Assisting Clients with Determining UBO

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Assisting Clients with Determining Ultimate Beneficial Ownership www.ibosassociation.com www.ibosassociation.com / 1

Contents 3 / Introduction 4 / What UBO tasks are required?

6 / Understanding ownership and control 8 / Three measures of beneficial ownership 10 / Two meanings of “Identify” 11 / Worked example: ABC Limited 13 / Appendix 1 Worked example 1: Sample Profile Ltd

16 / Appendix 2 Worked example 2: New Client Ltd

Legal Notice A member bank of the IBOS network is not acting in an advisory capacity, and the customer should seek legal, tax and/or regulatory advice from a qualified adviser or consultant.

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Introduction International banking regulations require that the ultimate beneficial owners of all companies are identified, down to various thresholds of ownership size, typically between 5% and 25% of your company or other entity.

Navigating through an organisation’s beneficial ownership structure may be simple, effortless, and require little time. However, it may also require significant effort, and it may require third parties to supply the information required.

When clients open a new bank account overseas they will need to identify all of these ultimate beneficial owners and these may not be immediately apparent from the organisation’s ownership structure. If clients are not prepared to identify these individuals, or are unable to do so, they will not be able to open a new bank account.

Some of the terms used here are often illustrative and may not always be appropriate for your organisation’s circumstances. For example, we generally refer to owners as shareholders but for some organisations a more precise term for referring to owners might be members. Similarly, some terms used here may vary from comparable terms as they are formally used in different jurisdictions, or for different types of organisations.

Although essential, the process of determining ultimate beneficial ownership is challenging and complex, as well as time-consuming. An organisation’s beneficial ownership structure may include one or more intermediary organisations (referred to here as Intermediate Beneficial Owners or IBOs) that are situated between an organisation and one or more beneficial owners (referred to here as Ultimate Beneficial Owners or UBOs).

This guide is designed to help understand who should be considered a beneficial owner, and to help navigate the process for determining IBOs, if any, and who the UBOs are.

Ongoing awareness This guide has been prepared to assist clients when they first establish a relationship with a bank. However, clients should maintain their awareness of their organisation’s beneficial ownership, to help them meet any contractual obligation that they may have with any bank requesting a declaration of beneficial ownership from time to time.

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What tasks are required in the account opening process?

1. To lay out the ownership structure of the organisation when the client (the “Applicant”) applies for an account 2. To identify the IBOs, who are always legal persons or legal arrangements, e.g., companies, trusts, partnerships, limited partnerships, and similar entities and who sit between the Applicant and the UBOs*

3. To identify the UBOs, who are always natural persons 4. To carry out the requisite identification checks on UBOs and IBOs as prescribed by the bank opening the account * Intermediate Beneficial Owners are not, in their own right, beneficial owners but must be identified as a necessary condition for the correct identification of the actual

beneficial owners.

Definition of “beneficial owner” from the Glossary to the FATF Recommendations* Beneficial owner refers to the natural person(s) who ultimately† owns or controls a customer‡ and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

† Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which the ownership/control is exercised through a chain of ownership or by means of control other than direct control

‡ This definition should also apply to beneficial owner or beneficiary under a life or other investment linked insurance policy.

*

FATF Guidance: Transparency and Beneficial Ownership; http://www.fatf-gafi.org/documents/documents/ transparency-and-beneficial-ownership.html; page 8; 9 March 2015.

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The definition is silent on:

The definition implies:

• References to entities other than natural persons

• Chained legal ownership and chained control of legal persons or legal arrangements

• The notion of intermediary entities, whether persons, legal persons or legal arrangements

• Cumulative ownership and control, that is ownership or control or both through otherwise separate multiple chains of ownership or control of the same legal person or legal arrangement

• Prescribing a minimum amount of ownership or control as a qualifying factor in determining beneficial ownership • The requirement to verify the identity of beneficial owners

• Effective control over legal persons and legal arrangement does not presume a holding of capital or assets or voting rights

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Understanding “owns”

Understanding “control” - part 2

Owning is a claim on the equity of a legal person or legal arrangement. If there is more than one owner, ownership is expressed as a percentage (a share) of the equity to each owner.

“The FATF definition focuses on the natural (not legal) persons who actually own and take advantage of capital or assets of the legal person; as well as on those who really exert effective control over it (whether or not they occupy formal positions within that legal person), rather than just the (natural or legal) persons who are legally (on paper) entitled to do so.”*

While for a corporation a portion of ownership is conveyed by the holding of a share, for our purposes, the term “share” applies equally to the allocation of a portion of equity ownership for all forms of legal persons or legal arrangements. For example, we may describe the portion of equity held by a partner in a partnership to be an x-percentage share of the partnership equity.

