tax Planning
A multinational
corporation, ABC Inc., operates in several countries, each with its own tax
regulations. To optimize its tax liabilities legally, ABC Inc. establishes
subsidiaries in low-tax jurisdictions. These subsidiaries hold the legal
ownership of various assets, such as patents, trademarks, or intellectual
properties, on behalf of ABC Inc. The subsidiaries are the legal owners,
fulfilling legal requirements in those jurisdictions. However, ABC Inc. is the
beneficial owner, enjoying the profits generated from these assets. This
structure enables the corporation to strategically manage its tax obligations
and protect its intellectual properties while staying within the bounds of the
law.
In both of the above cases, the legal owners are entities (a company or a legal entity), while the beneficial owners are individuals (Mr. X) or another entity (ABC Inc.) that enjoy the advantages and make decisions related to the assets.
Others
If a custodian bank holds shares of a mutual fund, or
if a broker holds securities in street name, the
true owner is the beneficial owner, although the bank or broker retains the
title for safety and convenience.
Beneficial ownership may also apply to circumstances in
which a person or company retains ownership rights even if a stock
is registered with another organization, such as a brokerage house. In this
case, the investor is the beneficial owner while the brokerage firm is actually
shown as the holder of the security.
Identifying Beneficial Owner Excercises based on 04 Sept 2023 Amendment to PMLR 2005
1. Company Example
An ultimate beneficial owner is the natural person(s) who exercises ultimate ownership and control over the company structure. Hence, if your business is owned by another company, the ultimate beneficial owners are the natural person(s) with 10% or more ownership interest in the parent company as well as a natural person with the with significant responsibility to control, manage or direct the parent company.
In the example below, both Abraham and Betty are beneficial owners because they
indirectly have 10% or more ownership interest in the client company and their
information. Tarson is not considered
beneficial owner because he does not meet the 10% threshold. Additionally, a
control person “Principal Officer” (such a CEO or General Manager of the senior
management cadre) must be provided.
2. Client is Owned by a Family Trust & another Company
In the example below, both Abraham and Betty are beneficial owners because they are both equal trustees of The ABC Family Trust, which has more than 10% ownership interest in the client company. Tessy are Tarson are also beneficial owners because they both have > 10% indirect ownership of the client company through Company B. Remember, all individuals who, directly or indirectly, have 10% or more ownership interest in your company must be listed on the form and provide their information. Additionally, a control person (such a CEO or General Manager of the senior management cadre ) must be provided.
3. Client is Owned by Trust and Trust is another legal entity not natural person
If a trust, directly or indirectly, has 10% or more ownership interest in your company and the trustee is another legal entity such as a law firm, bank or trust company, and there is no natural person as a co-trustee, then the legal entity may be listed as the beneficial owner. The name, address, and identification number of the legal entity of the trustee must be provided, and the RE may request additional documentation. If however there are multiple trustees or co-trustees, one of which is a natural person, then the information for that person as beneficial owner must be provided. A legal entity’s information as trustee may be provided only where a natural person does not exist for purposes of beneficial ownership.
In the example below, the information for the corporate trustee (ABC Trust Company), Tessy and T must be provided as beneficial owners. Additionally, a control person (such a CEO or General Manager must be of the senior management cadre) provided.
The roles of an author, settlor,
trustee, and beneficiary in a trust are different in the following ways:
·
Author or settlor: The person
who creates the trust, also known as the trustor or donor. The author or
settlor can be a trustee or beneficiary as well.
·
Trustee: The person who accepts
the trust and is responsible for managing the trust's assets and distributing
wealth.
· Beneficiary: The person who receives the benefits of the trust.
A trust is an obligation that the settlor places on the trustee to use the trust's assets for the benefit of the beneficiaries. A trust is not a legal entity or contract.
There is a maximum threshold of 25% for
determining controlling ownership, which is recommended by the Financial Action
Task Force ("FATF") to its 39 member countries based on a particular
jurisdiction's assessment of risk. India being one of the member nations, has
adopted the threshold well within the recommended threshold of the FATF.
Sometimes, Offshore Financial Centres are used for obscuring beneficial ownership. Therefore arriving at the ultimate beneficial owner become a time consuming and difficult process that needs expertise.
