Beneficial ownership in multi-layer structures: the 25% threshold explained

Why the threshold exists

When a company opens a relationship with a Canadian money services business, the provider verifies more than the company itself. It must find out which people stand behind it. Layered holdings are a well-known way to hide where money comes from or who really benefits from it, so the rules look through the corporate form to the individuals at the end of the chain.

Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations, a reporting entity that verifies an entity must obtain beneficial ownership information. For corporations and most other entities the reference point is 25%. Anyone who directly or indirectly owns or controls 25% or more must be identified. The provider must also understand the ownership, control and structure of the entity as a whole, so the chart matters as much as the list of names.

The figure is a minimum for collection. A provider may ask about smaller holders where its risk assessment calls for it, and many do so for higher-risk sectors or unusual structures.

What the rule asks for

The information a provider must obtain depends on the type of entity in front of it. In broad terms:

• Corporations: the names of all directors, and the names and addresses of every person who directly or indirectly owns or controls 25% or more of the shares.
• Trusts: the names and addresses of all trustees, all known beneficiaries and all settlors.
• Other entities, such as partnerships, foundations and associations: the names and addresses of every person who directly or indirectly owns or controls 25% or more of the entity.
• Every entity: information establishing its ownership, control and structure.

Collection is only the first step. The provider must take reasonable measures to confirm that the information is accurate, keep a record of what it obtained and how it confirmed it, and keep that record for at least five years. Beneficial ownership is also part of ongoing monitoring, so a change in shareholders after onboarding is something the provider will expect to hear about.

Direct and indirect ownership

Direct ownership is the easy case. If a person's name is on the share register of the client company for 30% of the issued shares, that person is a beneficial owner.

Indirect ownership means holding through one or more intermediate entities. The usual method is to multiply the percentages down the chain. If a person owns 50% of a holding company, and that holding company owns 60% of the client, the person's indirect interest in the client is 50% of 60%, which is 30%.

Two further points catch people out:

• Aggregation. Direct and indirect interests are added together. Someone with 5% directly and 22% through a holding company has 27% in total and must be identified.
• Different share classes. Percentages should be worked out on the basis that reflects real economic and voting rights. Where voting shares and non-voting shares are split between different people, the provider will usually want to see both calculations.

Arithmetic is only half of the test, because the rule covers ownership or control. The sections below on control and nominees deal with cases where the numbers alone give the wrong answer.

Worked examples across several layers

The table below sets out illustrative structures. The names are fictional and the examples are simplified to show the method.

Example F is where most disagreements arise. Henry's economic interest is about 20%, yet he decides how the whole 40% block is voted. Because the rule covers control as well as ownership, the safer reading is to identify him, and most providers will.

Trusts inside the chain

A trust has no shareholders, so the percentage test does not translate neatly. When the client itself is a trust, the provider collects the names and addresses of all trustees, all known beneficiaries and all settlors, whatever their economic share.

When a trust sits further up a corporate chain, the first question is whether the trust's indirect holding reaches 25%. In Example G it does. The provider then needs to know who stands behind the trust. In practice that means the trustee, which is often a licensed trust company, the settlor and the beneficiaries. Where a protector or enforcer holds powers such as the right to replace the trustee, providers routinely ask for that person too, because those powers amount to control.

Discretionary trusts raise a particular point. Beneficiaries may be described as a class, such as the settlor's children and remoter issue, rather than named. The provider will want the deed or a certified extract showing how the class is defined, the names of any beneficiaries who have received distributions, and confirmation that the trustee will report when a distribution is made to someone new. A letter of wishes is a private document, but some providers ask to see it, or a summary, for higher-risk relationships.

Control without ownership

Some people control a company without holding many shares. Providers look for the following, and a well-prepared client will disclose them before being asked:

• Shares with enhanced or multiple voting rights, for example a founder who holds 10% of the equity but 60% of the votes.
• Shareholder agreements that give one person a veto over key decisions, or the right to appoint or remove a majority of the board.
• Voting agreements under which several small holders agree to vote together. Where family members or business partners act as a bloc, their combined holding is often treated as one interest.
• Powers of attorney or management agreements that hand day-to-day authority to someone outside the share register.
• Lending or investment arrangements with covenants strong enough to dictate how the company is run.

