Ultimate beneficial owner of the bank

In general, a beneficiary is a natural person who gains profits or other advantages from something. In financial world, a beneficiary refers to someone who is qualified to receive distributions from a will, life insurance or a trust. In business world, it refers to a beneficial owner who ultimately owns and controls a business and/or another natural person on whose behalf a certain transaction is being conducted. Ultimate beneficiary is a person who exercises an ultimate effective control over a legal entity or an arrangement. Terms ultimately owns or controls as well as ultimate effective control are useful in situations when ownership of the company is exercised via chain of ownership and does not clearly shows the direct and actual owner of the business.

Importance of indicating an ultimate beneficial owner of the account

Beneficial ownership currently is the main issue for anti-money laundering (AML) compliance professionals in banks. And there is a well-grounded reason why. Developing extensive know your client (KYC) and other due diligence procedures before opening a bank account and throughout a cooperation with clients, banks have succeeded in countering terrorism, tax frauds and other crimes. Large-scale fraud is frequently related to inappropriate use of commercial structures. For example:

• 60% of inappropriately used business entities are involved in economic and financial crimes;
• 75% of known criminal organizations made use of business entities to mask their activities.

While banks risk losing their clients and profits after once again intensifying their KYC and other due diligence procedures, it is usually done to conform to rising AML requirements from the national governments and international institutions. Global AML standards are dictating that understanding ultimate beneficiaries of the bank accounts is an essential part of each financial institution's AML program, and can be reached via extensive know your client and other due diligence procedures.

Who exactly is considered an ultimate beneficiary of the bank account

The EU's Fourth Anti-Money Laundering Directive (MLD4) substantially addresses ultimate beneficiaries. Under this directive, ultimate beneficial ownership is assumed in one of three cases:

• A natural person holds an interest of 25% or more in the legal entity's capital;
• A natural person can exercise 25% or more of the voting rights during the general shareholders meetings;
• A natural person is a beneficiary of 25% or more of the entity's capital.

It is sometimes hard to determine the ultimate beneficiaries of a company. The above directive also dictates senior managing officials to be treated like beneficial owners in case the above criteria are not determined.

Ultimate beneficial owner and the nominees

In case a beneficial owner wants to keep his name from public records, the company can use a service of nominee shareholder. Nominee shareholder is generally an unrelated third party on which the shares of the legal entity are formally registered and are held on behalf of a beneficial owner. The ultimate beneficiary of the company can enjoy the actual ownership of the company, while the public ownership is kept in the name of the nominee shareholder. Generally, the true identity of the Ultimate beneficiary is known only to the law firm or the company formation service and the beneficiary itself.

Usually ultimate beneficiaries do not want to lose control over their companies, although they do not want to be publicly seen as the owners of the company either. Therefore it is crucial to set up appropriate documentation establishing the rights of the true ownership. These documents include trust declaration and nominee service agreement and are kept strictly confidential.

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