What is Beneficial Ownership?
A beneficial owner is a person who enjoys the benefits of ownership even though the title to some property is in another name. This can include individuals or groups who can vote or influence transaction decisions regarding a specific security, such as shares in a company.
Key Points
- Beneficial owners enjoy ownership benefits without holding the property’s title in their name.
- Differentiates from legal ownership, although generally, both roles align.
- Securities often registered under brokers for convenience and safety.
- Wealthy individuals may use trusts to manage and protect their assets, while they remain beneficial owners.
Understanding Beneficial Owners
In scenarios like mutual funds held by a custodian bank or securities held by a broker, the true owner remains the beneficial owner, ensuring both safety and convenience. Beneficial ownership can be shared and must be reported if it exceeds 5% of a company or entity. This is regulated under laws like the Securities Exchange Act of 1934.
Encouraging transparency is essential, especially where legal owners might prefer anonymity whether for legitimate or less favorable reasons. Financial institutions must verify the beneficial owners of their legal entity clients to prevent illicit activities such as money laundering.
Areas of Beneficial Ownership
Securities
Publicly traded securities are often registered under brokers’ names. The SEC regulates this practice, enabling tax law compliance. In certain cases, beneficial owners might opt not to name themselves directly—for legal, safety, or privacy reasons.
Real Estate
Most real estate registries list property owners. However, famous personalities or those seeking privacy might have trustees or entities named as owners to prevent publicizing their private details.
Asset Protection
Wealthy individuals might use trusts to legally shelter their assets. In intellectual property law, beneficial owners profit from patents, trademarks, or copyrights though legal rights might belong to another party.
The Panama Papers
The Panama Papers, released in 2016, exposed numerous offshore corporations’ beneficial ownerships. Some were legitimate, but others revealed hidden assets, including those of well-known figures whose actions sparked global scrutiny.
New Regulations
As of May 11, 2018, the Financial Crimes Enforcement Network (FinCEN) mandates that financial entities identify and verify beneficial owners to combat illegal financial activities.
Pros and Cons
Advantages
- Enables asset control without holding actual registration.
- Convenient for managing large portfolios.
Disadvantages
- Can cause delays in communication and dividends processing.
- Might conceal the real owner’s identity unethically when used with shell companies.
What is the Beneficial Ownership Rule?
Banks must identify beneficial owners when an account is opened, a measure to prevent illicit financial activities.
How to Determine Beneficial Ownership
Ownership above 25% equity or significant decision-making authority, like CEO or CFO positions, determine beneficial ownership in banking.
Exemptions from the Rule
Exempt entities include sole proprietorships, certain trusts, and non-account ownership among others.
Charitable Organizations
Charities and nonprofits disclose executives or officers with significant control instead of equity-based owners, fitting into beneficial ownership requirements.
Trust Ownership
Beneficial owners in trusts include settlors, trustees, and beneficiaries. Trustees holding 25% or more control over an entity are beneficial owners.
Conclusion
Having beneficial ownership means reaping benefits from assets held under a different name, commonly within financial institutions. Ensuring transparency in these relationships is vital to prevent unlawful activities and uphold the integrity of financial systems.
Related Terms: legal ownership, securities, mutual funds, custodian bank, Schedule 13D, Securities Exchange Act of 1934, Financial Crimes Enforcement Network, shell company.
References
- U.S. Securities and Exchange Commission. “Investor Bulletin: Holding Your Securities”.
- U.S. Securities and Exchange Commission. “Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting”.
- Financial Crimes Enforcement Network. “Information on Complying with the Customer Due Diligence (CDD) Final Rule”.
- U.S. Legal. “Beneficial Owner Law and Legal Definition”.
- International Consortium of Investigative Journalists. “Panama Papers”.
- Vox. “A Guide to the Six Biggest Revelations of the Panama Papers (so far)”.
- United States Department of the Treasury, Financial Crimes Enforcement Network. “Premium Finance Cash Refunds and Beneficial Ownership Requirements for Legal Entity Customers”.
- Financial Crimes Enforcement Network. “Beneficial Ownership Information Reporting”.
- Federal Register. “Beneficial Ownership Information Reporting Requirements”.
- Federal Financial Institutions Examination Council. “Beneficial Ownership Requirements for Legal Entity Customers”.
- Financial Crimes Enforcement Network. “Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions”, Page 15.
