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What does beneficial ownership mean for AML compliance

What does Beneficial Ownership mean for law firm AML compliance?

Anti-Money Laundering, Audit, Blogs, Legal Compliance, Regulatory Compliance, Risk Management /

Whether you’re based in the UK or Australia (where our sister firm AML Sorted is based), are a law firm whose areas of law offer corporate and commercial law, you’re going to need to know what Beneficial Ownership means.

The UK and Australian governments and regulatory bodies are pretty clued up on these risks, which is why they’ve brought in some stringent anti-money laundering (AML) regulations. Understanding beneficial ownership information is a central requirement of those regulations, and it’s critical to your firm’s AML compliance and control structures.

Contents

  • Understanding beneficial ownership
  • Definition of an individual PSC of a UK company
  • Definition of a beneficial owner of an overseas entity
  • Examples of concealing beneficial ownership
  • Don’t rely on the corporate veil — lift it
  • Challenge vague answers
  • Document the risk rationale
  • Verify control, not just ownership
  • Watch for layered structures
  • US Legislation News

Understanding beneficial ownership

When we talk about ‘beneficial ownership,’ it’s all about figuring out who really owns or controls something, whether it’s a property or a company. It’s not just about the names on the official paperwork, ie…. the ‘legal owners.’ For specialists like us at Teal Compliance, and AML Sorted, we’re like detectives, digging deeper and deeper until the ownership and control is truly transparent. In another life instead of solicitors and AML compliance experts we’d be investigative journalists!

In the world of property and conveyancing, as an example, we’ve got to identify and check who’s actually pulling the strings and getting any benefit from a property deal, even if they’re not the ones listed on the deeds. Our job in AML compliance is to support you, the law firms and the MLROs, protect your bottom line and your reputation whilst ensuring financial criminals are held to account.

Identifying beneficial owners is really important when we’re trying to stop money laundering because criminals are sneaky. They often hide their dirty money by owning entities that are set up through complicated setups like shell companies and trusts. It makes it really hard for anyone to trace where the money really came from.

In this blog, when we use the acronym PSC, this means person with significant control.

Definition of an individual PSC of a UK company

In accordance with the Economic Crime and Corporate Transparency Act: beneficial ownership (last updated on 1st March 2024) the definition of an individual PSC of a UK company comes under Schedule 1A, where it states that if an individual (“X”) meets one or more of the following conditions in relation to a company (“Y”), they must be registered as a PSC in respect of Y:

  1. X holds, directly or indirectly, more than 25% of the shares in company Y.
  2. X holds, directly or indirectly, more than 25% of the voting rights in company Y.
  3. X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of company Y.
  4. X has the right to exercise, or actually exercises, significant influence or control over company Y.
  5. The trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other specified conditions in relation to company Y, or would do so if they were individuals, and, X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.
    1. If you want to dig deeper into LSAG’s definition of a beneficial owner when it comes to the topic of TRUSTS, law firms should verify settlors, beneficiaries, protectors, and the assets the trust holds (not just the trustee). You can read more under LSAG Section 6.14.12.2) or of course, get in touch with us or become an ASK TEAL client.

Definition of a beneficial owner of an overseas entity

Under paragraph 6 of Schedule 2 to the Economic Crime (Transparency and Enforcement) Act 2022, a person (“X”) is a beneficial owner of an overseas entity or other legal entity (“Y”) if one or more of the following conditions are met:

  1. X holds, directly or indirectly, more than 25% of the shares in Y.
  2. X holds, directly or indirectly, more than 25% of the voting rights in Y.
  3. X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
  4. X has the right to exercise, or actually exercises, significant influence or control over Y.
  5. The trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above in relation to Y, and, X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity. Note: please reference 5.a above for more information on LSAG and trusts.

