Financial Service Providers (FSPs) play a crucial gate keeping role through which entry to financial markets can be accessed. Unfortunately, criminals are aware of this access point, and seek to exploit vulnerabilities of FSPs. More so, criminals who hide behind veils of corporate secrecy often seek to abuse the services and products of FSPs to launder illicit proceeds of crime. As part of South Africa’s fight against money laundering (ML) terrorist financing (TF) and proliferation financing (PF) it is vital that FSP’s remain vigilant and aware of the risks that they face by criminals, and in turn adhere to the obligations as set out in the Financial Intelligence Centre Act 38 of 2001 (FIC Act).
Owing to the potential abuse of FSPs, they have been identified as an accountable institution in terms of the FIC Act. As such, there are several obligations that FSPs must adhere to in compliance with the FIC Act, including the effective management of the risk they face. These obligations include following a risk-based approach and conducting of customer due diligence (CDD) which includes identifying the beneficial owner of a client that is a legal person, trust or partnership. As part of the CDD process, the FSP must determine whether a client is a domestic prominent influential person or foreign prominent public official and conduct enhanced due diligence when dealing with a client that poses a high ML/TF risk.
It is essential to understand the nature of the client’s business as well as the ownership and control structure of the client. Once this has been done, the FSP is then in the position to identify who are the natural person(s) that own or control that client. It is that natural person(s) that benefits from the business relationship and are referred to as the “beneficial owners”.
The FIC Act sets out the process of determining the beneficial ownership of a client (detailed in section 21B of the FIC Act). An FSP, must identify and take reasonable steps to verify beneficial owners.
SECTION 21B — BENEFICIAL OWNER PROCESS OF ELIMINATION
The accountable institution should follow a process of elimination. this entails first trying to identify the natural person who owns a controlling ownership interest in the client. However, if the accountable institutions has doubts as to who this natural person is or there is no natural person, then the accountable institution must proceed to the next step, that is to identify the natural person who exercises control by other means over the client. Alternative to the second step the accountable institution must determine the natural persons who exercise control over the management of the legal person.
In application of the Financial Action Task Force Recommendations 24 and 25, the FIC Act adopts this approach of transparency of beneficial ownership of legal persons and arrangements to mitigate the risk of abuse of corporate entities.
A key principle of the risk-based approach is understanding all the potential ML/TF/PF risk factors presented by a client. The beneficial owner, although not the actual client on the FSP’s books, contributes to the risk level the client presents remembering that criminals try to hide behind the façade of a corporate structure.
For further information refer to the FIC Guidance note 7, which has a chapter dealing with beneficial ownership. This can be found on the FIC website (https://www.fic.gov.za) along with other guidance notes, public compliance communications and user guides. You can contact the FIC’s compliance contact centre on +27 12 641 6000 or log an online compliance query by clicking on: https://www.fic.gov.za/ContactUs/Pages/ComplianceQueries.aspx