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FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism

A private bank is onboarding a company whose shares are not listed. The ownership chain shows Holdco A owning 60% of the company, and Holdco A is owned 50% by Ms. Rao and 50% by an unrelated investor. The bank applies a 25% threshold for beneficial ownership. What is the correct approach under sound CDD practice?

The bank must look through the holding company to the natural person. Ms. Rao indirectly owns 30% (60% times 50%), above the 25% threshold, so she must be identified and her identity verified as a beneficial owner. Stopping at the corporate shareholder would not satisfy customer due diligence.

  1. ATreat Holdco A as the beneficial owner and stop, since it holds the largest direct stake
  2. BLook through Holdco A and identify and verify Ms. Rao, who indirectly holds 30%, as a beneficial ownerCorrect
  3. CIgnore Ms. Rao because her direct holding in the company is zero
  4. DIdentify Ms. Rao only if she is also a director of the company

Explanation

Beneficial owners are natural persons who ultimately own or control the customer. Ms. Rao's indirect stake is 60% x 50% = 30%, above the 25% threshold, so she must be identified and verified. Stopping at a legal entity or relying on direct holdings only defeats the look-through requirement.

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