Examples of concealing beneficial ownership

The National Crime Agency’s (NCA) news page is full of crimes and it’s worth having a read to keep you and your compliance officers on their toes. The agency always says to keep a look out for changes in client circumstances. Are the international sanctions’ listings checked on a daily basis? If your client is an art dealer or auction house and your diligence measures flag up questions over their source of funds on their artwork, get them to check these red flags:

 

  • Attempts to transfer artwork or cultural property ownership to a family member, close contact, business associate or other intermediary, or
  • Attempts to sell artwork or cultural property quickly, or move it to another jurisdiction.

Be especially vigilant when dealing with front or shell companies, or intricate corporate or trust structures that obscure the ultimate beneficial owner. While it’s tempting to prioritise well-paying, existing clients, the heightened focus on combating money laundering means your firm faces significant risk if you’re flagged for inadequate AML compliance by the SRA. 

 

Definition of Beneficial Owners: those that might benefit from their ownership of an entity or asset (eg a company.) You will need to identify and undertake reasonable measures to verify the identity of your clients, especially when dealing with high-risk clients or transactions.

Don’t rely on the corporate veil — lift it

Always identify the natural person(s) behind any legal entities. Shell companies and complex structures can hide risk — dig and keep digging, until you find the ultimate beneficial owner (UBO), not just the named shareholders.

If you are concerned about upsetting your client, find ways of carrying out your due diligence and be specific and clear about what you need at the outset.

Why not provide a list to your client with the information you need and if they push back have the back up to explain the purpose.

You should always ask for their details – see below (where applicable) to support and evidence your AML processes and controls. The SRA and your insurer will thank you for this….

  • Shareholder registers
  • Company structure charts
  • Trust deeds 

Challenge vague answers

Here’s an example of what your MLRO might be up against….

Client: “Oh, the company is owned by a few investors.”

Reply with… “To comply with regulations, we need to identify the individuals who ultimately own or control the company. Could you please provide a list of all shareholders with more than 25% ownership, and details about anyone who has significant control over the company’s decisions? We really want to protect your own interests and this information will support this.”

Document the risk rationale

Keep clear notes on why a client is low, medium, or high risk, especially if beneficial ownership is complex. You’ll thank yourself during audits or inspections.

Our own software, the TEAL TRACKER, supports your documentation and evidence in this regard because it includes a high-risk client register, an undertakings register, incident management tracker, file reviews and more. 

Here’s the framework we are aligning ourselves to, and knowing which legislation your tracking and note taking adhere to will help you and your team.

Money Laundering Regulations 2017: These regulations are the cornerstone of AML compliance in the UK and place a legal obligation on firms to identify beneficial owners.   

Economic Crime (Transparency and Enforcement) Act 2022: This Act introduced the Register of Overseas Entities, further emphasizing the importance of beneficial ownership transparency, especially in relation to UK property.

Proceeds of Crime Act 2002 (POCA): This is the legal backbone of the UK’s fight against money laundering and places stringent obligations on law firms to be vigilant, to have strong AML controls, and to report suspicious activity. 

Companies Act 2006 (in particular Schedule 1A): In this act, it defines “People with Significant Control” (PSCs) for UK companies, which is closely related to the concept of beneficial ownership. 

Verify control, not just ownership

Control can be exercised in various ways, and it’s important to look beyond just shared ownership.

A person can be an ultimate beneficial owner (UBO) if they exercise significant control, even if their shareholding is below 25%, for example when your client is an LLP. Check for influence via voting rights, directorships, or veto powers.

Red flags to be on high alert for include:

Nominee Directors or Shareholders: The use of nominees to hold shares or directorships.

Lack of Transparency: Reluctance to provide information or vague answers about ownership and control.   

Inconsistent Information: Discrepancies between information provided by the client and information from other sources.

Why not do your research and look into their confirmation statements, do they have information on control of beneficial ownership on their websites, or are Board Minutes available to you?

Check on the Registers for Beneficial Owners website, and run a check on the background and relationships of the company’s directors and senior management.

Watch for layered structures

Multiple holding companies across jurisdictions may indicate masking of the truth! You’d want to understand the chain until you reach a human being. We appreciate that layered ownership structures can feel like untangling a particularly tricky ball of wool, but the key is to break it down step by step—each layer tells part of the story.

