Imagine the scenario. You are having a meal in a fine restaurant and over the evening, a few things are not up to standard. You decide enough is enough and ask to speak to “the owner”.
But who exactly do you really wish to speak to?
You really want to speak to someone with responsibility for the provision of your meal – the person in charge of delivery – most likely the head waiter; possibly the chef. This is unlikely to be the “owner”.
The ownership and operation of a restaurant – particularly those in a global five-star hotel chain – is most likely a complex array of investors – many of which will themselves be collective investment vehicles with a matrix of terms – together with franchise agreements and the like. All may have some consequence over how the restaurant is run but none of which would have any direct influence on the enjoyment of your meal.
In a similar way, the concept of beneficial ownership (particularly in the private wealth context) has evolved to something far wider than ownership. Today the notion of beneficial ownership encompasses control and influence as well as traditional ownership.
The company limited by shares has become a global norm over the last century. The company has separate legal personality. It owns assets in its own name and it sues, and is sued, in its own name. The shareholders have limited liability. The courts – certainly in common law jurisdictions – have been very reluctant to pierce the corporate veil.
However – at some point at least – only natural persons can be said to “enjoy” the results of a body corporate[i] – either via extraction of profits or using the assets or other rights owned by the company.
It seems logical therefore that the concept of beneficial ownership does look to natural persons in terms of ultimate ownership. Furthermore, since a body corporate cannot function without the input of natural persons[ii], the concept of beneficial ownership has also extended to persons without any ownership stake at all but with control or influence.
In fact, as shall be seen below, certain “beneficial owners” may actually be prohibited from any form of ownership at all – for example a protector of a trust who is an excluded person.
To many people, the phrase “beneficial ownership” relates the separation of legal and beneficial ownership. For example, where a nominee is used to hold registered shares, the legal owner is the nominee and the beneficial owner is the person(s) on whose behalf the nominee holds the shares. However, today’s beneficial ownership is far more complex than this.
The concept is particularly relevant at present with various forms of sanctions being imposed and expanded because of the tragic events in Ukraine.
The Russia (Sanctions) (EU Exit) Regulations 2019 (relevant in the United Kingdom, the British Overseas Territories and Crown Dependencies)[iii] state that:
“11 —(1) A person (“P”) must not deal with funds or economic resources owned, held or controlled[iv] by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.”
The Financial Action Task Force (FATF) has been the main driver for beneficial ownership[v] information being obtained as far as prevention of crime and anti-money laundering initiatives are concerned. The issues of disclosure and verification of such information is and will continue to be open to debate.[vi]
The FATF glossary[vii] states:
“Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.
 Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control...”
In 2014, the FATF issued guidance[viii] entitled “Transparency and Beneficial Ownership” to further comment on its Recommendations 24 (Transparency and beneficial ownership of legal persons) and 25 (Transparency and beneficial ownership of legal arrangements).
“Countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities, through either a register of beneficial ownership or an alternative mechanism.”[ix]
In parallel to this the European Union[x] have also been developing a concept of “beneficial ownership” through a series of Anti-Money Laundering Directives:
“Member States are currently required to ensure that corporate and other legal entities incorporated within their territory obtain and hold adequate, accurate and current information on their beneficial ownership.”[xi]
Beneficial owner has its meaning in Directive 2015/849 Article 3 (paragraph 6):
“‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least:
(a) in the case of corporate entities:
(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means …”[xii]
Therefore, over the last seven or so years there has been an introduction of relevant laws and regulations attempting to deal with this issue.
The final part of this article focuses briefly on Jersey and Guernsey[xiii] where, as is often the case, a company is owned 100 per cent by the trustees of a discretionary[xiv] trust (the Scenario). Assuming the trustee, company and governing law of the trust are all based in the same jurisdiction (and assuming no exemptions apply) – who is/are the beneficial owner(s)?[xv]
Jersey in its guidance[xvi] also states that discretionary beneficiaries are not beneficial owners. In the Scenario, information will need to be provided about the following:
Interestingly, the guidance also states in terms of “controllers”:
“You must consider whether any person otherwise exercises ultimate effective control over a trust which gives them ultimate effective control over the underlying entity…A person has the right to exercise ultimate effective control over a trustee if that person has the right to direct or influence the running of the activities of the trustee in terms of the trust.
Such persons, which may include the settlor, should be recorded as controllers, for example, those who hold the following rights:
(a) Right to appoint or remove a trustee, except through application to the courts or as a result of a breach of fiduciary duty by the trustee
(b) Right to direct or veto the distribution of funds or assets
(c) Right to direct or veto investment decisions of the trustee
(d) Right to amend the trust deed
(e) Right to revoke the trust.”
