Customer Due Diligence (CDD) : Legal Entities

This post is based on RBI Master Circular dated Feb 25, 2016 updated on Jan 04, 2024

Part III- CDD Measures for Legal Entities

For opening an account of a company, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained:

(a) Certificate of incorporation

(b) Memorandum and Articles of Association

(d) A resolution from the Board of Directors and power of attorney granted to its managers, officers or employees to transact on its behalf

(e) Documents, as specified in Section 16, relating to beneficial owner, the managers, officers or employees, as the case may be, holding an attorney to transact on the company’s behalf

(f) The names of the relevant persons holding senior management position; and

(g) The registered office and the principal place of its business, if it is different.

For opening an account of a partnership firm, the certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained:

(a) Registration certificate

(b) Partnership deed

(d) Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf

(e) the names of all the partners and

(f) address of the registered office, and the principal place of its business, if it is different.

For opening an account of a trust, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained:

(a) Registration certificate

(b) Trust deed

(d) Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf

(e) The names of the beneficiaries, trustees, settlor, protector, if any and authors of the trust

(f) The address of the registered office of the trust; and

(g) List of trustees and documents, as specified in Section 16, for those discharging the role as trustee and authorised to transact on behalf of the trust.

For opening an account of an unincorporated association or a body of individuals, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained:

(a) Resolution of the managing body of such association or body of individuals

(b) Permanent Account Number or Form No. 60 of the unincorporated association or a body of individuals

(d) Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf and

(e) Such information as may be required by the RE to collectively establish the legal existence of such an association or body of individuals.

Explanation: Unregistered trusts/partnership firms shall be included under the term ‘unincorporated association’.

Explanation: Term ‘body of individuals’ includes societies.

For opening account of a customer who is a juridical person (not specifically covered in the earlier part) such as societies, universities and local bodies like village panchayats, etc., or who purports to act on behalf of such juridical person or individual or trust, certified copies of the following documents or the equivalent e-documents thereof shall be obtained and verified:

(a) Document showing name of the person authorised to act on behalf of the entity

(b) Documents, as specified in Section 16, of the person holding an attorney to transact on its behalf and

Provided that in case of a trust, the RE shall ensure that trustees disclose their status at the time of commencement of an account-based relationship or when carrying out transactions as specified in clauses (b), (e) and (f) of Section 13 of this MD.

Part IV - Identification of Beneficial Owner

For opening an account of a Legal Person who is not a natural person, the beneficial owner(s) shall be identified and all reasonable steps in terms of sub[1]rule (3) of Rule 9 of the Rules to verify his/her identity shall be undertaken keeping in view the following:

(a) Where the customer or the owner of the controlling interest is

i. an entity listed on a stock exchange in India, or

ii. it is an entity resident in jurisdictions notified by the Central Government and listed on stock exchanges in such jurisdictions, or
iii. it is a subsidiary of such listed entities; it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such entities.
(b) In cases of trust/nominee or fiduciary accounts whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary is determined. In such cases, satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are acting, as also details of the nature of the trust or other arrangements in place shall be obtained.

The KYC updation and Transaction Monitoring including identification of Beneficial Owner are equally applicable to all forms of legal entities.

The Reserve Bank of India (RBI) defines a beneficial owner (BO) as a natural person or persons who have a controlling ownership interest in a company, or who exercise control through other means. This includes:

· Owning or being entitled to more than 10% of the company's shares, capital, or profits

· Having the right to appoint most of the directors

· Controlling management or policy decisions, such as through shareholders agreements, voting agreements, or management rights

Determining who qualifies as a BO of a partnership firm

REs must perform KYC procedures for individuals who:

· Own at least 10% of the partnership firm

· Are entitled to 10% of the profit share of the partnership firm

· Exercise control over management or policy decisions

Where the customer is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/have ownership of/entitlement to more than 15 percent of the property or capital or profits of the unincorporated association or body of individuals.

Explanation: Term ‘body of individuals’ includes societies. Where no natural person is identified under (a), (b) or (c) above, the beneficial owner is the relevant natural person who holds the position of senior managing official.

Where the customer is a trust, the identification of beneficial owner(s) shall include 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.

Beneficial Owner vs. Beneficiary

A beneficiary is someone designated to receive money, property, or other benefits of assets via a trust or will. The difference between beneficial owner vs. beneficiary is that beneficiaries usually need to have ownership (either legal or beneficial) over the assets they benefit from.

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They may, however, gain ownership if certain conditions are met (e.g., the legal owner passes away). They also typically do not have voting rights or other influence over how the asset is to be managed, unlike how beneficial owners do.

General Process for Identifying the BO

Examples of different types of beneficial ownership include ultimate Beneficiary Owners(UBOs) of a business, a trust, a property or securities. The UBO of a business own the majority of its shares and will therefore earn money from the company.

A trust is a legal arrangement in which one party (the trustor) transfers ownership of assets to another party (the trustee) for management on behalf of a third party (the beneficiary).

Regarding property, the person who enjoys the benefits of a property is also usually its legal owner, however if individuals prefer to keep their ownership private, they can do so via a trust.

As for securities, although the publicly traded stocks are registered in the name of financial institutions, the individuals holding these shares are the UBOs as they are entitled to any capital gains from their sale or trade.

Step 1: Obtain essential information on assets

Beneficial owners control or benefit from assets such as companies, properties, trusts, securities, funds, and so on. So the first step is to gather key information on those assets.

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These could include the names, addresses, registration numbers, and legal statuses of relevant businesses and properties. It can also include the names and addresses of anyone on a company’s board of directors, or anyone involved in a trust – trustors, trustees, and (if possible) beneficiaries.

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Step 2: Identify an asset’s ownership structure and proportions

Businesses and other assets may use positions, terms, and systems such as “nominees,” “corporate directors,” or “bearer shareholders” to obfuscate who really owns them. Keep in mind the general criteria for beneficial owners – capital share, management voting rights, and profit share – when reviewing information about an asset to determine who directly and indirectly owns it. Then find out how ownership of the asset is divided up among those people or groups.

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Step 3: Verify which stakeholders qualify as beneficial owners

Generally, someone who holds at least 10% of the capital stake, voting powers, and/or profit rights for an asset is considered a beneficial owner (or ultimate beneficial owner, if their ownership share is among the highest for that asset).

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However, that threshold may vary based on jurisdiction (sometimes as high as 25% or even low 5%), so make sure to check a country’s specific legislation when making a list of beneficial owners of the asset.

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‍Let’s assume Mr.X as the Chairman of a corporation and own 50% of its stock. Mr. X share ownership with Individuals A and B, who own 30% and 10% of the stock, respectively. Mr.X also appoint Individual C as a Managing Director and they don’t own any stock.

In this case, everyone is a beneficial owner except for Individual B since B neither have substantial control over the company nor exceed the 10% ownership threshold.

Ownership by A= 30%*50%=15%

Ownership of B = 10%*50%=5%

Chairman’s holdings: 50-(15+5)=30%