What would you do in the following scenarios?

  • Multiple Layers of Ownership where ownership is divided across several entities, often spanning different jurisdictions (e.g. Company A owns Company B, which owns Company C, and so on).
  • Use of Shell Companies, which are entities that exist only on paper, with no significant business activities, often used to add layers of ownership without transparency.
  • Circular Ownership, which occurs when entities within the structure own shares in each other, creating a loop that obscures the ultimate beneficial owner (UBO).
  • Offshore Jurisdictions are entities registered in jurisdictions with high levels of secrecy and minimal disclosure requirements are often included to complicate tracking.
  • Nominee Directors or Shareholders (as mentioned above), can be individuals or entities who are listed as directors or shareholders but act on behalf of the true owners without having actual control or interest.
  • Frequent Changes – watch out for regular changes in ownership, directors, or shareholders because these can make it harder to establish a clear picture of control.
  • Trusts and Foundations are legal arrangements that can be used to conceal the identity of the true owners by placing assets under the control of trustees or foundations.

The above structures are often red flags for money laundering, tax evasion, or other illicit activities. In these circumstances, your enhanced due diligence (EDD) measures, such as verifying the identities of beneficial owners and understanding the ownership structure, are crucial to back you and your practice up.

US Legislation News For Information

It’s worth noting that the US has also stepped up its efforts in corporate transparency, introducing new provisions that came into effect on 1st January 2024.  These rules now require certain corporate entities in the States to report information about their beneficial owners.

Much like the corporate transparency legislation we’ve seen introduced in other parts of the world, including our own measures here in the UK, the overarching goal is to make it tougher for those with illicit intentions to conceal their activities behind shell companies or other murky ownership structures. The hope is that this increased transparency around who really owns and controls these entities will be a significant weapon in the ongoing fight against money laundering and the financing of terrorism.

To wrap this article up, the one thing I urge you to remember, is that it’s up to you to take reasonable measures to verify the identity of the beneficial owner.

 

LS beneficial ownership definition

For more information on the Register of Overseas Entities, you can click here to read more. The ROE came into force in the UK on 1 August 2022 through the new Economic Crime (Transparency and Enforcement) Act 2022.

Thanks for reading and if you have any specific questions on this subject or would like to take advantage of our ASK TEAL service, you can get in touch HERE.

 

Tom Hughes

Senior Associate

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SARs - understanding suspicious activity with key insights and reporting tips from Teal Compliance and Amy Bell

SARs – Understanding Suspicious Activity: Key Insights and Reporting Tips

Anti-Money Laundering, Audit, Blogs, Legal Compliance, Regulatory Compliance, Risk Management /

Teal Compliance explains the signs of suspicious activity in law firm compliance and risk management.

Before I kick off this blog, I’m going to remind you (or explain to you if you are new to the role of an MLRO or COLP) what suspicious activity actually means when it comes to law firm compliance and risk management.

In the context of anti-money laundering (AML) compliance, “suspicious activity” refers to behaviour, transactions, or patterns of conduct that give rise to a suspicion that money laundering or other criminal activity might be taking place. 

Persons working in the regulated sector are required under part 7 of the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000, taking into account relevant guidance provided by your regulator, for example the SRA and the Law Society of England and Wales.

If you hold a client account, carry out work in trust and company formation, or offer conveyancing as a legal service, you are more likely to be targeted by financial criminals. Our ASK TEAL service is extremely helpful and supportive for defining suspicious activity, understanding reasonable grounds, inappropriate use, responsibilities of the MLRO / MLCO (depending on size of firm), and the process around reporting economic crime.

To get an idea of the amount of reports submitted, the UK Financial Intelligence Unit (UKFIU) receives over 460,000 SARs per year and stores them in a secure central database.

