Piercing the Corporate Veil : Investigating Beneficial Ownership in Layered Corporate Structures
Introduction : A useful starting point for an inquiry is a company’s shareholder register. It is well established in the corporate and financial crime practice that legal or registered ownership frequently diverges from beneficial ownership which is the identity of a natural person who ultimately owns or controls an entity, where the legal or registered ownership is in another person’s or another entity’s name. A corporate structure can often be complicated with layers of companies, holding or subsidiary, the nominees, the shareholders and the entities based overseas making it difficult to see who actually owns or controls an entity. At times this complexity is deliberate while at other times it may simply result from the way a business is structured. To advise as a lawyer on corporate transactions, financial regulation, or anti money laundering (AML) matters it is important to know how to trace the real beneficial owner. It is not just a matter of technical compliance but it is part of the due diligence that the clients, the regulators and the courts expect from legal counsels.
This blog addresses the governing legal framework, the principal techniques by which the ultimate ownership and control can be hidden, and how the regulators respond to such structures of business. It also provides a practical step by step approach, including a checklist for red flags to carry out these investigations effectively.
The Legal Framework
The International Standard
The Financial Action Task Force (FATF), is the main international body that is responsible for setting standards on money laundering and terrorist financing. It has strengthened its rules on beneficial ownership in March 2022. The countries are expected to ensure that competent authorities have access to adequate, accurate, and up-to-date beneficial ownership information under Recommendation 24. This information should not come from just one source. Instead, the authority should be able to use a combination of company records, official registers, and other reliable sources when investigating the ownership structures.
The FATF guidance of March 2023 also adopted a risk-based approach. This means that countries should consider not only the companies incorporated within their own jurisdiction, but also foreign companies that have a sufficient connection with that particular jurisdiction. The guidance further recognizes that ownership can be difficult to trace Pair structures involving nominee shareholders, better shares, multiple companies or entities operating across different jurisdictions. These majors are intended to make it more difficult to use complex corporate structures to hide the identity of the person who ultimately owns or controls the company.
Position in India
In India the main legal framework for identifying significant beneficial ownership is incorporated under Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules). In simple terms, the framework is intended to identify the individuals who ultimately has a significant ownership interest or an influence over the company, even where that interest is held indirectly through other companies or persons.
An individual may qualify as a significant beneficial owner under the SBO Rules, whether acting alone or together with others or through one or more persons or trusts the individual holds indirectly or together with any direct holdings, at least 10% of the shares or voting rights of the company or has the right to receive at least 10% of total distributable dividend or other distribution in a financial year. The rules also covered the individuals who have the right to exercise significant influence or control over the company. The threshold of sand was introduced through the Companies (Significant Beneficial Owners) Amendment Rules 2019 which replaced the earlier 25% threshold.
The process of disclosure requires the significant beneficial owner to make a declaration to the company in form BEN-1. The company is then required to file Form BEN-2 with the Registrar of Companies and maintain a register of significant beneficial owners in Form BEN-3. The rules also prescribe specific time periods for the filings and require the company to take reasonable steps to identify the significant beneficial owners and give notice wherever necessary.
This framework also provides for a mechanism in situations where the required information is not provided. When a person fails to give the information sought by the company within the prescribed period of time or where the information provided is not satisfactory the company may apply to the National Company Law Tribunal (NCLT). The Tribunal then may impose restrictions on the concerned shares, including restrictions on their transfer and on the exercise of voting or other rights attached to those shares. Penalties may be attracted under Section 90 of the Companies Act, 2013 for non-compliance with the disclosure requirements.
Mechanisms of Concealment
The main legal concern arises when a corporate structure is delicately made more complicated to hide the person who ultimately owns and controls the entity this can be done in several ways including:
Companies placed across different jurisdictions.
Individuals may appear as shareholders or directors while actually acting on behalf of someone whose identity is not disclosed.
Better shares have historically allowed ownership to pass through physical possession of the share certificate making it harder to identify the actual owner.
Separating the rules of settler, trustee and beneficiary can sometimes make it difficult to identify the beneficial owners.
Companies incorporated in jurisdictions with limited ownership disclosure.
The Regulatory and Professional Response
The regulators are mainly responded to the hidden beneficial ownership in 3 ways
Beneficial ownership registers: The companies are increasingly required to disclose their ultimate beneficial owners to the central or official register. The SPO in India and the UK’s register of overseas entities are prime examples of this approach.
Customer due diligence: The banks and other regulated entities must identify and verify the beneficial owners of their clients and carry out additional checks where there are high risk factors.
Sanctions screening: Sanctions checks may also extend to the beneficial owners of an entity particularly where a sanctioned person may be using a company or intermediary to conduct transactions.
Practical Red-Flag Checklist
The following questions may be asked to identify genuine Red-flags regarding the ultimate ownership of the company.
Is the ownership structure spread across more than three layers without a clear business reason?
Are any shareholders themselves nominee companies or trust whose ultimate beneficiaries are unclear?
Do the declared SPO details match the shareholding shown in the company’s register?
Was there a significant delay between a change in control and the required statutory filing?
Do the company’s banking records identify a different controller from the person disclosed in its statutory records?
Does any company in the ownership chain operate through a jurisdiction identified by FATF as having strategic deficiencies?
Do voting rights or the power to appoint directors appear disproportionate to the declared shareholding?
Conclusion
The investment for beneficial ownership can bring together corporate law, financial crime compliance and for careful document review. The key is not to take the information such as shareholders name, a director’s address or the date of filing at the face value. Each piece of information should be checked against reliable and independent sources to understand who actually owns or controls the entity. As countries continue to strengthen their disclosure requirements this kind of careful cross checking will become an important part of the corporate and regulatory work. The ultimate goal is not simply to identify names on paper but it is to establish who is really behind the structure, who has the control, and whether the information provided can be trusted.
Author: Aarya Temgire in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney
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