Identifying beneficial owners in the KYC process
German money laundering law stipulates that in business relationships with companies, obliged entities must identify the so-called "Ultimate Beneficial Owners" (UBOs).
In our blog article KYC in the onboarding of new customers We have looked at due diligence obligations in general – there you will also learn exactly what KYC means and why this process is important.
Today we will go into detail and clarify the questions of what a UBO is, how it is determined, and what applies if there is no UBO calculated to be.
Who is the beneficial owner of a company?
The Money Laundering Act defines the term as follows:
Beneficial owners within the meaning of the Money Laundering Act (GwG) are natural persons who ultimately own or control the contracting party, or the natural person on whose behalf a transaction is ultimately carried out or a business relationship is ultimately established, § 3 GwG.
According to Section 3 Paragraph 2 of the Money Laundering Act (GwG), natural persons who directly or indirectly
- hold more than 25% of the capital shares,
- control more than 25% of the voting rights or
- exercise control in a comparable manner
to the beneficial owners of a company.
However, there are two exceptions: Legally constituted foundations and other companies that are not listed on an organized market in accordance with Section 2 Paragraph 11 of the Securities Trading Act and are not subject to transparency requirements with regard to voting rights shares or equivalent international standards that correspond to Community law.
It's about economic advantage.
In simple terms, the investigation aims to identify which person or group of people actually and effectively benefits from the economic advantages of a particular transaction, asset, or company. In other words, who profits from the gains, revenues, or assets.
According to the Money Laundering Act (GwG), this is a person who owns more than 25% of the company's shares or, through more than 25% of the voting rights, or in a comparable manner, has the right to exercise significant control over the company.
And that's not necessarily the legal owner. In many cases, it's other people who derive economic benefits from the company.
Why does a UBO need to be determined?
As with all parts of the KYC process, determining the UBO (Ultimate Beneficial Owner) is also about preventing, disclosing, and combating fraud. The beneficial owner must be identified after this process. This is a due diligence obligation under the German Money Laundering Act (GwG).
Disclosing the UBO allows governments and authorities to better track who is involved in a transaction and who has actual control over assets or companies.
The beneficial owners are listed in the transparency register Registered – every German company is required to do this after a new UBO (Unique Business Owner) has been determined. This registration must be carried out by all Obligated parties under the Money Laundering Act The information can be accessed and verified. If a discrepancy is found, it must also be reported to the transparency register.
What does it mean to exert control?
Let's make this a bit more concrete. According to the definition in the German Money Laundering Act (GwG), the beneficial owner exercises significant control over the company. What exactly does that mean?
If a natural person owns more than 25% of the shares or voting rights in a company, they can make important decisions, both in the company's interest and in their own. This can include, for example...
- the right to appoint or dismiss the majority of the members of the administrative, management or supervisory body that determines financial and business policy (Section 290 Paragraph 2 No. 2 of the German Commercial Code),
- the right to determine financial and business policy on the basis of a control agreement concluded with another company or on the basis of a provision in the articles of association of the other company (Section 290 Paragraph 2 No. 3 HGB) or
- The fact is that, from an economic perspective, it bears the majority of the risks and opportunities of a company that serves to achieve a narrowly defined and precisely defined goal of the parent company (special purpose vehicle), cf. Section 290 Paragraph 2 No. 4 of the German Commercial Code (HGB).
This person then has a controlling influence on the company.
How is the beneficial owner determined?
Now that we know in theory what a beneficial owner is, we can look at the concrete steps for determining this. Basically, there are two calculation methods: the dominance principle and the accumulation principle.
In Germany, the dominance principle is prescribed as a method by the Money Laundering Act (GwG). Nevertheless, it is important to know and understand the other principle as well, in case you ever do business with foreign companies.
We will look at both methods using several examples.
Dominance principle
The 25% threshold plays a crucial role in the dominance principle. It is essential that there is a direct stake of over 25% in the customer at the first level of ownership. A simple example:
In this case, Max and Rita are the beneficial owners of Meier-GmbH, as they each hold more than 25% of the shares.
Things become more complex with a multi-tiered ownership structure. From the second ownership level onwards, the threshold of over 25% no longer applies. Instead, it is examined who...
- more than 50% of the capital shares are held or
- Controls more than 50% of the voting rights or
- can exert a controlling influence (see Section 290 Paragraph 2 of the German Commercial Code).
For the purposes of calculation, capital shares are therefore equivalent to voting rights. Holdings through other holdings must also be taken into account. For example:
Looking at the percentages, Tina exceeds the 25% threshold at the first level, and Karin exceeds the 50% threshold at the second level. However, even though Karin controls the land-based limited liability company (GmbH), she is not the beneficial owner of the dream-based limited liability company (GmbH), as the land-based limited liability company only holds 20% of it. Therefore, Tina is the sole beneficial owner.
The situation would be different if the proportions were divided as follows:
In this case, both Tina and Karin are the beneficial owners. Tina, because she directly holds more than 25% of the shares, and Karin, because she controls the Land-GmbH with more than 50% – and this company also holds more than 25% of the Traum-GmbH.
Finally, let's look at a complex example involving direct and indirect beneficial owners:
In this example, Marc is the beneficial owner. At the first level of ownership, no one holds more than 25% of the shares. However, Marc reappears at the second level. He therefore directly holds 20% from level 1 and indirectly another 20% from level 2. This exceeds the 25% threshold.
Accumulation principle
This method involves multiplying all shareholdings within a given shareholding strand. Capital shares and voting rights are treated equally. If the result of the calculation exceeds 25%, the identified individual at the end of the shareholding strand is the beneficial owner.
Both direct and indirect shareholdings are taken into account, and the shares or voting rights are added together. Let's look at an example that compares the dominance principle and the accumulation principle:
According to the accumulation method, Karl and Jan are the beneficial owners. Calculation method:
Karl: 100% x 90% x 30% = 27%
Jan: 90% x 44% = 39,6%
According to the dominance method, Susi, Karl, and Jan are the beneficial owners. Explanation:
Susi: Controls Flower GmbH (20%) and directly owns 6% = 26%
Karl: Controls Water UG, which controls Plant UG = 30%
Jan: Controls Green GmbH = 40%
The fictitious beneficial owner – when no one can be identified
However, there may be situations in which, despite careful examination, no natural person can be identified as the beneficial owner. For example:
- If the shares are distributed in such a way that no person owns more than 25% and cannot exercise significant control in any other way.
- If they are non-profit, tax-exempt legal entities.
- When, despite intensive research, no information about shareholdings can be obtained.
Therefore, there is neither direct nor indirect control by a natural person. In this case, the German Money Laundering Act (GwG) provides for the so-called "fictitious beneficial owner." This can be the legal representative, the managing partner, or the customer's business partner.
Even a fictitious beneficial owner must be checked against the information in the transparency register.
Identify beneficial owners at the touch of a button – with KYCnow
Determining the beneficial owners can be very time-consuming, depending on the complexity of the case. Simply gathering all relevant information about the company and its ownership levels requires significant resources.
With KYCnow, we help streamline the KYC process. All relevant company data is gathered from reliable sources within seconds and stored in a digital KYC file. The identification of the Unauthorized Business Owners (UBOs) then takes place at the touch of a button. Within just 60 seconds, you know exactly who is behind the company – and whether you are authorized to conduct business with them. Even the retrieval, comparison, and (if necessary) reporting of discrepancies to the transparency register can be automated via KYCnow.
See for yourself and get to know KYCnow now without obligation.
Roczniewski