Certain types of legal entities, such as companies, trusts, and partnerships, can be particularly susceptible to misuse by criminals due to their structure or inherent characteristics. Criminals often use these entities to hide their identities and obscure financial transactions linked to illegal activities. Recent guidance from the Financial Intelligence Centre (FIC), now strongly recommends that institutions consider those holding 5% or more of ownership interest as having a controlling stake, aiming to improve transparency and combat misuse.
Criminals often exploit entities such as companies, trusts, and partnerships to hide their identity, lend an air of legitimacy, or mask financial transactions tied to illegal activities. A typical method they use involves setting up multiple layers of shareholding in a private company to obscure who truly controls it.
For instance, in South Africa, the “Great Bank Heist” involving VBS demonstrated how the bank was systematically looted, with funds being channeled to companies owned by the perpetrators rather than to them directly. Similarly, recent reports have highlighted alleged fraud and corruption in government tender processes. Such abuse of legal entities for money laundering is a global issue.
Although the FIC has long required the identification of Ultimate Beneficial Owners (UBOs) under Section 21B of the FIC Act, there was previously little clarity on the specific shareholding thresholds for identifying such ownership in private or public companies. It was generally understood that a 25% shareholding was sufficient to establish ownership or control.
Recently, the FIC issued Public Compliance Communication 59 (PCC59) to provide clearer guidance. This communication reaffirms the need to identify UBOs through an elimination process of ownership and control but introduces a significant change: it now “strongly recommends” that institutions consider those holding 5% or more of ownership interest as having a controlling stake.
As a result, the FIC now expects Accountable Institutions (AIs) to identify UBOs based on at least a 5% shareholding in entities with shares, though they can go further if needed.
This adjustment aligns with the Ownership Register maintained by CIPC and addresses ongoing misuse of legal entities in money laundering schemes and abuse of public procurement processes.
AIs are advised to review their procedures to incorporate this new guideline, ensuring their Risk Management and Compliance Program (RMCP) is updated and signed off accordingly.
How to identify Ultimate Beneficial Owners (UBO’s)
FICA compliance experts DocFox offers extensive training and assistance on understanding UBOs. You can read more about UBOs and how to manage them in their 3 part article series.
DocFox will be hosting a UBO webinar on the 18th of September. Join the webinar to gain more insight on everything you need to know about UBOs according to the FIC Act. In the session, the compliance experts will cover the challenges of identifying UBOs and why it’s important.You can view more information and register for the webinar here.
