PMLA

Concept of Beneficial Ownership under PMLA and Other Laws

Every entity, such as banks, non-banking financial companies (NBFCs), etc., which is regulated by any of the Government authorities or regulatory bodies, needs to adhere to numerous anti-money laundering and customer identification norms. These norms must be adhered to when such an entity makes any transactions with and without an account-based relationship with a customer. The entity also needs to monitor such transactions in order to ensure that there are no illicit money laundering activities being performed by its client. One such norm includes the identification of the beneficial ownership in the case of a company, partnership, body of individuals or unincorporated association. This article sheds light on the concept of beneficial ownership under PMLA with respect to such regulated entities.

What is Beneficial Ownership?

A beneficial owner is any individual who is considered to be the ultimate owner or controller of any transaction. The concept of the beneficial owner comes into the picture when the transaction is in some other person or entity’s name, and a different natural person benefits from the transaction once it is executed completely. Under money laundering laws in India, the concept of beneficial owners and their reporting are dealt with under Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

As per the rule, the beneficial owner of a transaction must be identified by the reporting entity through controlling ownership interest and control. The meaning of beneficial owner differs in the case of different entities.

Beneficial Ownership in a Company

In the case of a Company, the beneficial owner is considered to be the natural person or persons who act on their own or through one or multiple juridical persons. It includes all the natural persons who have a controlling ownership interest in a transaction or have control over it in any other manner.

Controlling ownership interest means when a person has ownership or authority in the company amounting to more than 25% of its total shares, capital or profits. Further, in the context of a company, control means the authority to appoint directors and control the management of the company or policy making. Such control may be acquired through management rights, shareholding, voting rights, etc.

Beneficial Ownership in a Partnership Firm

In a partnership firm, a beneficial owner is also any natural person or persons who have a controlling ownership interest or hold control in any other manner. It includes any natural person or persons who act on their own or execute such control or interest through any juridical person. Controlling ownership interest in the case of a partnership firm means the ownership or authority of more than 15% of the shares, profits or capital of the firm.

Beneficial Owner in an Unincorporated Association/Body of Individuals

In this case, the beneficial owner is any natural person or persons who have a controlling ownership interest in the entity for more than 15% of the property, or profits in the unincorporated association or body of individuals. A vital point to note here is that when it comes to a body of individuals, there can be no juridical person associated with the entity since, by the very meaning of it, it can only have individuals to carry out its income-earning activities.

Beneficial Ownership in a Trust

In the case of a trust, the beneficial owner is an author of the trust, the trustees or any beneficiaries holding more than 15% interest in the trust. It also includes any natural person or persons who possess the ultimate control over the activities of the trust through control or ownership in it.

In case the client holding controlling interest is listed on an Indian stock exchange or resides in any country recognised by the India Government and listed on stock exchange of such country. Further, this also includes any subsidiary of such entities.

Beneficial Ownership in any other Case

In case no natural person can be recognised in any of these cases, the beneficial owner will be the natural person holding the designation of the Senior Managing Officer of the entity.

Rule 9 of the PML Rules also states that there is no need for identifying or verifying the identity of any shareholder or beneficial owner in a case when a client or the owner of any controlling interest is any entity that is listed on any Indian Stock Exchange. It also includes any entity that is resident in any jurisdiction as notified by the Indian Government and listed in the stock exchange of such jurisdiction. Further, it also includes any subsidiaries of such listed entities.

A reporting entity needs to identify if the client is acting on behalf of any beneficial owner and take the necessary steps to identify the beneficial owner. Further, the entity must also obtain necessary certified copies of the documents or e-documents from its clients relating to its beneficial owners, managers, officers, employees, etc.

Additional Laws Dealing with the Concept of Beneficial Ownership under PMLA

The Companies Act, 2013

Section 90 of the Companies Act, 2013^[1] lays down the provision for the register of significant beneficial owners in a company. Under this Section, every individual, whether acting alone or along with or through one or more persons or trusts who holds beneficial interests of at least 25% in the company’s shares or has the authority to exercise or actually exercises the right to significant influence or control in the company, must mandatorily make a declaration to the company regarding such beneficial interest. Such declaration must specify the nature of such interest and other such details as required, along with any changes in such interest.

