New regulatory guidance lowers the threshold for identifying company owners, making it harder for criminals to hide behind corporate structures, writes Hawken McEwan, director of risk and compliance at DocFox.
In the ongoing battle against financial crime, South Africa has taken a significant step forward. The Financial Intelligence Centre (FIC) has recently issued new guidance on Ultimate Beneficial Ownership (UBO), lowering the threshold expected for identifying controlling ownership from 25% to 5%.
This change, detailed in Public Compliance Communication 59 (PCC59), represents a crucial shift in our approach to combating money laundering, corruption, and other financial crimes.
Understanding the change
For years, it was generally understood that a 25% shareholding was sufficient to establish ownership or control of a company. However, criminals have become increasingly sophisticated, often using complex webs of smaller shareholdings to obscure their control over legal entities. The new 5% threshold is a direct response to these tactics, making it significantly harder for bad actors to hide behind corporate structures.
This change didn’t come out of nowhere. It aligns with the Companies and Intellectual Property Commission’s (CIPC) Beneficial Ownership Register and addresses the high levels of financial crime in South Africa. It particularly aims to tackle the well-publicised issue of tender corruption, where shell companies are often used to front illicit transactions.
Impact on the fight against financial crime
The lowered threshold is a powerful tool in uncovering what criminals might try to hide. By looking closer at ownership structures, investigators are much more likely to identify scenarios where one person holds multiple smaller shareholdings across various entities – a common tactic used to maintain control while staying under the radar.
This change is reminiscent of the challenges faced when South Africa was greylisted by the Financial Action Task Force (FATF) in February 2023. Just as the greylisting highlighted gaps in our financial crime-fighting infrastructure, this new UBO regulation addresses a critical vulnerability in our system.
Challenges for businesses
While this change strengthens our defences against financial crime it does introduce new considerations for businesses. Many companies have historically viewed detailed shareholder disclosures as an invasion of privacy. The new 5% threshold demands an even closer look at ownership structures, which may be met with some resistance.
However, it’s worth noting that the recent requirement for the Beneficial Ownership Register at CIPC, which mandates the declaration of all shareholders at 5% or greater, should make this task less laborious. Many companies will have already done the groundwork to comply with CIPC requirements.
Technology will also play a crucial role in navigating these new requirements. While solutions like DocFox cannot directly obtain the UBO information from clients – the responsibility still lies with the institution – they can significantly streamline verifying the identities of all identified UBOs. This helps businesses maintain compliance without drowning in paperwork.
Consequences of non-compliance
It’s important to note that while the FIC “strongly recommends” the 5% threshold, the industry expects it to become the de facto standard from now on. Non-compliance with FICA can have significant consequences, ranging from reprimands to substantial fines.
In a post-greylisting environment, where South Africa is under increased international scrutiny, the stakes for compliance have never been higher.
Impact on the average citizen
You might wonder how these seemingly technical changes affect the person on the street. In reality, increased transparency in business ownership has far-reaching effects on our daily lives.
When businesses are more transparent, it becomes harder for corrupt individuals to exploit company structures for personal gain. This can lead to fairer competition, potentially lower prices for consumers, and reduced risk of job losses because of fraudulent business practices.
Moreover, as we have seen with the fallout from scandals like the VBS Bank heist, when financial crimes go unchecked, society’s most vulnerable often suffer the most. By tightening our UBO regulations, we are creating a more robust system that protects everyone – from individual savers to entire communities.
Looking ahead
As we implement these new regulations, it is important to remember that compliance is not just about ticking boxes. It is about creating a financial ecosystem that’s hostile to criminals and welcoming to legitimate businesses and investors. This shift towards greater transparency represents a significant cultural change in how we approach business and finance in South Africa.
While the path to full compliance may seem daunting, it’s a necessary step that requires collaboration across all sectors. Businesses, regulators, and technology providers like DocFox must collaborate to develop innovative solutions that make UBO verification and overall KYC processes more efficient and effective. This collaborative approach will be vital to implementing these changes without overburdening legitimate businesses.
As we continue to strengthen our defences against financial crime, we move closer to not just getting off the FATF’s grey list, but to building a financial system that is truly world-class in its integrity and transparency. This evolution will have far-reaching effects, potentially attracting more foreign investment, improving our global economic standing, and fostering a more ethical business environment domestically.