Example: In a Limited Partnership the General Partner, or more precisely the persons, including legal persons and legal arrangements, acting for the General Partner, have effective control over the partnership whether or not the General Partner owns capital or assets of the partnership.

Implication: For corporations, calculating ownership is simply a matter of calculating the percentage of all outstanding shares – irrespective of class or type of shares - that an owner holds.

Tip: The calculation of percentage of equity ownership has no regard for the value of the shares, whether the nominal value or the market value.

Implication: All legal persons or legal arrangements have beneficial owners even if no natural person ultimately owns capital or assets at or above the prescribed threshold level. *

FATF Guidance: Transparency and Beneficial Ownership; http://www.fatf-gafi.org/documents/documents/transparencyandbeneficial-ownership.html; page 8; 9 March 2015. Also see a similar reference in page 9 addressing Legal Arrangements.

Understanding “control” - part 1 Not all ownership of equity conveys the right to control legal persons or legal arrangements.

• For example, in a limited partnership the partners having limited liability have no control of the partnership: general partners have all control.

For a corporation, while all shares confer a right of ownership, not all shares have the same rights.

For example, some shares (preferred or preference shares) have the right to dividend payments before dividends are paid to other shares (common or ordinary shares); some shares have the right to vote on the major decisions of the company or on the appointment of directors, while others do not; or some shares afford one vote per share, whereas others may afford multiple votes for each share.

Implication: All shares are an equal claim on equity but not all shares provide equal ability to control the legal person or legal arrangement. It is very important, therefore, to account for a share of equity separately from accounting a share of control.

Tip: Do not assume that all common shares or all preferred shares have the same rights as traditionally accorded to each of these types of share.

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Beneficial Ownership – corporation (25% threshold)* Class A

Owner 1

Shares

Votes

100

100

Class B Shares

500

Owner 2

Votes

Class C Shares

Votes

50

0

500

Class D Shares

10

Votes

100

Shares

Votes

Shares

Votes

150

100

10.79%

3.31%

510

600

36.69% 19.83%

Owner 3

Beneficial Ownership – three measures

%

Total

20.14%

2.48%

Owner 4

200

200

50

500

250

700

17.99%

23.14%

Treasury

50

50

150

1,500

200

1,550

14.39%

51.24%

Outstanding

350

350

215

2,150

1,390

3,025

• • • *

525

525

300

0

Owner 2 is a beneficial owner Treasury has voting control, i.e., management has voting control Owners 3 and 4 should be considered beneficial owners if it is known that they are likely to act jointly The percentage threshhold varies from bank to bank, and some banks will require verification down to a 5% threshhold.

Prescribed level or threshold Ownership as a measure of total equity (for corporations, measure percentage of all shares outstanding, including shares held in Treasury) Control conveyed (or not conveyed) by virtue of voting rights (measure percentage of voting rights) Control by any other means (senior executive, informal and formal controlling arrangements)

• FATF’s recommendations do not establish whether all Beneficial Owners need to be identified or only those who meet or exceed a certain level of ownership or control • Each FATF member country defines the minimum level or threshold of ownership or control for identifying Beneficial Owners applicable for its jurisdiction, which commonly is 25% ownership or control • The prescribed minimum level may be lower for certain classes of Legal Persons or Legal Arrangements such as, for example, corporations whose stock trades in certain Stock Exchanges • Using a risk-based approach, banks decide whether to adhere to the prescribed minimum threshold, or whether they wish to apply a higher-level threshold, or to apply a higher threshold only under certain conditions, for example when carrying out enhanced due diligence of the Applicant The bank opening the account defines the prescribed level or threshold of Beneficial Ownership for you when applying to establish banking arrangements with them.

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The two meanings of “identify”

Worked Example ABC Limited

Good Deeds Foundation 99.64% Eequity 0% Voting Rights

You need to distinguish between two tasks: 1. Ascertaining who are the UBOs and IBOs, following the prescribed level or threshold applicable for a given bank

D. Smith 0.06% equity 21.57% voting rights

2. Verifying the identity of the UBOs and IBOs, as required by the individual bank

Jones Family Trust 0% Equity 1.92% Voting Right

Task (1) involves two steps: 1. Analysing and assessing facts required to ascertain the UBOs and IBOs. This may involve examining the IBOs’ capitalisation tables, or shareholder lists, or suitable ownership organograms

2. Collecting information regarding the identity of the UBOs and IBOs such as names, registered addresses, residential addresses, jurisdiction of legal formation, nationality, date of birth, date of legal formation, etc.

