Beneficial Ownership: a Worked Example

The legal reason is customer due diligence: a bank must know whom it is dealing with, and the name on a company's share register may be another company. Sanctions lists name owners as well as companies, and politically exposed person checks only work on people, so the chain has to end in people.

A lender has a further reason of its own. The person at the end of the chain is the one whose decisions shape the business. That person may stand behind a guarantee or decline to, may own the supplier the borrower pays, and may take the dividends the covenant is meant to limit.

Three points recur. The owner must be an individual: a company or a trust cannot be the answer. Ownership counts whether it is direct or indirect, so the chain is followed through every layer. And control stands alone. New Zealand's guidance includes those who can appoint or dismiss senior managers, and a person whose instructions a nominee follows.

Multiplying the percentages along a chain is a common way of measuring indirect ownership, but it is not the only reading. Under the UK's persons with significant control rules, which the money laundering regulations draw on for control, someone with a majority stake in an intermediate company is treated as holding what that company holds. Someone holding 60% of the votes in a company with a 40% stake therefore shows up with 40% for that purpose, not 24%.

Trusts need their own reading. In New Zealand, a trustee with control is a beneficial owner, as is a beneficiary with a vested interest above 25%, and a settlor or protector may be one through powers under the deed; a discretionary beneficiary does not count by ownership until the trustees exercise their discretion. The UK's list for a trust customer is wider and names the settlor, trustees, beneficiaries or class of beneficiaries, and anyone with control.

A candle maker, constructed for this page like every figure in it, applies for a US$6m term loan. Its share register shows three holders. The managing director owns 25% directly, a family trust holds 25%, and a holding company holds 50%. That holding company is owned 40% by a local investor and 60% by a company registered offshore.

The threshold wording decides the ownership limb for the managing director, but not the outcome, because he runs the business and is likely to qualify on control in all three markets. The trust also sits at exactly 25%, so the same wording applies to it; the bank still follows it to its two trustees, who vote the shares and may qualify on control. The local investor is below the line and has no special rights. The offshore company is the open question: it holds 30% effectively, and it controls the holding company, which holds half the votes. The largest individual owner is not on the register.

The bank asks who owns the offshore company. Its registered agent replies with a nominee's name, and the bank asks again. A second letter identifies the person the nominee acts for. That person is verified and screened, and the credit team finds that he also owns the distributor that buys a third of the candles. The proposed guarantee came only from the managing director. The bank now has a related-party question and a guarantee question it could not have asked from the register.

If the agent had declined to name anyone, the application could not have proceeded in the ordinary way. New Zealand's guidance says that where the bank cannot satisfy itself who the beneficial owner is, customer due diligence is incomplete: it must not establish the relationship, must end an existing one, and must consider a suspicious activity report. The UK's regulation is to the same effect. For a company, it allows a senior manager to be treated as the beneficial owner instead, but only once every means of finding the owner has been tried, and the steps must be recorded.

A shareholder is a legal owner. The individual at the end of the chain is the beneficial owner, and the two are the same person only in the simplest company. A director is a different concept again: a director runs the company by appointment and may have no ownership, though one who actually controls it qualifies on that ground. Someone who simply has authority to operate the account is, in New Zealand's guidance, a person acting on behalf of the customer, and is verified separately rather than treated as an owner.

A public register helps but does not settle the matter. The UK's person with significant control test differs from the money laundering definition, and a bank cannot meet its duty by relying only on the register. It must also report material discrepancies. The source of wealth enquiry, by contrast, starts where this one ends: once the person is named, it asks how that person came by the money.

DEFINED IN ONE PARAGRAPH → · RELATED-PARTY TRANSACTIONS → · A ONE-MINUTE FILE ON IT →

It decides when the money can move. Identification of the beneficial owners is commonly a condition precedent to drawdown, and a chain that takes weeks to resolve holds the settlement date. It decides whether the structure makes sense: complex layers with no reasonable explanation are something New Zealand's guidance tells banks to treat as a possible attempt at concealment, while a family trust with an obvious purpose is usually just a family trust.

And it has to stay current. A share transfer, a new trustee or a sale of the holding company can change the answer, so the record is refreshed at review and on known events. A change of control clause gives the lender a contractual reason to hear about some of those events, though it may not catch every change the law cares about.

CONDITION PRECEDENT → · CHANGE OF CONTROL →