What is a Beneficial Owner?
A beneficial owner is a person who enjoys the benefits of ownership even though the title to some form of property is in another name.
It also means any individual or group who, directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.
Understanding Beneficial Owners
When a custodian bank holds shares of a mutual fund or when securities are held by a broker under a street name, the actual owner is the beneficial owner, even though, for safety and convenience, the bank or broker holds the title.
Beneficial ownership may be shared among a group of individuals. Suppose a beneficial owner controls a position in more than 5% of a company or entity. In that case, it must file Schedule 13D under Section 12 of the Securities Exchange Act of 1934.1 Beneficial ownership is distinguished from legal ownership. In most cases, the legal and beneficial owners are the same. Still, in some cases, they are legitimate and sometimes less legitimate, and the beneficial owner of a property may wish to remain anonymous.
When a corporation or other legal entity opens a bank account, the bank must identify the beneficial owners of that entity. This is intended to prevent money laundering and tax evasion.
Areas of Beneficial Ownership
Each type of asset has different rules for how beneficial ownership is recorded. Although these rules vary by jurisdiction, these are some of the most common standards:
Securities
As mentioned in the example above, publicly traded securities are often registered in the name of a broker for safety and convenience.
The Securities and Exchange Commission (SEC) recognizes this and has regulated the practice. In private companies, a beneficial owner may not want their name as a shareholder of record for several reasons. So long as tax laws and other laws are complied with, this practice is not illegal.
Real Estate
In most countries, real estate registries show the names of the owners of properties. Sometimes, a beneficial owner may not want their name to appear on public records. In such cases, it is common for trustees or other entities to act as legal owners in place of the beneficial owner.
For example, famous artists or politicians may not want their home addresses to be easily found in public records, so they do not appear personally on title deeds.
Asset Protection
Wealthy individuals at risk of lawsuits or who simply want to protect their assets and plan their estate generally use trusts to act as the legal owners of their property, often securities and money. At the same time, they and their families continue to be the beneficial owners. Here again, this practice is legal but highly regulated.
In intellectual property law, a beneficial owner benefits from a trademark, patent, or copyright, even though the legal right belongs to someone else. This may happen when an intellectual property owner assigns some of their rights to another party.3
Panama Papers
In early 2016, the International Consortium of Investigative Journalists famously made public what it called the “Panama Papers.” These documents, taken from the archives of the law firm Mossack Fonseca & Co., show in detail the beneficial ownership of several thousands of offshore corporations.
While many were used legally, some beneficial ownership was hidden for nefarious or illegal motives. The papers revealed several public figures’ secret business activities and holdings, including British Prime Minister David Cameron and Icelandic Prime Minister Sigmundur Gunnlaugsson, who resigned. It also sheds light on the web of secret holdings by Russian leader Vladimir Putin.5
Newer Rules Regarding Beneficial Owners
On May 5, 2016, the Financial Crimes Enforcement Network (FinCEN) fortified and clarified due diligence requirements for banks, brokers, mutual funds, and other financial entities. Most importantly, the new rules require legal entity customers to identify and verify the identities of their beneficial owners when they open an account. These rules took effect on May 11, 2018.6
Regulatory Requirements for Beneficial Ownership
When a broker or other financial institution holds assets on behalf of a corporation or other legal entity, they must record the beneficial owner of those assets. This is intended to prevent money laundering or the use of financial infrastructure for terrorism financing.
Under financial regulations, a beneficial owner is anyone with a stake of 25% or more in a legal entity or corporation. Beneficial owners can also be considered anyone with a significant role in the management or direction of those entities or any trusts that own 25% or more of an entity.
Advantages and Disadvantages of Beneficial Ownership
Beneficial ownership can simplify owning and possessing certain assets, such as securities. A typical example is the stock market. It is rare for someone to take actual possession of the stocks they buy, which would incur additional paperwork. Instead, their stocks remain in the hands of the brokerage, which holds them in beneficial ownership. This is sometimes called owning the shares in “street name.”
However, there are some tradeoffs to holding shares in street names. There may be some communication delay, as all official messaging from the issuing firm must first pass through the brokerage. There may also be delays in issuing dividends and interest payments.
In shadier circumstances, beneficial ownership may also be used to withhold the actual ownership of a property or security. An example might be assets legally held by a shell company that the beneficial owner controls. Although such companies are not inherently illegal, they are sometimes used to keep the owner’s financial assets a secret.
Pros and Cons of Beneficial Ownership
Pros
- Allows stockholders to control their shares and receive dividends without registering in their name.
- It can be a convenient way to manage large numbers of assets.
Cons
- For securities, all communication and dividends must pass through the broker.
- Shell companies can sometimes be used to conceal the identity of their beneficial owners for unethical purposes.
What is the Beneficial Ownership Rule?
In banking, the Beneficial Ownership Rule is a regulatory requirement for banks to collect information on the beneficial ownership of an account at the time that the account is opened. This is intended to prevent money laundering and tax evasion by identifying the actual owners of the legal entity that opens an account.
How Do You Determine Beneficial Ownership?
In banking, beneficial ownership is determined based on the ownership and control of the legal entity. Ownership means any person with more than 25% equity in the legal entity, and control means any individual with significant decision-making responsibility, such as a CEO or CFO.
Who is exempt from the Beneficial Ownership Rule?
Certain entities do not need to provide identifying information under the beneficial ownership rule. These include sole proprietorships, certain trusts, non-account ownership, and (in the case of credit cards) authorized users who are not the actual owners of the cards.9
Who is the Beneficial Owner of a Charity or Nonprofit?
For charities and nonprofits, the beneficial ownership rule does not apply to those with over 25% of the company because these entities do not typically have percentage-based controlling interests. However, they must still disclose the information of any executive or officer with significant control over the company.
Who is the Beneficial Owner of an Irrevocable Trust?
Regarding trusts, beneficial ownership information includes information on the settlor, trustees, protector, beneficiaries, and any other person exercising ultimate control over a trust.11 If a trust owns 25% or more of a corporation or legal entity, the trustee(s) of that trust are considered beneficial owners of the corporation.
Beneficial ownership allows someone to benefit from assets held in the name of a company or other legal entity. This is most common for securities, typically registered with a broker where the beneficial owners are their customers.
In banking, a legal entity’s beneficial owners are those individuals with a significant equity interest or control over the entity’s finances. Banks are required to collect this information to prevent money laundering.
Conclusion
- A beneficial owner is a person who enjoys the benefits of ownership, even though the property’s title is in another name.
- Beneficial ownership is distinguished from legal ownership, though the legal and beneficial owners are the same in most cases.
- Publicly traded securities are often registered in the name of a broker for safety and convenience.
- Wealthy individuals often list their assets under trust while they remain the beneficial owner.