Before I crack on with more guidance and examples of suspicious activity, here’s a reminder of acronym meanings:

  • SOW – source of wealth
  • SOF – source of funds
  • SAR – suspicious activity report
  • MLRO – money laundering reporting officer
  • MLCO – money laundering compliance officer
  • AML – anti-money laundering
  • CDD – customer due diligence
  • DAML – defence against money laundering

This blog is predominantly for the legal profession and we’re kicking it off with Section 12 of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Regulations), Section 12 definition.

AML Guide: Independent legal professionals/trust/company service providers

So, when we’re talking about ‘independent legal professionals’ in these regulations, what we’re really referring to is a firm or a solo lawyer, you know, someone who’s running their own show, providing legal or notarial services to other people. But, and this is important, it’s specifically when they’re involved in financial or property deals.

 

Think things like:

  • the buying and selling of real estate and property or business entities;
  • Management of client money, securities or assets;
  • the opening or management of bank, savings or securities accounts;
  • anything to do with setting up, running, or managing a company, when money’s involved; or
  • the creation, operation or management of trusts, companies, foundations or similar structures.

When you ever read someone that ‘participates’ in a transaction for these rules, what we’re talking about is if they’re helping out with the planning or actually making the transaction happen. Essentially, if they’re acting for the client in some way during the whole thing. It’s about being involved, not just watching from the sidelines.

And then, when we get to ‘trust or company service provider’ that’s a firm who’s running a business and offering these specific services to clients. Now, the key here is, it’s only when we’re actually providing these services that we fall under that definition. So, basically, if I’m providing these services:

  • forming a firm (The SRA’s definition – forming any entity that, whether or not a legal person, is not an individual and includes a body corporate and a partnership or other unincorporated association)
  • acting, or arranging for another person to act
    • as a director or secretary of a company
    • as a partner of a partnership; or
    • in a similar capacity in relation to other legal persons;
  • providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or any other legal person or legal arrangement; 
  • acting, or arranging for another person to act,
    • as a trustee of an express trust or similar legal arrangement;
    • or a nominee shareholder for a person other than a company whose securities are listed on a regulated market.

Here’s Section 12’s specifics from source READ HERE.

What is the Definition of Suspicious Activity?

So, what exactly counts as ‘suspicion’ in our line of work? 

Well, it’s a lower hurdle than you might think. In the case of R v Da Silva the present standard is set. Lord Justice Longmore said,

“So, probably, ‘knowing’ will not arise and what will arise instead is ‘suspecting’, which is a very different state of mind to knowing. To suspect something, you have a state of mind that is well short of knowing that the matter that you suspect is true. It is an ordinary English word. Members of the jury, if the Crown can show that the defendant said to herself, ‘I suspect that this money is the proceeds of criminal conduct, but it may be, on the other hand, that it is not’, that would fall within the definition of ‘suspicion’. The dictionary definition, which I direct you is relevant to the meaning of the word, is this. The dictionary definition of ‘suspicion’: ‘an act of suspecting, the imagining of something without evidence or on slender evidence, inkling, mistrust’. Therefore, any inkling or fleeting thought that the money being paid into her account 9950 might be the proceeds of criminal conduct will suffice for the offence against her to be proved.”

Essentially, if there’s a possibility, beyond just a far-fetched one, that something’s amiss, you’ve got a reportable suspicion. Of course, a simple ‘gut feeling’ isn’t enough, but if you’re thinking ‘there’s a chance this isn’t right,’ it’s time to take action.

I’m often asked about examples and how far back in the SOF you should be looking at suspicious activity work or actions. The answer is…it depends…because no two clients are the same and no two matters are the same. I’d start by some training on this to begin with, and thereafter have a clear protocol in your policies for firmwide use and follow with proactive controls. Better safe than sorry right?

Suspicious activity may include:

Unusual or inexplicable transactions: Let’s say you’re a conveyancer and your client has passed on admin and payments to a proxy third party. Why? Maybe the purchase price is much higher than current market value. Is your retainer set out £1,000 but they are insistent they’d like to be retained at £10,000? There are a variety of red flags to watch out for here.

