How to Identify the Beneficial Owners of Company and Trust Clients

Identifying a beneficial owner means identifying the individuals who ultimately own or control a client. The client may be a company, unit trust or discretionary trust; it is not the accounting firm performing the checks. For an accounting firm providing a designated service, the purpose is to look beyond the legal name on the engagement and understand the people behind the client structure.

The process is often described as a three-step cascade. It is useful for companies and unit trusts, but the company fallback does not automatically apply to a trust. Discretionary trusts also require a different analysis because beneficiaries do not hold fixed ownership percentages.

What beneficial ownership means

Under AUSTRAC guidance, a beneficial owner is an individual who directly or indirectly owns 25 per cent or more of the client, or controls the client. Ownership and control are separate tests. A person can be a beneficial owner without holding shares or units if that person can direct the client’s decisions. [1]

The three-step process for companies and unit trusts

For a company or unit trust client, work through ownership, then control, then the correct fallback in sequence. The summary below shows how each step differs by structure.

Step one — apply the ownership test

For a company, identify every individual who directly or indirectly owns at least 25 per cent of the shares or ownership interest. For a unit trust, identify individuals who hold at least 25 per cent of the units or fixed entitlement. [1][5]

Indirect interests must be calculated through every layer. If Priya owns 100 per cent of Holding Co and Holding Co owns 30 per cent of Client Co, Priya indirectly owns 30 per cent of the client and is a beneficial owner. If Daniel owns 80 per cent of a company that holds 40 per cent of the units in Client Unit Trust, Daniel’s indirect interest is 32 per cent. Interests held through separate paths should be aggregated.

Step two — apply the control test

Control asks who can influence or direct the client’s decision-making. For a company, examine voting power, rights to appoint or remove directors, control of the board, veto rights and practical influence over financial and operating policies. AUSTRAC states that company control can arise from more than 50 per cent of voting power or issued capital, control of board composition, or practical influence and established behaviour. [1]

For a unit trust, examine the trust deed rather than stopping at the unit register. Consider who controls the trustee or governing body, who can appoint or remove the trustee, who has reserved or veto powers, and who in practice determines important decisions. A unit holder below 25 per cent may still be a beneficial owner through those rights. If the trustee is a company, trace the beneficial owners of the corporate trustee as well. [3]

Step three — apply the correct fallback

For a company, if reasonable steps do not establish any beneficial owner, AUSTRAC permits a documented fallback. The firm must record the enquiries made and difficulties encountered, collect information about the chief executive officer or equivalent, and verify that person’s identity to the extent appropriate to the client’s risk. The CEO is not automatically declared to be a beneficial owner; this is a CDD fallback after the ownership and control enquiries have been exhausted. [2]

A unit trust should not simply default to a CEO. It remains subject to the trust requirements. The firm must identify the individual trustees, the beneficial owners of any corporate trustee, the settlor, appointor, guardian or protector, and any other individual who controls the trust. The deed may also identify fixed beneficiaries meeting the ownership threshold. The outcome and the reasoning should be recorded even where no additional person is found through the percentage test. [3]

Discretionary trusts require a separate process

A discretionary trust is different because its beneficiaries generally have no fixed entitlement to income or capital until the trustee exercises a discretion. It is therefore usually inappropriate to apply a 25 per cent ownership calculation to the beneficiary classes. Instead, the firm should begin with the trust deed and identify the people who administer, control or can materially influence the arrangement.

First, identify every individual trustee. Where there is a corporate trustee, identify that company and trace its beneficial owners; also establish the individuals responsible for its governance and executive decisions where relevant. Second, identify each individual settlor, appointor, guardian and protector. Third, examine the deed, variations, trustee resolutions and actual conduct for any other individual able to replace the trustee, direct distributions, veto decisions or otherwise control the trust. AUSTRAC’s trust guidance treats these roles as central to the beneficial ownership enquiry. [3]

An appointor should be identified and the deed reviewed to understand the person’s powers rather than relying on the title alone. Do not exclude a settlor merely because the settled amount was nominal. Where a corporate trustee is used, do not stop at the company name: identify its beneficial owners and the individuals responsible for its governance and executive decisions as applicable.

Keep beneficiaries and beneficial owners separate

For a trust, AUSTRAC also requires the firm to establish the identity of each beneficiary or, where individual identification is not possible because of the trust’s nature, record each class of beneficiaries. This identifies the persons on whose behalf the trust receives the designated service. It is related to, but not the same as, beneficial ownership. A beneficiary becomes a beneficial owner where the person has the relevant ownership or control, as may occur with a fixed-interest unit trust or a bare trust. [3]

Evidence and records

The analysis should be supported by reliable information appropriate to risk. For companies, this may include ASIC extracts, annual statements, the constitution and shareholder agreements. For unit and discretionary trusts, use the current trust deed, amendments, unit register, trustee appointment instruments, resolutions and independent professional confirmation where necessary. Record the structure, calculations, control rights, discrepancies and final conclusion.

Initial CDD is generally completed before the designated service begins. If the required matters cannot be established on reasonable grounds, the firm must not commence the service unless a specific delayed-verification rule applies. Relevant CDD and decision records must generally be kept for seven years after the relationship ends or the final occasional transaction. [4]

The practical takeaway

The 25 per cent test is the starting point, not the whole answer. For companies and unit trusts, work through ownership, control and the structure-specific fallback in sequence. For discretionary trusts, focus on the deed, the trustee structure and every person with formal or practical control, while separately recording beneficiaries or beneficiary classes. That distinction produces a clearer, more defensible client file and avoids treating every trust role or senior manager as the same thing.

Sources

1. AUSTRAC — Determining ownership and control structures
2. AUSTRAC — Initial CDD for a body corporate, partnership or unincorporated association
3. AUSTRAC — Initial CDD for a trust
4. AUSTRAC — Overview of initial customer due diligence
5. AUSTRAC — New enrolment form questions