Hidden ownership poses a real threat
If you have not yet got to grips with KYC and UBO, you could soon be up FIC creek without a paddle. Ah, the wonders of acronyms, dear reader. In plain English, financial and risk advice practices that ignore rules around Know Your Customer (KYC) and Ultimate Beneficial Owner (UBO) could face censure from the Financial Intelligence Centre (FIC).
A global anti-money laundering stance
These obligations trace through to South Africa’s ongoing adoption of global anti-money laundering standards. The Financial Intelligence Centre Act (FICA) enshrined KYC nearly two decades ago; more recent amendments, perhaps driven by global Financial Action Task Force (FATF) scrutiny, extended the net to cover beneficial ownership. In short, international pressure has hard-wired UBO into our regulatory framework and increased the penalties for non-compliance.
FAnews recently attended an ‘Everything You Need to Know About UBOs’ webinar to get to grips with the evolving advice risk landscape. Hawken McEwan, Director of Risk and Compliance at nCino KYC Africa, took to the virtual podium to explore FICA obligations and UBO compliance from a South African perspective. His first port of call, however, was to discuss some of the shocking stories exposed by the local media over the years. As it turns out, South Africa’s politically connected offer countless opportunities to examine the AML-CFT world.
“We are going to explore a couple of real cases that cost South Africa billions in documented losses,” McEwan opened. “These cases could have been prevented, or at least identified much earlier, had proper ownership disclosure been adhered to.” FAnews readers will be familiar with the list of scandals trotted out, starting with VBS Mutual Bank, which was placed under curatorship after running into a corruption-induced liquidity crisis, and ending with the well-documented State Capture saga.
A corruption report that shocked the nation
“Forensic investigators into the VBS matter delivered a report that shocked the nation … the perpetrators of the heist made away with almost R2 billion,” the presenter said. Unlike many of the scandals that make headline news nowadays, this was not an orchestrated, sophisticated cyberattack, but a group of around 53 individuals who systematically looted a community bank over about three years. The theft was enabled through a web of shell companies, nominee shareholders and hidden beneficial ownership structures that made transfers difficult to track.
McEwan described the Gupta-linked State Capture as “the most sophisticated manipulation scheme in South African history”. He said that when investigators set out to trace the cash flows from the various ill-gotten government contracts, they found a web of shell companies, nominee directors and offshore entities. “The real controllers were the Gupta family,” he said. “And they had managed to capture, effectively, state-owned enterprises through family, friends, acquaintances, political connections and hidden beneficial ownership.”
State Capture worked because the Gupta family had designed a system “that appeared legitimate on paper but was corrupt in practice”. There is no better backdrop to introduce South Africa’s beneficial ownership laws, or to explain why the laws include provisions for seeing through complex structures, nominee arrangements and more detailed ultimate control analysis. “We cannot just look at who is on paper, we have to understand who is really pulling the strings,” McEwan explained.
The harm runs deep as the rot
The bottom line: if you find a major government contract awarded to a company headquartered at a residential address and run by a 24-year-old whose social media accounts announce ‘unemployed’ … your alarm bells should start ringing. “When companies win contracts based on political connections rather than capability, it damages the entire business environment … qualified companies might lose opportunities to firms that cannot actually deliver the work,” the presenter said.
Crypto assets add a new layer to AML-CFT activities. The audience learned that criminal syndicates favour smaller, decentralised cryptocurrencies to move ill-gotten gains. A report by Chainalysis shows a staggering USD 24.2 billion of illicit cryptocurrency transfers in 2024, with over 60% of these funds going to sanctioned entities or terrorist organisations. Local regulators have picked up on the trend, explaining why the Financial Sector Conduct Authority (FSCA) has already flagged 30 unlicensed crypto service providers for further investigation.
Authorised financial services providers (FSPs), including brokers and financial advice practices, are seen as accountable institutions for FICA purposes and must comply with KYC, UBO and reporting rules. In practice, this means doing the necessary customer due diligence on your clients, including making sure you understand the beneficial owners of these clients. McEwan went to lengths to illustrate how intermediaries should apply the look-through principle to determine UBOs with a 5% or greater interest in their clients.
Finding the natural persons at the end of the ownership chain
“Understanding exactly who the client is, even if they are trying to hide under a veil of complex structures, sits very squarely within the duties around customer due diligence,” he said. A UBO is the natural person who has ultimate benefit from, or can ultimately control, an entity (your client) and its operations. Flushing out the UBO can be quite a process, especially when your client is a listed entity with thousands of minority shareholders. In such cases, the search usually begins with the CEO, CFO or founder.
In the case of trusts, which are notoriously difficult to ‘see through’, your investigation might start by looking at the donor and founder to figure out where the trust assets originated from before moving on to the trustees (who control the funds) and beneficiaries. Whatever institution you are dealing with, the idea is to “look at the levers of control, and figure out who can direct what it does, where its assets are used and how those assets are used.”
The presentation played out in the context of Public Compliance Communication 59, issued by the FIC on 8 August 2024. In it, the FIC indicated that accountable institutions should take a closer look at any UBO with an interest of 5% or higher to align with its risk assessment of the South African market. “It is vital that accountable institutions identify the beneficial owner by whatever means is appropriate, and when it comes to looking at shareholding to achieve that, there is an expectation to go to 5% to evidence that ownership,” McEwan said.
Looking through layered structures
He dedicated a good part of his presentation to illustrating the dilution method to determine the UBOs of a Pty Limited client. If a company owns 20% of your client, and an individual in that company owns 80% of its shares, that individual actually has a 16% stake in your client, making him or her a UBO. You get the answer by multiplying the two percentages to get to an effective stake. The lesson was to always “look through” layered structures, because indirect holdings can easily push a natural person above the 5% threshold.
Val Brink, an admitted attorney and Enterprise Business Development Executive at nCino KYC Africa, inadvertently concluded the discussion during her introductory remarks. She gave a clear overview of the compliance landscape and highlighted how financial crime red flags, regulatory obligations under the FIC Act, and the challenges of identifying beneficial owners all come together in practice. She reminded attendees that the identification of UBOs was central to South Africa’s fight against money laundering and fraud.
“Financial crime, including money laundering, fraud and terrorist related financing, often hides behind complex ownership structures, shell companies, trusts and nominee arrangements,” she said. “By uncovering the UBO, we shine a light on those hidden interests, making it far harder for criminals to conceal illicit funds or exert undue influence.”
Writer’s thoughts:
Advisers increasingly stand at the frontline of anti-money laundering efforts, with KYC and UBO compliance central to protecting both clients and practices. Are you confident your AML-CFT processes can withstand the next compliance review? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