Inconsistent behaviour: We would urge you to be on high alert for inconsistent purchaser behaviour in conveyancing or commercial entities. Are they changing key details, are they hard to get hold of, putting off replying to urgent requests? Time to investigate them further!

Deceptive and secretive clients: Got a client that seems evasive? Is the client avoiding questions? Is the client providing incomplete or false information? Why did the client choose your firm?

Exploitation of professional services: You will have been hiding under a rock if you don’t realise that financial criminals target us in the legal services to hide the origins of their illicit funds, i.e. dirty cash. Remember this case of a well paying and long standing corporate client who manipulated their instructing firm and chugged £4.1m through the client account for use of a banking account? The firm was fined £36k by the SRA. Legal Futures article can be read HERE.

A suspicion does not require certainty or concrete proof of money laundering. Instead, it arises when, based on the available information you have, a reasonable person concludes that there is something unusual warranting further investigation.

You’ll no doubt have read the latest cases for firms being fined for breaching AML conditions, like the firm where two partners were fined £50k for offering a banking facility to their wealthy client. In 2023 – 2024 alone, the SRA “submitted 23 SARs, performed 237 proactive inspections, and 258 desk-based reviews, and brought enforcement action against a combined total of 78 firms and individuals.”

This is Teal’s original blog, which has more information to delve into: “AML Definition of Suspicion”

Please note that failure to file a SAR after suspicion is raised is an offence under UK law. You can read the full Law Society guidance HERE.

Key Indicators of Suspicious Activity

The following are some classic examples of what to look out for in terms of red flags.

Unusual Transactions

  • Large, unexpected deposits with no clear explanation.
  • Multiple small transactions that together exceed a threshold.
  • Use of complex legal structures (e.g., trusts, offshore companies) without clear rationale.

Client Behaviour

  • Reluctance to provide identification or supporting documentation.
  • Insistence on confidentiality without clear reason.
  • Clients seeking to use cash for large transactions.

High-Risk Jurisdictions

  • Funds originating from or being sent to high-risk jurisdictions (e.g., countries known for corruption or weak AML controls) 
  • Keep your “Black and grey” lists pinned to your desktop for continued updates.

Conveyancing and Real Estate

  • Over or under valuation of property compared to market norms.
  • Use of funds from unverified sources, particularly cash deposits.

Obligations for Law Firms

Under the AML regime, solicitors and law firms must:

  1. Conduct Customer Due Diligence (CDD): Verify the client’s identity and the source of funds.
  2. Monitor Transactions: Look for unusual patterns or behaviours.
  3. Report Suspicious Activity: File a Suspicious Activity Report (SAR) to the UK Financial Intelligence Unit (FIU) within the National Crime Agency (NCA) if suspicious activity is identified.

Scenarios of Suspicious Activity

Here are some examples that will give you some insights into what and how organised crime can work:

Scenario 1: High-Value Cash Deposit for a Property

A solicitor is instructed by a new client to assist in purchasing a property worth £1.5 million. The client insists on paying £1 million in cash and provides vague explanations for the source of funds. Despite requests for supporting documentation, the client refuses to provide details.

Red Flags: Large cash payment, lack of source-of-funds evidence, and unwillingness to cooperate.

Action: The solicitor would usually file an internal suspicious activity report to their MLRO and then it is the responsibility of the MLRO to decide whether a SAR needs to be made to the NCA.

Scenario 2: Use of Offshore Companies

A client establishes an offshore company and instructs a solicitor to assist with purchasing several properties. The company is registered in a jurisdiction with weak AML controls, and the client is vague about the ultimate beneficial owner (UBO).

Red Flags: Complex structures without legitimate purpose, high-risk jurisdiction, and lack of transparency regarding UBOs.

Action: The solicitor must conduct enhanced due diligence (EDD), request documentation to identify the UBO, and must speak to their MLRO, and then file a SAR if suspicions persist.