As per Rule 2(h) of the Companies (Significant Beneficial Owners) Rules, 2018, such interest may include the following:

• When the individual directly or indirectly holds at least 10% of shares, including compulsorily convertible debentures, global depository receipts or compulsorily convertible preference shares.
• When the individual holds directly or indirectly at least 10% of voting rights in the shares.
• When the individual has the right to receive or participate in at least 10% of the total distributable dividend or any such distribution in a financial year through any direct or indirect holdings.

Any individual is considered to be a holder of the right or entitlement indirectly in the company in the following cases:

• When the member of the reporting company is a body corporate registered in India or abroad, except for a limited liability partnership. Further, the individual holds a majority of stake in the member or in the ultimate holding company of the member.
• When the member is a Hindu Undivided Family (HUF), and the individual is the Karta of such HUF.
• When the member is a Partnership firm, and the individual is a partner, or holds the majority of the stake in the body corporate that is a partner, or in the ultimate holding company of the body corporate (the partner).
• When the member is a trust, and the individual is a trustee (in a charitable trust or discretionary trust), a beneficiary (in a specific trust) or an author/ settler (in a revocable trust).
• When the member is a pooled investment vehicle or any business controlled by it and is based in a member country of the FATF on Money Launder, and the regulator of such country is a part of the International Organisation of Securities Commissions, the individual is a general partner, or an investment manager, or a CEO when the investment manager of that pooled vehicle is a body corporate or partnership firm.

However, any individual will not be considered a holder of the right or entitlement if the shares in the reporting company are held in the name of the individual only or when the individual who has or acquires a beneficial interest in the shares has made a declaration for the same to the reporting company.

Section 90 of the Companies Act further states that every company must mandatorily maintain a register of such declared interest and related changes such as the name of the individual, address, date of birth, details of ownership, etc. The company must also file a return of significant beneficial owners mentioning the names, addresses and other information, including any changes related to such details.

RBI’s Master Direction

The Reserve Bank of India, vide its Master Direction on Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating Financing of Terrorism (CFT)/Obligation of banks and financial institutions under the PML Act requires every bank, NBFC or other financial institution to identify the beneficial ownership of their customers as per the testing parameters laid down under the PML Rules. Under the Master Direction, controlling ownership interest means ownership or authority of more than 25% of the shares, profits or capital of the company. It also reiterates the meaning of control as defined under the PML Rules.

SEBI Circulars relating to Beneficial Ownership

The Securities and Exchange Board of India (SEBI) has provided different circulars and guidelines while dealing with the term beneficial ownership.

Under the SEBI Master Circular No. CIR/ISD/AML/3/2010, all registered intermediaries have to mandatorily obtain the details of their clients and also identify and verify the persons who hold the beneficial ownership in the securities account. The process to conduct this activity must be laid down by the registered intermediaries in their Client Due Diligence Policy.

Further, SEBI has laid down the compulsory requirement for identifying the beneficial owners through Uniform Know Your Client (KYC) requirements under its Master Circular CIR/MIRSD/16/2011. The requirement is applicable to all SEBI-registered entities, including Depository Participants through Depositories, Mutual Funds, and Association of Mutual Funds in India, Portfolio Managers, Collective Investment Schemes and Venture Capital Funds.

Additionally, SEBI issued its Master Circular CIR/MIRSD/2/2013 on Guidelines on Identification of Beneficial Ownership, where all SEBI registered entities, including KYC Registration Agencies (KRAs), Alternate Investment Funds (AIFs), Investment Advisors, among other registered entities mentioned above, need to review the Know Your Client (KYC) and Anti-Money Laundering (AML) Policies and implement them in order to identify the beneficial owners of their clients.

Considering the definition laid down under Rule 9, the Delhi High Court, in Bhavya Bishnoi vs Income Tax Office CRL.M.C. 1708/2022, held that a beneficial owner in case of any asset means any person who has directly or indirectly provided some consideration for such asset, and such consideration is provided for the direct or indirect immediate or future benefit for themselves or any other person.

Conclusion

Every reporting entity such as a bank, NBFC or any other such financial institution needs to adhere to the PML Act, 2005 and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, in order to identify the beneficial owner while establishing any account-based client relationship. This must be done as per the testing parameters defined under Rule 9 of the PML Rules to ensure that no incident beneficial ownership that may result in the activities of money laundering goes unidentified.

Read Our Article: Disclosure of Significant Beneficial Ownership