Guernsey’s guidance[xviii] is interesting in respect of “controllers”. Consideration needs to be given to “any individual who holds one or more of the powers listed[xix]… under the trust deed or other formal document relating to the trust. It is important to be aware that this applies only to what are sometimes described as positive or active powers, not to negative or passive powers that the individual may only use to prevent another person from acting in a particular way or which are dependent on a trigger event outside the individual’s control”.
Furthermore, Guernsey also requires consideration of “individuals whom the resident agent of the legal person knows or believes are exercising control over the trust. It is not envisaged that this will occur with trusts where the trustee is a Guernsey licensed fiduciary, i.e. the majority of trusts within the ownership structures of Guernsey legal persons. This is because Guernsey’s fiduciary sector is fully conversant with the responsibilities of a trustee, including the long-established principle of domestic and international trust law that a trustee which permits third parties to control its actions is acting improperly”.
Therefore, in the case of a Protector with a power of veto, they would be a beneficial owner in Jersey but not in Guernsey. Unless, of course, the resident agent “knows or believes” the holder of such veto “exercised control” – in which case they would also be a beneficial owner. With public registers of beneficial ownership being highly likely, differences like this may be important.
[i] It being noted that there can be charitable or philanthropic purposes not necessarily for natural persons but causes supported by natural persons.
[ii] Saving any debate about Artificial Intelligence for later!
[iii] Via for example the Russia (Sanctions) (Overseas Territories) Order 2020 (as revised)
[iv] Subsection (6) states: “The reference in paragraph (1) to funds or economic resources that are “owned, held or controlled” by a person includes, in particular, a reference to—
(a)funds or economic resources in which the person has any legal or equitable interest, regardless of whether the interest is held jointly with any other person and regardless of whether any other person holds an interest in the funds or economic resources;
(b)any tangible property (other than real property), or bearer security, that is comprised in funds or economic resources and is in the possession of the person.”
[v] The term “beneficial owner” first appeared in tax treaties in the early-mid twentieth century: see Richard J. Vann – “Beneficial Ownership: What does History (and Maybe Policy) Tell Us” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144038
[vi] This debate is for another time.
[ix] From R24.
[x] When the United Kingdom was a member.
[xi] Para 25 of DIRECTIVE (EU) 2018/843 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2018
[xii] The full definition at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015L0849&from=EN
[xiii] In the interests of space a wider comparison was not permitted. In addition they have detailed guidance.
[xiv] Meaning in basic terms no beneficiary has any vested interest.
[xv] There may also be differences between the level of registration required.
[xvii] Financial Services Jersey Law
[xix] In essence the same as the Jersey list above but without the “or veto”
Richard Grasby is a Partner in Appleby’s Hong Kong office, leading the Private Client, Trusts and Family Office practice. Richard advises trustees, ultra-high net worth individuals, private trust companies and family offices on the establishment, restructuring and administration of trusts, including special trusts i.e. BVI VISTA, Cayman STAR and Employee Benefit Trusts. He regularly assists in estate administration, succession planning and family governance. Private clients and family offices instruct Richard to advise on the use of corporate vehicles for asset holding and succession planning purposes. Richard is an expert in regulatory law including AML, AEOI, economic substance and licensing and risk management for trust companies. He also advises on collective investment funds, particularly unit trusts and private label funds. Richard has acted for many of the world’s leading trust companies, financial institutions, wealthy individuals and related structures. He has experience with dealing with clients and advisors across the globe. Richard has over 20 years’ post qualification experience with the majority spent in offshore firms. Richard has lived and worked in Jersey, London, the Cayman Islands and (since 2009) Hong Kong. He is admitted as a solicitor in England and Wales and the British Virgin Islands and is a Registered Foreign Lawyer in Hong Kong. He has also been admitted as an Attorney in the Cayman Islands. Richard is an active member of STEP. He has been on the local executive committee since 2012 and is a former chair. He is on the global steering committees for the Business Families and International Client Special Interest Groups. He is a member of the Academic Community. Richard is an elected Academician of the International Academy of Estate and Trust Law (the only such offshore practitioner in APAC). He is also a Certified Anti Money Laundering Specialist. Richard is a lecturer on trusts and family offices for the Hong Kong Securities and Investment Institute and for the Hong Kong University of Science and Technology. He is a member of the Hong Kong Trustee Association, the Family Firm Institute the International Bar Association and the Investment Migration Council. Richard is an active speaker at events across the world and a writer for many journals.