Understanding Beneficial Ownership

Beneficial ownership refers to the individuals who ultimately own or control a company or asset. Knowing the beneficial ownership of a company or asset is critical for businesses and financial institutions to identify and mitigate potential risks such as money laundering, fraud, and terrorism financing. However, in some cases, it's not enough to only identify the beneficial owner of a primary entity. In such cases, we are required to collect beneficial ownership information for secondary or parent entities.

This article aims to explain the importance of collecting beneficial ownership information for secondary or parent entities per FinCEN Guidance.

Why do we collect beneficial ownership information for secondary or parent entities?

In many cases, companies or assets are owned by another company or asset, known as the parent entity. Collecting beneficial ownership information for the parent entity is crucial because it helps Payrix to have a comprehensive understanding of the ownership structure and control of the primary entity. This information helps to identify the individuals who ultimately control and influence the primary entity, including potential sources of funding, business operations, and decision-making processes.

Furthermore, collecting beneficial ownership information for secondary or parent entities is essential in situations where the primary entity is owned or controlled by multiple layers of companies or assets. In such cases, knowing the beneficial ownership of each layer helps Payrix to identify potential risks associated with complex ownership structures, including money laundering, tax evasion, and other financial crimes.

Collecting beneficial ownership information for secondary or parent entities is also essential for compliance with legal and regulatory requirements. Many countries have introduced laws and regulations that require businesses and financial institutions to identify the beneficial ownership of companies or assets. Failure to comply with these requirements can result in severe financial and reputational damage, including fines, sanctions, and legal action.

In conclusion, collecting beneficial ownership information for secondary or parent entities is critical for Payrix to mitigate potential risks associated with complex ownership structures, comply with legal and regulatory requirements, and maintain a comprehensive understanding of the ownership structure and control of primary entities. By collecting and verifying beneficial ownership information, Payrix can ensure that they are not facilitating financial crimes and are complying with legal and regulatory requirements.

Beneficial Ownership Mandate

The US Department of the Treasury FinCEN (Financial Crimes Enforcement Network), has issued final rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for financial institutions.  Payrix is not a covered financial institution as defined by the regulation, however, Payrix’ Sponsor Banks are covered financial institutions and have therefore cascaded the Customer Due Diligence (“CDD”) Rule to Payrix prior to opening merchant accounts.  

The CDD Rule, which amends Bank Secrecy Act regulations, aims to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains. The CDD Rule clarifies and strengthens customer due diligence requirements for U.S. banks, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities. The CDD Rule requires these covered financial institutions to identify and verify the identity of the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts.

The CDD Rule has four core requirements. It requires covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to:

1. Identify and verify the identity of customers

2. Identify and verify the identity of the beneficial owners of companies opening accounts

3. Understand the nature and purpose of customer relationships to develop customer risk profiles

4. Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

With respect to the requirement to obtain “beneficial ownership” information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.  This is referred to as the two-prong approach.  

Beneficial Ownership: Core Elements

 As noted, Beneficial Ownership has 2 prongs: an “ownership prong” and a “control prong.”  With limited exceptions (see “Variants and Exceptions” section below), Payrix must perform due diligence on each of the following 2 types of individuals associated with merchant accounts.  

Beneficial Owner(s)(“Ownership Prong”)

Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, owns 25 percent or more of the equity interests of a merchant.  A drill-down through several layers of legal entities may be needed to determine each individual that meets this threshold. 

At minimum, the following information about the individual(s) must be collected, verified, and screened: 

1. Legal name 

2. Date of birth 

3. Address (residential or business street address) 

4. Social Security Number (SSN) [For non-U.S. persons without an SSN or ITIN, their foreign passport number and country of issuance or similar identification.] 

Individual with Significant Responsibility (“Control Prong”) 

An individual with significant responsibility for managing the merchant and/or significant responsibility to enter the company contractually with Payrix, such as an executive officer or senior manager (e.g., Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, Treasurer, or any other individual who regularly performs similar functions). 

At minimum, the following information about the individual must be collected, verified and screened: 

1. Legal name 

2. Date of birth 

3. Address (residential or business street address) 

4. Social Security Number (SSN) [For non-U.S. persons without an SSN or ITIN, their foreign passport number and country of issuance or similar identification.]

5. Title 

Note

1. At times, the same individual could fulfill 2 or more of the roles above.  

2. A merchant may have as few as zero or as many as four individuals who fulfill the ownership prong, but at least one individual is required under the control prong.  

3. Beneficial Owners are sometimes referred to as “Ultimate Beneficial Owners” (UBOs).  

4. The full 9-digit SSN is required for a U.S. person.  

5. For non-U.S. persons without a U.S. SSN or Individual Taxpayer Identification Number (ITIN), obtain a current, non-expired foreign passport number and country of issuance, alien identification card number, or reference number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photo or similar safeguard.  

6. The collection of the % beneficial ownership of each individual representing the “ownership prong” (Beneficial Owners with 25%+ ownership) is required by Payrix 7) If a non-statutory business trust directly or indirectly owns 25% or more of a legal entity, the trustee(s) is deemed the Beneficial Owner.  

Variants and Exceptions

The following types of merchants are subject to alternate requirements, as described below:

• Sole Proprietors 

• Nonprofits 

• Excluded Legal Entities (such as government entities, certain publicly traded corporations, financial institutions.) 

Sole Proprietors 

The following information about the sole proprietor must be collected, verified and OFAC/MATCH screened: 

1. Legal name 

2. Date of birth 

3. Residential Address 

4. Social Security Number (SSN) [For non-U.S. persons without an SSN or ITIN, their foreign passport number and country of issuance or similar identification.] 

Nonprofits  

Nonprofit corporations or similar entities such as charitable, not-for-profit, nonstock, or public benefit corporations that have filed organizational documents with the appropriate state authority are excluded from the “ownership prong” (only) requirements. 

1. Legal name 

2. Date of birth 

3. Address (residential or business street address) 

4. Social Security Number (SSN) [For non-U.S. persons without an SSN or ITIN, their foreign passport number and country of issuance or similar identification] 

Note

1. The requirements for the Individual with Significant Responsibility (“control prong”) and the Individual Opening the Account remain fully applicable.  

2. As addressed above, the SSN of the Individual with Significant Responsibility (“control prong”) must be collected.  

Excluded Legal Entities  

Certain legal entities that are subject to significant regulatory oversight are excluded from BOTH the “ownership prong” (Beneficial Owners with 25%+ ownership) and “control prong” (Individual with Significant Responsibility) requirements.  “Excluded Legal Entities” include: 

1. U.S. government entities. 

2. U.S. publicly traded corporations (and their wholly owned subsidiaries) that are listed on the New York, American, or NASDAQ stock exchanges (only). 

3. Regulated U.S. financial institutions, including their holding companies. 

4. U.S. state-regulated insurance companies. 

5. Public accounting firms registered under section 102 of the Sarbanes-Oxley Act. 

Updating Beneficial Owner Information

Payrix is required to maintain risk-based processes and procedures for updating Beneficial Owner information.  At minimum, Beneficial Owner information must be updated (or investigated and confirmed current) in the event of any of the following risk triggers:

1. Change of ownership.

2. Change of the Individual with Significant Responsibility.

3. Change to the merchant’s business legal name or Tax ID or legal entity (incorporation) status.

4. Indication(s) that an Assumed Sole Proprietor is, in fact, NOT a sole proprietor (such as additional parties with control of the merchant account, result of public domain review, elevated payment card volume).

 Beneficial Ownership Information Matrix