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Understanding Beneficial Ownership When Conducting Due Diligence

What is Beneficial Ownership?

Legal definitions of beneficial ownership differ from country to country. It can broadly be defined as taking part in the benefits of ownership, regardless of what form the actual ownership takes. More often than not, this means the ability to control the transactional activity of a business entity or asset.

Therefore, the ultimate beneficial owner of a company must be a natural person—that is, an actual person and not another company. For example, let’s say our target company lists a person as its sole shareholder. That person is its legal (or registered) owner. He or she is also its beneficial owner. In this case, identifying beneficial ownership—the right to control transactional activity—is straightforward.

But what if the target company is owned not by a person but by another company? The second company would be the legal owner, but identifying beneficial ownership is more complicated. We would need to move farther up the chain, identifying the person who legally owns the second company. That person would be the beneficial owner of the target company, with the second company as an intermediary.

There can be any number of intermediary companies between a company and its ultimate beneficial owner(s) (see Fig. 1).

 

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Fig. 1: The target company is linked to its beneficial owner via intermediary companies A, B, and C.

 

As if this weren’t complex enough, beneficial ownership is sometimes hidden behind intermediary companies registered in jurisdictions that do not disclosure legal owners. These are what we refer to as “black hole” or “dead end” jurisdictions. Offshore locations such as the British Virgin Islands, Belize, and St. Kitts and Nevis fall into this category. Intermediary companies in these jurisdictions can make it difficult, if not impossible, to trace an ownership chain up to the ultimate beneficial owner.

Some jurisdictions, such as Ukraine, have made it mandatory for companies to disclose their beneficial owners. These countries provide investigators with a window into black hole jurisdictions and present a crucial, albeit small, check against complete obfuscation of beneficial ownership.

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