Beneficial Ownership Meaning and Regulation

What Is a Beneficial Owner?

A beneficial owner is a person who enjoys the benefits of ownership even though the title to some form of property is in another name.

It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.

Key Takeaways

A beneficial owner is a person who enjoys the benefits of ownership though the property's title is in another name.
Beneficial ownership is distinguished from legal ownership, though in most cases, the legal and beneficial owners are one and the same.
Publicly traded securities are often registered in the name of a broker for safety and convenience.
Wealthy individuals often list their assets under trust while they remain the beneficial owner.

Understanding Beneficial Owners

When shares of a mutual fund are held by a custodian bank or when securities are held by a broker in street name, the true owner is the beneficial owner, even though, for safety and convenience, the bank or broker holds the title.

Beneficial ownership may be shared among a group of individuals. If a beneficial owner controls a position of more than 5% of a company or entity, it must file Schedule 13D under Section 12 of the Securities Exchange Act of 1934.

Beneficial ownership is distinguished from legal ownership. In most cases, the legal and beneficial owners are one and the same, but there are some cases, legitimate and sometimes less legitimate, where the beneficial owner of a property may wish to remain anonymous.

When a corporation or other legal entity opens a bank account, the bank must identify the beneficial owners of that entity. This is intended to prevent money laundering and tax evasion.

To prevent money laundering, banks are required to verify the beneficial owners of the companies or legal entities that open an account. For these purposes, a beneficial owner is anyone with more than 25% ownership of a legal entity, or anyone who controls the legal entity.

Areas of Beneficial Ownership

Each type of asset has different rules for how beneficial ownership is recorded. Although these rules vary by jurisdiction, these are some of the most common standards:

Securities

As mentioned in the example above, publicly traded securities are often registered in the name of a broker for safety and convenience.

The Securities and Exchange Commission (SEC) recognizes this and has regulated the practice. In private companies, for a number of reasons, a beneficial owner may not want their name as a shareholder of record. So long as tax laws and other laws are complied with, this practice is not illegal in itself.

Real Estate

In most countries, real estate registries show the names of the owners of properties. In some cases, a beneficial owner may not want their name to appear on public records. In such cases, it is common for trustees or other entities to act as legal owners in place of the beneficial owner.

For example, famous artists or politicians may not want their home addresses to be easily found in public records, so they do not appear personally on title deeds.

Asset Protection

Wealthy individuals who are at risk of lawsuits, or simply want to protect their assets and plan their estate, generally use trusts to act as the legal owner of their property, often securities and money, while they and their families continue to be the beneficial owners. Here again, this practice is legal but highly regulated.

In intellectual property law, a beneficial owner is someone who benefits from a trademark, patent, or copyright even though the legal right belongs to someone else. This may happen when the owner of an intellectual property assigns some of their rights to another party.

Panama Papers

Famously, in early 2016, the International Consortium of Investigative Journalists made public what it called the "Panama Papers." These documents, taken from the archives of the law firm Mossack Fonseca & Co., show in detail the beneficial ownership of several thousands of offshore corporations.

While many were used legally, it appears some beneficial ownership was hidden for nefarious or illegal motives. The papers revealed the secret business activities and holdings of several public figures, including British prime minister David Cameron and Icelandic prime minister Sigmundur Gunnlaugsson, who resigned as a result. It also shed light on the web of secret holdings by Russian leader Vladimir Putin.

Newer Rules Regarding Beneficial Owners

On May 5, 2016, the Financial Crimes Enforcement Network (FinCEN) fortified and clarified due diligence requirements for banks, brokers, mutual funds and other financial entities. Most importantly, the new rules require legal entity customers to identify and verify the identities of their beneficial owners when they open an account. These rules took effect on May 11, 2018.

Regulatory Requirements for Beneficial Ownership

When a broker or other financial institution holds assets on behalf of a corporation or other legal entity, they are required to record the beneficial owner of those assets. This is intended to prevent money laundering or the use of financial infrastructure for terrorism financing.

Under financial regulations, a beneficial owner is considered anyone with a stake of 25% or more in a legal entity or corporation. Beneficial owners can also be considered anyone with a significant role in the management or direction of those entities, or any trusts that own 25% or more of an entity.

Advantages and Disadvantages of Beneficial Ownership

Beneficial ownership can simplify the process of owning and possessing certain assets, such as securities. A common example is the stock market. It is rare for someone to take actual possession of the stocks that they buy, which would incur additional paperwork. Instead, their stocks remain in the hands of the brokerage, which holds them in beneficial ownership. This is sometimes referred to as owning the shares in "street name."

However, there are some tradeoffs to holding shares in street name. There may be some delay in communications, as all official messaging from the issuing firm must first pass through the brokerage. There may also be delays in issuing dividends and interest payments.

In shadier circumstances, beneficial ownership may also be used to withhold the actual owner of a property or security. An example might be assets that are legally held by a shell company that is controlled by the beneficial owner. Although such companies are not inherently illegal, they are sometimes used to keep the owner's financial assets a secret.

Pros and Cons of Beneficial Ownership

Pros

Allows stockholders to control their shares and receive dividends without actually registering in their name.
Can be a convenient way to manage large numbers of assets.

Cons

For securities, all communication and dividends must pass through the broker.
Shell companies can sometimes be used to conceal the identity of the beneficial owners for unethical purposes.

What Is the Beneficial Ownership Rule?

In banking, the Beneficial Ownership Rule is a regulatory requirement for banks to collect information on the beneficial ownership of an account at the time that the account is opened. This is intended to prevent money laundering and tax evasion by identifying the actual owners of the legal entity that opens an account.

How Do You Determine Beneficial Ownership?

In banking, beneficial ownership is determined based on ownership and control of the legal entity in question. Ownership means any person with more than 25% equity in the legal entity, and control means any individual with significant decision-making responsibility, such as a CEO or CFO.

Who Is Exempt from the Beneficial Ownership Rule?

Certain types of entities do not need to provide identifying information under the beneficial ownership rule. These include sole proprietorships, certain trusts, non-account ownership, and (in the case of credit cards) authorized users who are not the actual owners of the cards.

Who Is the Beneficial Owner of a Charity or Nonprofit?

For charities and nonprofits, the beneficial ownership rule does not apply to those with over 25% of the company, because these entities do not typically have percentage-based controlling interests. However, they must still disclose the information of any executive or officer who has significant control over the company.

Who Is the Beneficial Owner of an Irrevocable Trust?

When it comes to trusts, beneficial ownership information includes information on the settlor, trustees, protector, beneficiaries, and any other person exercising ultimate control over a trust. If a trust owns 25% or more of a corporation or legal entity, the trustee(s) of that trust are considered beneficial owners of the corporation.

The Bottom Line

Beneficial ownership allows someone to benefit from assets that are actually held in the name of a company or other legal entity. This is most common for securities, which are typically registered with a broker where the beneficial owners are their customers.

In banking, the beneficial owners of a legal entity are those individuals who have a large equity interest or control over the entity's financials. Banks are required to collect this information in order to prevent money laundering.