New 5% beneficial ownership threshold: Key updates and compliance actions under FICA regulations
By Compli-Serve
The Financial Intelligence Centre (FIC) has introduced important updates in its latest Public Compliance Communication (PCC-59) regarding Ultimate Beneficial Ownership (UBO) under the Financial Intelligence Centre Act (FICA) regulations. The most significant change is the recommendation to lower the threshold for identifying controlling ownership from 25% to 5%. This shift aligns with international best practices and reflects South Africa’s ongoing efforts to combat money laundering, terrorist financing, and the misuse of legal entities in public procurement.
Key Compliance Requirements and Actions
1. Update Your Risk Management Compliance Programme (RMCP)
All accountable institutions must revise their RMCPs to incorporate the new 5% threshold for identifying and verifying beneficial owners. This adjustment ensures that individuals who hold significant control or influence over a legal entity are captured within the institution’s compliance framework.
2. Incorporate a Hybrid Approach
PCC-59 advocates a hybrid approach that takes into account both direct and indirect ownership, as well as overall control influence. Accountable institutions should amend their procedures to consider all relevant forms of control, ensuring the identification process is comprehensive and adheres to both the new threshold and the broader ownership influence criteria.
3. Enhance Risk-Based Measures
Institutions are encouraged to adopt a risk-based approach, particularly in higher-risk scenarios. This means that even beneficial owners with less than a 5% stake should be identified and verified if deemed necessary by the institution’s risk assessment. This approach is critical in complex ownership structures where control may be fragmented across multiple, smaller holdings.
4. Revise Client Due Diligence (CDD) Processes
Client due diligence processes must be updated to ensure accurate collection, verification, and regular review of beneficial ownership information. Institutions should refer to the practical examples provided in PCC-59 to guide the implementation of these new requirements effectively.
Understanding Beneficial Ownership
Beneficial ownership refers to the natural persons who ultimately own or control a legal entity, such as a company, trust, or partnership. Identifying these individuals is vital in the fight against money laundering and terrorist financing, as criminals often use complex ownership structures to obscure the true source of funds. Under FICA accountable institutions are required to establish and verify the ownership and control structures of their clients, using reliable and independent sources to ensure the accuracy of the information.
The Process of Identifying Beneficial Owners
The identification process under the FIC Act follows a structured approach:
Controlling Ownership Interest
The first step is to identify any individual who holds a controlling ownership interest of 5% or more in the legal entity.
Control Through Other Means
If no individual meets the controlling ownership criteria, institutions must identify those who exert control through other mechanisms, such as nominee arrangements or significant influence over management.
Management Control
If neither of the above criteria applies, the focus then shifts to individuals who control the management of the entity, such as directors or senior managers.
Special Considerations and Ongoing Compliance
Additional due diligence is required when dealing with foreign or state-owned entities, which often have more complex ownership structures. Institutions must conduct thorough investigations to identify the ultimate beneficial owners in these cases.
It is crucial for institutions to maintain accurate and up-to-date beneficial ownership information. This involves regular verification of information and making updates as needed. Failure to identify a beneficial owner should lead to further scrutiny and may require the filing of a suspicious transaction report as mandated by FICA.
Managing Risks and Ensuring Compliance
The risk profile of a client is significantly influenced by the characteristics of its beneficial owners. High-risk indicators include associations with politically exposed persons (PEPs), connections to known criminals, or involvement in public procurement. In these cases, enhanced due diligence is required, and institutions should consider identifying all levels of beneficial ownership, regardless of the ownership percentage.
Compliance teams within accountable institutions must actively implement these new requirements, establish robust identification and verification procedures, conduct regular reviews, and provide ongoing training to staff. By doing so, they will mitigate risks associated with financial crimes and ensure full compliance with FICA regulations, thereby contributing to the integrity and security of South Africa’s financial system