Scenario 3: Unusually Structured Payments

Corporate client instructs a law firm to hold funds in a client account as part of a commercial transaction. The funds are received in multiple instalments from unrelated third parties, and the client can’t provide a satisfactory explanation.

Red Flags: Multiple third-party payments, no legitimate business explanation.

Action: Conduct CDD on all parties involved, report to their MLRO, and refuse to proceed if concerns remain, and consider filing a SAR.

Scenario 4: Evasive Client Behaviour

A client seeks advice on setting up a trust but is reluctant to disclose the purpose or the source of the funds. The client requests frequent meetings but provides contradictory information about their income and assets.

Red Flags: Lack of transparency, contradictory information, and attempts to obscure the trust’s purpose.

Action: Ask further questions, verify the information provided, and if suspicions persist, file a SAR.

 

ALWAYS report suspicious activity to your MLRO come what may.

What triggers a suspicious activity report (SAR) in the UK?

Here’s the deal. There are these laws we have to follow, right? Part 7 of the Proceeds of Crime Act (POCA) and the Terrorism Act. Basically, if you’re working in a regulated field – and that’s us – you have to file a Suspicious Activity Report if you have a sniff that someone’s trying to launder money, evade tax or fund terrorism.

If you, as a law firm, suspects that a client’s SOW or SOF is suspicious, you have to:

  • Conduct further inquiries to clarify the situation.
  • Document all findings and decisions.
  • Consider whether to file a Suspicious Activity Report (SAR).

Reporting Suspicious Activity (SAR)

The above triggers would mean then that you, as an MLRO, or compliance officer, overseeing compliance in your firm should report suspicions straight away to the NCA and SRA (if regulated by the SRA) as follows.

National Crime Agency (NCA):

Yes, as a law firm, you are legally required to report suspicious activity to the NCA via a SAR. The NCA has made this easy to do, as they have a secure SAR portal that you can submit a Suspicious Activity Report.

It shouldn’t surprise you that the SAR portal is SECURE.

NCA SAR portal flow chart

Solicitors Regulation Authority (SRA):

While a legal practice has to primarily report suspicious activity to the NCA, it also has obligations to the SRA. Doesn’t everything?!

If the suspicious activity involves a breach of SRA rules or raises concerns about the firm’s compliance, they must report this to the SRA.   

Aligning to the SRA’s guidance, you’ve got to report all serious breaches of the money laundering regulations to them. Schedule 4 (12) of the regulations state that supervisors have to collect all information regarding the number of contraventions of these Regulations committed by supervised persons.

A reminder of what constitutes as a Serious Beach

  • serious or persistent compliance failures involving safeguards designed to prevent money laundering
  • clear risks of money-laundering activity taking place, or
  • where there has been potential loss or harm to businesses or individuals.

ASK TEAL is the perfect support solution and service for you, where our compliance consultants and associates are on hand to guide you through your query. Please find out more HERE.

The SRA has its ETHICS HELPLINE to help if unsure: 0370 606 2577 

Amy's Reminders and Key Takeaways

Further to the Law Society Risk & Compliance Conference 2025, there is a clear requirement for law firms to conduct better and more robust AML protocols. Don’t rely on a template and not tailor it to your clients and areas of work. 

Always conduct thorough CDD and escalate to EDD where necessary.

Please be vigilant about client behaviour, source of funds, and high-risk jurisdictions.

Report suspicions promptly through a SAR, even if it means delaying or refusing a transaction. It’s just not worth the risk.

If there’s one thing I’ve learned in my years working with law and AML, it’s this: meticulous record-keeping is your ultimate defence when demonstrating compliance.

TEAL TRACKER

Suspicious Activity Resources Reminder

When we draft Firm Wide Risk Assessments for clients we also refer to the 2023 amendments which you can read HERE. This amendment was made so that domestic PEPs are treated as lower risk than overseas PEPs, although to be clear, EDD does need to be applied in both instances.

Thanks for reading, and please get in touch with any questions, you know I’m always happy to help.

Amy (with a big dollop of help from Rhiannon!)

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