Another Family Trust 0% equity 2.0% voting rights

A. Apple 100%

Task (2) depends on the requirements of the bank opening the account and may include one or more of the following: 1. Doing nothing further 2. Confirmation from a professional third party such as a lawyer or chartered accountant, of the accuracy and completeness of the identified UBOs or IBOs or both 3. Checking the validity of the identity of the UBOs by comparing the given elements of identity established in task 1 against trusted documents such as passports or driving licences, or by other means

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4. Checking the validity of the identity of the IBOs by comparing the given elements of identity established in task 1 against copies of documents, such as certificates of formation issued by competent authorities, or by other means such as consulting public records available online, or through trusted bureaux who procure such information from public records

ABC Limited

GTR Inc. 0.3% equity 74.51% voting rights

ABC Limited, UBOs and IBOs – 25% prescribed threshold UBOs

IBOs

• A. Apple: 74.51% of the voting rights • Executive or Board of Directors of Good Deeds Foundation: 99.64% of the equity

• GTR Inc.: 74.51% of the voting rights • Good Deeds Foundation: 99.64% of the equity

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Worked example 1: Sample Profile Ltd / Appendix 1

Worked Example 1 Sample Profile Ltd

i. ‘Identifying UBOs and IBOs’ ii. ‘Building the ownership chart’ iii. ‘Sample Profile Limited, UBOs and IBOs’

Appendix

Sample Profile Ltd (Location of Incorporation)

Worked Examples

3 individuals 5.11%

E. G. Smith 26.01%

ABC Canada Inc. (Location of Incorporation) 40.32%

Private Holdco Ltd (Location of Incorporation) 80%

FGB Ltd (Location of Incorporation) 23.25%

R. B. Sampson 5.31%

R. B. Sampson 86.23%

1 individual 13.77%

5 individuals 20%

P. E. Martin 100%

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Appendix 1 / Worked example 1: Sample Profile Ltd

Worked example 1: Sample Profile Ltd / Appendix 1

Identifying UBOs and IBOs

Sample Profile Ltd (Location of Incorporation)

Sample Profile Ltd (Location of Incorporation) 3 individuals 5.11%

3 individuals 5.11%

1.

ABC Canada Inc. (Location of Incorporation) 40.32%

E. G. Smith 26.01%

FGB Ltd (Location of Incorporation) 23.25%

ABC Canada Inc. (Location of Incorporation) 40.32%

E. G. Smith 26.01%

R. B. Sampson 5.31%

Private Holdco Ltd (Location of Incorporation) 80%

UBO: E.G. Smith needs to be identified because that person owns 26.1% of Sample Profile Limited directly

2. IBO: ABC Canada Inc. needs to be identified because it is a legal person owning 40.32% of Sample Profile Limited directly

FGB Ltd (Location of Incorporation) 23.25%

R. B. Sampson 5.31%

R. B. Sampson 86.23%

1 individual 13.77%

5 individuals 20%

P. E. Martin 100%

Building the ownership chart

Sample Profile Ltd (Location of Incorporation)

1.

UBO: P.E. Martin needs to be identified because this

2. IBO: Private Holdco Ltd because:

person owns:

a. directly owns 80% of ABC Canada Inc., which owns

a. 100% of Private Holdco Limited, which owns…

b. 40.32% of Sample Profile Limited directly

b. 80% of ABC Canada Limited, which owns…

c. 80% x 40.32% = 32.256%

c. 40.32% of Sample Profile Limited directly 3 individuals 5.11%

E. G. Smith 26.01%

ABC Canada Inc. (Location of Incorporation) 40.32%

3. UBO: R.B. Sampson needs to be identified because this person owns 5.31% of Sample Profile Limited directly, and owns 86.23% of FGB Limited directly, which in turn owns 23.25% of Sample Profile Limited directly a. 86.23% x 23.25% = 20.05% b. 20.05% + 5.31% = 25.36%

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FGB Ltd (Location of Incorporation) 23.25%

R. B. Sampson 5.31%

R. B. Sampson 86.23%

1 individual 13.77%

d. 100% x 80% x 40.32% = 32.256%

Sample Profile Limited, UBOs and IBOs – 25% prescribed threshold UBOs

IBOs

• E.G. Smith: 26.01% • R.B. Sampson: 25.36% • P.E. Martin: 32.256%

• ABC Canada Inc: 40.32% • Private Holdco Ltd: 32.256%

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Appendix 2 / Worked example 2: Sample Profile Ltd

Worked example 2: Sample Profile Ltd / Appendix 2

Worked Example 2

Deconstructing:

New Client Ltd i. ii. iii. iv.

1st layer •

‘Deconstructing: 1st Layer’ ‘Deconstructing: 2nd Layer’ ‘Deconstructing: 2nd - 3rd Layers’ ‘New Client Limited, UBOs and IBOs’

New Client Ltd (Location of Incorporation)

Both direct owners are Intermediary Beneficial Owners.

•

Their direct ownership exceeds the 25% threshold.