The test is practical. If a person can decide what the company does, or can block what it wants to do, the provider will usually treat that person as a controller and identify them, even where their shareholding is small or nil.

Nominees and corporate officers

Nominee shareholders and nominee directors are lawful in many jurisdictions and common in international structures. They do not remove the need to identify the person behind them. A provider will ask who the nominee acts for and will expect to see the nominee agreement or declaration of trust that records the arrangement.

The same applies to corporate directors and corporate secretaries. If a company's sole director is another company, the provider will look through that director to the individuals who run it.

Some points to expect:

• A nominee who will not disclose the beneficial owner is a serious obstacle, and many providers will decline the relationship on that ground alone.
• Where a structure uses several nominee layers with no clear commercial reason, the provider will ask why. A good answer, such as privacy for a well-known family or a requirement of a fund's administrator, should be given in writing.
• Where bearer shares still exist under a jurisdiction's law, providers expect evidence that they have been immobilised with a custodian, or converted to registered form, before onboarding.

When no one reaches 25%

Some entities have no individual at or above the threshold. Five equal partners at 20% each is a simple example. A company with a wide shareholder base, or a structure where holdings are diluted through several layers as in Example E, is another.

This does not end the exercise. The provider still records the ownership, control and structure of the entity, and still asks the control questions set out above. Often someone does control the entity in practice, through the board, through a voting agreement or through a management contract, even though no one owns a quarter of it.

Where the analysis genuinely finds no owner or controller at the threshold, the provider records that conclusion, how it reached it and what documents it relied on. It is a legitimate outcome. A provider will often still want identification for the main shareholders below the threshold and for the directors, because its risk assessment may call for it even where the regulations do not.

The most senior managing officer

The regulations contain a fallback. If a provider cannot obtain the beneficial ownership information, or cannot confirm that it is accurate, it must take reasonable measures to verify the identity of the entity's most senior managing officer. That is usually the chief executive or the person who performs that role, such as a managing director.

The fallback comes with a consequence. The provider must treat the entity as high risk and apply enhanced measures. That brings closer monitoring, more frequent reviews and further questions about source of funds and the purpose of transactions.

Clients sometimes see the senior managing officer route as a shortcut. It is better understood as a last resort. A provider that relies on it for a structure that could have been disclosed fully will have to justify that choice, and many will simply decline. The faster path is nearly always to provide the full chart and supporting documents at the outset.

Reasonable measures to confirm

Confirming accuracy is a separate duty from collecting the information. A list of names typed into a form does not confirm anything on its own. Reasonable measures scale with risk, and typically involve some combination of the following:

• Registers of members and registers of directors for each company in the chain, certified by a registered agent or company secretary.
• Certificates of incorporation, good standing and incumbency, recently dated.
• Constitutional documents, shareholder agreements and any documents creating special voting rights.
• Trust deeds, deeds of appointment or retirement of trustees, and any deed adding beneficiaries.
• Searches of public corporate registers where the jurisdiction offers them.
• A signed ownership declaration from a director, cross-checked against the documents.

For a lower-risk local company, a signed declaration supported by a register search may be enough. For a four-layer structure across several offshore jurisdictions, the provider will want primary documents for every layer. Wherever the documents and the declaration disagree, expect the provider to ask until the gap is explained.

Before you act

This article is general information about how beneficial ownership is assessed in Canada. It is not legal advice, and the treatment of a particular structure depends on its documents and facts. If you are setting up or restructuring a holding arrangement, take advice from a lawyer in the relevant jurisdiction.

If you are preparing to open an account, a clear ownership chart showing percentages and voting rights at each layer, with a register for every entity and identification for each person who meets the threshold, will save time on both sides. Our onboarding page explains what CCYFX asks for, and the international companies page covers the structures we commonly see.