Legal Ownership & Companies Act 2013
The legal owner is a person whose name is entered in the register of members and every other person who is a beneficial owner in the records of a depository. Section 88 of the Companies Act, 2013 provides for the requirement of maintenance of register of members. The details of members are also required to be filed in the annual return each year. Section 2(55) of Companies Act, 2013 defines ‘member’ in relation to a company, as:
(i)
The
subscriber to the memorandum of the Company who shall be deemed to have agreed
to become member of the company, and on its registration, shall be entered as
member in its register of members;
(ii)
Every
other person who agrees in writing to become a member of the company and whose
name is entered in the register of members of the company;
(iii)
Every
person holding shares of the company and whose name is entered as a beneficial
owner in the records of a depository;
“Beneficial
ownership” meaning : India
Concept of ‘significant beneficial owner’ (“SBO”) has been introduced in section 90 of the Companies Act, 2013.
“Beneficial
ownership” has been defined under section 89(10) of the Companies Act, 2013
read with rule 2(e) of Companies (Significant Beneficial Owners) Rule 2018.
Beneficial interest in a share includes, directly or indirectly, through any
contract, arrangement or otherwise, the right or entitlement of a person alone
or together with any other person or –
(i)
Exercise
or cause to be exercised any or all of the rights attached to such share; or
(ii)
Receive
or participate in any dividend or other distribution in respect of such share.
‘Significant beneficial owner’ means an individual referred to in sub-section
(1) of section 90 (holding ultimate beneficial interest of not less than 10%)
read with sub-section (10) of section 89, but whose name is not entered in the register
of members of a company as the holder of such shares, and the term ‘significant
beneficial ownership’ shall be construed accordingly;
Explanation 1: For
the purpose of this clause, the significant beneficial owner, in case of
persons other than individuals or natural persons, shall be determined as
under:
(i)
Where
the member is a company, the significant owner is the natural person, who,
whether acting alone or together with other natural persons, or through one or
more other persons or trusts, holds not less than 10% share capital of the
company or who exercises significant influence or control in the company
through other means;
(ii)
where
the member is a partnership firm, the significant beneficial owner is the
natural person, who whether acting alone or together with other natural
persons, or through one or more other persons or trusts, holds not less than
10% of capital or has entitlement of not less than 10% of profits of
partnership;
(iii)
Where
no natural person is identified under (i) or (ii), the significant beneficial
owner is the relevant natural person who holds the position of senior managing
official;
(iv)
where
the member is a trust (through trustee), the identification of beneficial
owner(s) shall include identification of the author of the trust, the trustee,
the beneficiaries with not less than ten per cent. Interest in the trust and
any other natural person exercising ultimate effective control over the trust
through a chain of control or ownership;
Explanation 2: It is hereby clarified that
instruments in the form of global depository receipts, compulsorily convertible
preference shares or compulsorily convertible debentures shall be treated as
‘shares’ for the purpose of this clause;
Words and expressions used in these rules but
not defined and defined in the Act or in Companies (Specification of
Definitions Details) Rules, 2014 shall have the meanings respectively assigned
to them in the Act and the said Rules.
The foregoing discussion highlights that the SBO with regard to particular shares is someone
different from the ‘beneficial owner’ of those shares. The differences between
SBO and beneficial owner can be summarised as follows:-
- Beneficial owner can be individual or an entity (incorporated or non-incorporated), but SBO is necessarily an individual.
- Beneficial owner of shares can be direct owner (i.e., registered shareholder is himself the beneficial owner) OR can be indirect owner (i.e., registered shareholder and beneficial owner are different).
But
the registered owner of particular shares cannot be SBO for those particular
shares, although he may be having some other shares in the Company in his
direct name. This is because the concept of SBO emphasises mainly on indirect
holding, and direct holding is also clubbed with indirect holding. But direct
holding alone will not make a registered shareholder an SBO.
·
Beneficial
ownership disclosure is applicable for even 1 share in the Company. But for
being SBO and triggering the disclosure requirement for SBO, that individual
should hold 10% of shares / voting rights / right to participate in
distributable dividend / any other distribution / control/ significant
influence.
·
The
Forms prescribed for disclosure of beneficial owner is MGT-4, MGT-5 and MGT-6
as per section 89 of the Act. But for SBO,
section 90(1) of the Act creates obligation on the SBO to give declaration to
the Company in Form BEN-1 within 30 days of acquiring beneficial interest and
within 30 days of any change therein. In turn, section 90(2) creates obligation
on the Company to file e-form BEN-2 with ROC of MCA within 30 days of receipt
of declaration in Form BEN-1.
Further
the Explanation to the definition of SBO given in Rule 2(1)(h) of SBO Rules,
especially Explanation III explains who the SBO shall be, in case of different
types of shareholders.
Happy Reading,
Those who read this, also read:
Comments
Post a Comment