Circular ownership and Beneficial Owners
Circular ownership makes it difficult and not intuitive to calculate who are the Beneficial Owners of a company. The challenge of circular ownership in AML has been known for some years, and most experienced AML analysts and AML vendors are familiar with the challenge.
However, it is worth revisiting the topic from time to time, because of its importance.
The challenge can be summarized as follows: Circular ownership creates a difference between direct ownership and the integrated/indirect ownership, and this difference makes it hard to understand who is actually a Beneficial Owner.
A couple of examples illustrate the challenge
The example above is the ownership structure of an anonymized Swiss company. The ownership structure has several cases of circular- and cross ownership, and it is not easy to manually assess whether the two individuals are Beneficial Owners.
If you use a traditional bottom-up approach, to see whether there are links above 25% in every step between the subject company and the individuals, you will conclude that the company has no Beneficial Owners.
The fact is that Jonas Jacobsen has an integrated-/indirect ownership of 85.8% and should be declared a Beneficial Owner.
A smaller, cleaner example makes it easier to grasp the challenge.
This is the ownership structure of an anonymized Czech company.
The example is complete (there is not any missing ownership data), and there is an individual on the top. Intuitively, she has to be a Beneficial Owner. However, her direct ownership is only 2.35%. A lot of commercial services will say that this company has no Beneficial Owners.
The circular ownership between the three companies creates self-ownership. The green box owns itself indirectly by 97.65%. The effect is that the direct ownership of the individual is 2.35%, but her indirect/integrated ownership in the green box is 100%. She should be declared a Beneficial Owner.
Most AML legislations demand that the obliged entities understand the ownership- and control structures of their clients. An obliged entity will have to understand circular ownership to say that it understands their clients’ ownership structures.
If you want to discuss circular ownership, or other cases of ownership analytics, please contact T-rank.
Arne Petter Omholt, apo@trank.no, +47 928 45 233