In a significant advancement in the ongoing battle against financial crime, South Africa has recently introduced robust regulations concerning Ultimate Beneficial Ownership (UBO). The Financial Intelligence Centre (FIC) has issued new guidance, lowering the threshold for identifying controlling ownership from 25% to 5%. This pivotal change, outlined in Public Compliance Communication 59 (PCC59), marks a crucial step in the nation’s efforts to combat money laundering, corruption, and other financial crimes.
Closing the Net on Corporate Secrecy
Traditionally, a 25% controlling ownership stake was deemed sufficient to establish ownership or control of a company. However, as criminals have become increasingly sophisticated, they exploited complex webs of smaller shareholdings to obscure their influence over legal entities. The introduction of a 5% threshold directly addresses these tactics, making it significantly more difficult for bad actors to conceal their control behind corporate structures.
This regulatory shift aligns with the Companies and Intellectual Property Commission’s (CIPC) Beneficial Ownership Register and tackles the alarming levels of financial crime in South Africa, particularly in relation to tender corruption, which frequently involves shell companies facilitating illicit transactions.
Enhancing the Fight Against Financial Crime
The new UBO regulation empowers investigators to uncover hidden ownership structures. By scrutinizing ownership more closely, authorities can identify instances where individuals hold multiple smaller shareholdings across various entities—a common strategy to maintain control while flying under the radar.
This change also responds to the challenges highlighted when South Africa was greylisted by the Financial Action Task Force (FATF) in February 2023. The new regulations aim to close the gaps in financial crime-fighting capabilities revealed by this greylisting.
Considerations for Trusts and Companies
While these changes bolster defenses against financial crime, they also introduce new considerations for businesses. Historically, many companies viewed detailed ownership disclosures as an invasion of privacy. The new 5% threshold necessitates a more meticulous examination of ownership structures, which may encounter some resistance.
However, the recent requirement for the Beneficial Ownership Register at CIPC mandates the declaration of anyone with more than 5% beneficial ownership. Many companies may have already completed the groundwork to comply with these requirements.
Implications for Trusts
Standard FICA information regarding all natural persons linked to a trust, including founders, trustees, and beneficiaries must be filed with the Master of the High Court, by virtue of submitting a UBO register. If any of these roles are held by a legal entity, the natural person representative of that juristic entity must be declared. This comprehensive approach ensures that ownership structures are transparent and accountable.
The Consequences of Non-Compliance
Understanding the consequences of non-compliance is critical. While the FIC “strongly recommends” adherence to the 5% threshold, it is expected to become the de facto standard. Non-compliance with the Financial Intelligence Centre Act (FICA) can lead to severe repercussions, including reprimands and substantial fines. In the wake of South Africa’s greylisting, where the nation faces increased international scrutiny, the stakes for compliance have never been higher.
Implications for the Average Citizen
You might wonder how these technical changes affect everyday citizens. Increased transparency in business ownership can lead to profound changes in daily life. Transparent operations make it more challenging for corrupt individuals to exploit company structures for personal gain, fostering fairer competition, potentially lowering prices for consumers, and reducing job losses resulting from fraudulent practices.
Looking Ahead
As these regulations are implemented, it’s essential to recognize that compliance is not just about ticking boxes; it’s about fostering a financial ecosystem that is inhospitable to criminals while welcoming to legitimate businesses and investors. This move towards greater transparency represents a significant cultural shift in South Africa’s approach to business and finance.
Although the path to full compliance may seem daunting, it is a necessary step that demands collaboration across all sectors. Businesses, regulators, and technology providers must work together to develop innovative solutions that streamline UBO verification and enhance overall Know Your Customer (KYC) processes. This collaborative approach will be vital to implementing these changes without overburdening legitimate enterprises.
As South Africa continues to bolster defenses against financial crime, the aim is not only to exit the FATF grey list but also to build a financial system renowned for its integrity and transparency. This evolution could attract increased foreign investment, enhance the country’s global economic standing, and promote a more ethical business environment domestically.
For further information or assistance regarding UBO, please do not hesitate to reach out to our compliance team at compliance@rvn.co.za.
Written by: RVN Group
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as financial advice.