Ultimate Beneficial Ownership: Identifying & Verifying Beneficial Owners in AML Due Diligence
- WQ Consulting
- Aug 31, 2023
- 5 min read
Updated: Oct 30, 2025
Contents
Introduction
In your quest to learn about AML Due Diligence, you've probably come across the term "beneficial ownership" many times, but what does it really mean? In this guide, we'll break down the ins and outs of beneficial ownership and provide helpful tips on identifying and verifying beneficial owners. Ready to dive in? Let's go!
Understanding Beneficial Ownership
For AML purposes, most jurisdictions require beneficial ownership information to be collected at a threshold of 25% or more. This means that onboarding teams must identify every customer who owns at least 25% of a company.
Each organization sets its threshold appropriately. However, it's more than just figuring out who owns what percentage. The other key issue is "control." In some cases, it's possible that an individual not meeting the ownership threshold can exercise control over the presenting entity.
As we delve in, keep in mind that identifying and verifying beneficial owners in AML due diligence is like a cat and mouse game; compliance teams need to have the right risk-based protocols in place when new or existing customers present a higher risk of money laundering or terrorist financing. Stay tuned as we break down the key points on what constitutes beneficial ownership and why it's important in AML due diligence.
Identifying Beneficial Owners
1. What is Beneficial Ownership?
Beneficial ownership refers to the person or persons who have the ultimate control over the funds in an account. In other words, it is the individual or group who enjoys the benefits of owning an asset or an entity, such as a business.
2. Why is it Important in AML Due Diligence?
AML Due Diligence plays a significant role as it helps to identify and verify the true owners of a legal entity customer. This information is crucial to prevent money laundering, terrorist financing, and other financial crimes.
3. Risk-Based Procedures for Verification of Beneficial Owner Information
Reporting institutions must establish and maintain written risk-based procedures for verifying the identity of each beneficial owner of a legal entity customer within a reasonable period of time after the account is opened.
These procedures must contain the elements required for verifying the identity of customers that are individuals.
4. Documentary and Non-Documentary Verification Methods
Guidance on documentary and non-documentary verification methods may be found in the core overview section “Customer Identification Program” of the FFIEC BSA/AML Examination Manual.
A reporting institution need not establish the accuracy of every element of identifying information obtained but must verify enough information to form a reasonable belief that it knows the true identity of the beneficial owner(s) of the legal entity customer.
5. Determining Ultimate Beneficial Owners
During the due diligence process, compliance teams must identify an account’s ultimate beneficial owner and determine whether they’re legitimate or attempting to hide behind structures to launder money or finance terrorism.
The percentage of control often determines beneficial ownership. For AML purposes, most jurisdictions require beneficial ownership information to be collected at a threshold of 25% or more.
Each organization sets its own appropriate threshold. For high-risk customers, the beneficial ownership threshold can be as low as 10%.
6. Threshold for Beneficial Ownership
The other key issue is “control.” This is crucial when determining what degree of due diligence is appropriate for someone. For instance: When the presenting entity is located in a low-risk jurisdiction but the ultimate owning or controlling entity is located in a high-risk jurisdiction.
7. Risk-Based Protocols for High-Risk Customers
Where compliance teams need to go a step beyond identifying and verifying their customers, it's important that compliance teams have the right risk-based protocols in place when new or existing customers present a higher risk of money laundering or terrorist financing.
8. Obtaining Accurate and Complete Information
Compliance teams must obtain accurate and complete information about the ownership structure of the entity, underlying or related entities, and persons who have control of the entity or its business affairs.
Verifying Beneficial Owners
A financial institution must create risk-based procedures for verifying the identity of each beneficial owner of a legal entity customer within a reasonable period of time after the account is opened.
Photocopies of the documents listed in 31 CFR 1020.220 may be used for documentary verification. These can also use non-documentary verification methods to establish the identity of owners.
Verifying the source of funds and wealth is critical in the AML due diligence process. Compliance teams must ensure that the stated source of funds matches the actual source. They must also identify the wealth of beneficial owners to assess their ability to conduct transactions. Failure to conduct these checks may lead to instances where bad actors can use legitimate businesses to launder money.
When dealing with third-party payors, the onboarding process must include proper vetting. Due diligence must be conducted on third-party payments to ensure that they are not being used to circumvent the AML due diligence process. The same robust checks used on the initial account holder must be used.
The process of verifying beneficial owners can be challenging, but having the proper procedures in place makes it much easier. Compliance teams must stay on top of new requirements and adjust their procedures accordingly.
Remember, failure to conduct these checks can expose the reporting institution to regulatory risk and, worse, the risk of promoting criminal activity. Stay vigilant, stay informed - it’s the best defense against money laundering and terrorist financing!
Stay vigilant, stay informed - it’s the best defense against money laundering and terrorist financing!
Challenges and Solutions
Identifying and verifying beneficial owners can be a complex task, especially for high-risk customers and transactions involving low-risk jurisdictions.
Compliance teams must establish strict risk-based protocols for verifying beneficial ownership information to spot money laundering or terrorist financing activities. For high-risk customers, the beneficial ownership threshold can be as low as 10%, but obtaining accurate and complete information remains a challenge.
Compliance professionals need to be prepared to deal with different legal structures and understand the ownership and control relationships between customers.
In addition, dealing with low-risk jurisdictions can be challenging as it may require a different set of policies and procedures. Nonetheless, leveraging technology can help identify, verify and screen beneficial owners, reducing the risk of regulatory violations.
Conclusion
In conclusion, identifying and verifying the beneficial ownership of an account is crucial to comply with AML regulations.
Reporting institutions must establish risk-based procedures to collect accurate and complete information of beneficial owners.
The verification process should ensure that these have enough information to form a reasonable belief about the true identity of the beneficial owner.
Adhering to the threshold of beneficial ownership and having the right protocols for high-risk customers is essential. While challenges like dealing with low-risk jurisdictions and obtaining accurate information exist, with diligent efforts, one can mitigate the risk of money laundering or financing terrorism.
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