Venture Capital L.P. (Location of Registration) 30%

Parent Client Ltd (Location of Incorporation) 70%

New Client Ltd (Location of Incorporation)

Venture Capital L.P. (Location of Registration) 30%

Parent Client Ltd (Location of Incorporation) 70%

Another Company Inc (Location of Incorporation) 60%

Jones Family Trust (Location of Creation) 40%

G. Stein 1% Equity 45% Voting Rights

General Partner Inc (Location of Incorporation) 95%

M. Findlay 1% Equity 45% Voting Rights

L. Francis 98% Equity 10% Voting Rights

General Partner L.P. (Location of Registration) 2%

* None of the investors holds an

Parent Client Ltd (Location of Incorporation) 70%

Another Company Inc (Location of Incorporation) 60%

J.E. Smith 5%

investment of 85.04% or more

New Client Ltd (Location of Incorporation)

2nd layer

10 Individual Investors* 98%

J.E. Smith 100%

Trustees Settlor Protectors Beneficiaries

Deconstructing:

Jones Family Trust (Location of Creation) 40%

Venture Capital L.P. (Location of Registration) 30%

General Partner L.P. (Location of Registration) 2%

10 Individual Investors* 98%

•

Another Company Inc. is an indirect Intermediary Beneficial Owner: 60% x 70% = 42%

•

The Jones Family Trust is also an indirect Intermediary Beneficial Owner: 40% x 70% = 28%. It is highlighted as a dark block because Trusts are representations of true beneficial owners, but are also legal arrangements

•

As the general partner for Venture Capital L.P., the General Partner L.P. is a controlling entity even if it only has 0.60% indirect ownership. In Limited Liability Partnerships, the general partner makes all business decisions, and the limited

* None of the investors holds an

partners are just passive investors. Therefore, the most senior executive managers of the general partners are controlling

investment of 85.04% or more

Ultimate Beneficial Owners •

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None of venture capitalists are indirect beneficial owners because none has a sufficiently high equity interest

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Appendix 2 / Worked example 2: Sample Profile Ltd

Deconstructing: 2nd - 3rd layers •

Worked example 2: Sample Profile Ltd / Appendix 2

Another Company Inc (Location of Incorporation) 60%

(1% x 60% x 70%). The control arises from G. Stein and M. Findlay each holding nearly half of the voting rights of Another Company Inc., which is

2nd - 3rd layers •

Both G. Stein and M. Findlay are indirect controlling Ultimate Beneficial Owners, notwithstanding each having negligible equity interests of 0.42%

Deconstructing:

L. Francis is an Ultimate Beneficial Owner: 98% x 60% x 70% = 41.16%

As the general partner for General Partner L.P., General Partner Inc. is a controlling entity even if it only has 0.57%

G. Stein 1% Equity 45% Voting Rights

indirect ownership. In Limited Liability Partnerships, the general partner makes all business decisions, and the limited partners are just passive investors. Therefore, the most

itself an Intermediary Beneficial Owner •

General Partner L.P. (Location of Registration) 2%

General Partner Inc (Location of Incorporation) 95%

J.E. Smith 5%

senior executive managers of the general partners are M. Findlay 1% Equity 45% Voting Rights

controlling Ultimate Beneficial Owners.

•

With that being said, it is very likely that the executive management of General Partner Inc. are the same individuals as the executive managers of General Partners L.P.

J.E. Smith 100%

L. Francis 98% Equity 10% Voting Rights

Deconstructing: 2nd - 3rd layers •

Each beneficiary of The Jones Family Trust is an Ultimate Beneficial

Jones Family Trust (Location of Creation) 40%

Owner: 40% x 70% = 28%. Note that beneficiaries of the Trust are not considered for their individual share of the Trust; instead, all are Ultimate

New Client Limited, UBOs and IBOs – 25% prescribed threshold

Beneficial Owners •

Each Trustee is a controlling Ultimate Beneficial Owner.

•

A bank, according to its policy, may also consider each of the Settlors and

UBOs

each of the Protectors of the Trust as Ultimate Beneficial Owners.

•

The interest on the Settlors arises from the Settlors being the original source of the wealth of the Trust. On the other hand, the interest on the Protectors arises from the Protectors potentially acting as controlling parties because they may potentially control the Trustees of the Trust.

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Trustees Settlor Protectors Beneficiaries

• Executives that operate General Partner L.P. - Executives that operate General Partner Inc. • G. Stein • M. Findlay • L. Francis

IBOs • Beneficiaries and related controlling parties of The Jones Family Trust - Beneficiaries - Trustees - Settlors - Protectors

• Parent Client Ltd: 70% - Another Company Inc.: 42% - The Jones Family Trust • Venture Capital L.P.: 30% • General Partner L.P. • General Partner Inc.

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