Defining and capturing information on the beneficial ownership of investment funds

  • Publication date: 28 March 2024
  • Authors: Ramandeep Kaur Chhina, Alanna Markle

Policy and regulatory framework on the beneficial ownership transparency of investment funds

The cases above suggest that regulatory requirements may be falling short of effectively mitigating the risks of investment funds becoming instruments for financial crime and other forms of misuse. The question remains as to whether current BOT requirements for investment funds are appropriate: firstly, to understand how they are owned, controlled, and used to derive benefit; and secondly, to help prevent their misuse, as part of the broader regulatory framework. There is a need to better identify weaknesses in the BOT framework set out by current international standards that could be exploited by criminals. To address these issues, this section considers how well international standards apply to investment funds, and assesses whether current frameworks on BOT for investment funds are appropriate and adequate, and how they can complement broader regulatory frameworks.

Applying internationally established definitions of beneficial ownership to investment funds

International standards do not contain a specific definition of beneficial owners of investment funds. Therefore, it is important to understand how the notion of beneficial ownership should be applied to investment funds, which enable natural persons to own, control, and benefit from assets. This lack of a standard definition is potentially due to the fact that BOT reforms have so far largely focused on limited liability companies, and this focus has shaped the legal definitions that have emerged to best fit their mould. However, as BOT is being applied to an increasing number of corporate vehicles, there is a need to constantly reassess what BO means as a substantive concept when applied to other entities and arrangements, such as trusts, state-owned enterprises (SOEs), PLCs, and investment funds. [47]

The FATF is the global standard-setting body for AML, including for the disclosure of BOI. Many jurisdictions take the FATF’s Recommendations into consideration when legislating for and defining beneficial ownership. The definition recommended by the FATF can be taken as a useful working hypothesis for understanding what beneficial ownership may look like in a particular jurisdiction and how it can be applied to investment funds. As discussed, investment funds can be organised in a variety of legal forms. To identify reportable beneficial owners of investment funds under the definitions set out by the FATF, the first consideration is whether a fund is a legal entity or arrangement.

Beyond the FATF, institutions such as the World Bank point to the need to consider a broad, substantive definition and adopt an open-minded approach that takes all economic realities into account when setting out and applying the definition of beneficial ownership, as well as a variety of potential policy aims. [48] Therefore, this section also considers how to treat investment funds under a broader, substantive definition of beneficial ownership that includes the concept of benefiting from corporate vehicles. Certain countries have already included being able to benefit from corporate vehicles in their definition. Some civil society organisations have argued that the concept of “benefitting from” should be included explicitly as a third prong in the definition of beneficial ownership in international standards, including AML standards. [49]

Investment funds organised as legal entities

Legal entities, referred to as legal persons by the FATF, are corporate vehicles with a separate legal personality. This means a legal entity can do many of the things a natural person can do in law in its own name, such as owning assets, entering into contracts, and acquiring debt. Forms of companies, such as corporations and limited liability companies, are the most common type of legal entities. In countries where limited partnerships – or other forms of partnerships that may be used for investment – have a separate legal personality, the considerations for how to apply the definition of the beneficial ownership of legal entities will also be applicable to investment funds organised in this way.

According to the FATF recommendations, “in the context of legal persons, beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person”. [50] BOI should be collected in a government register as well as by obliged entities, such as banks and financial service providers, which are also required to identify and verify the identity of the beneficial owners of a legal person as part of their CDD.

The FATF provides guidance for actors conducting CDD to apply a three-step or cascading approach, which is instructive in nature, to identify the beneficial owners of a legal entity in practice: first, by identifying any natural person(s) with a controlling ownership interest; second, if the ownership interest is so diversified that there are no natural persons exercising control in this manner, by reporting natural persons exercising control of the entity through other means; and third, where no natural person is identified via the above means, by identifying the relevant natural person who holds the position of senior managing official. [51] The cascading approach is seen as less comprehensive than BO definitions for disclosure to central registers because if the party conducting CDD identifies individuals under the first test, there is no obligation to continue unless they have doubts after the first step, thereby some beneficial owners may not be reported.

Take the example of UCITS or other commercially available retail funds. One of the key features of these funds is a large distribution network that often extends across borders, making it possible for a very large number of natural persons to hold their units as investments. These persons are all benefitting from the fund, but in many cases they are unlikely to qualify as reportable beneficial owners under a legal definition based on AML standards. This is for several reasons:

  • First, it may be difficult to find investors holding a percentage of shares in such funds that exceed the jurisdiction’s legal threshold for reportable beneficial ownership. A commonly used threshold is 25% or more of share ownership or voting rights, [52] but shareholding in retail funds is usually very small, for instance down to fractions of a percentage. In addition, due to the presence of intermediaries (see Box 1), it may not be feasible to establish the aggregate ownership of a single beneficial owner through multiple shareholdings.
  • Second, the ownership of a fund can change intraday, with the aggregate levels of percentage ownership potentially changing through no action of a given investor, but through other investors subscribing or redeeming their holdings and thus changing the percentages held by all parties. It will be challenging and impractical to track such passive changes in beneficial ownership held by each shareholder in both absolute and relative terms, let alone to track such changes through to an intermediary’s customer.
  • Third, it may not be appropriate or practical to consider natural persons holding only a few shares of a UCITS or other commercial fund via an intermediary to be reportable beneficial owners. The underlying customers of the intermediary – the investors in the fund – have no direct relationship with the investment fund, which makes it infeasible for them to have a controlling ownership or significant influence over the daily activities of a fund.

Due to these factors, if the standard CDD approach is applied, it will likely result in the failure to identify any natural person with significant ownership or control held via investment interests. Instead, it would most often identify fund managers, being senior officials, as beneficial owners. The manager’s identity may also be on record via other regulatory obligations, for instance as an authorised signatory, approved person, or director. Therefore, beyond identifying fund managers, applying a standard CDD approach may not lead to the identification of any beneficial owners of investment funds organised as legal entities.

This presents a challenge for covering investment funds in central registers because in many countries senior officials may be explicitly excluded from the definition of the beneficial ownership of legal entities for the purposes of disclosure to a central register. As a result, it is highly likely that central BO registers requiring investment funds to register their beneficial owners find that no one is identified or registered as such. This can be observed in established BO registers that include BO declarations on corporate vehicles operating as investment funds, for instance in Luxembourg (Box 6).

Box 6. Undeclared beneficial owners of investment funds – Luxembourg

Luxembourg’s BOT regime covers a wide range of corporate vehicles that facilitate the ownership and control of assets within its scope. The Luxembourg Register of Beneficial Owners (Registre des Bénéficiaires Effectifs, or RBE) requires all entities that are registered with the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés, or RCS) to disclose and regularly update information on their beneficial owners. This encompasses companies and partnerships, whether regulated or not, including Luxembourg investment funds such as UCITS and other types of alternative investment funds. [53]

Luxembourg is home to the largest number of investment funds in Europe, the second largest in the world after the US. Despite the requirement for investment funds to disclose their BOI to the RBE, a report published by Transparency International noted that 81% of the 16,777 investment funds registered did not declare any beneficial owners. [54] The report notes that this is most likely due to their inability to identify any beneficial owners according to Luxembourg’s statutes.

The legal definition is taken from the amended law of 12 November 2004 on the fight against money laundering and terrorism financing, which defines a beneficial owner as “any natural person who ultimately owns or controls the customer or any natural person on whose behalf a transaction or activity is being conducted”. [55] It is, in other words, identical to the FATF recommendations as well as being aligned to the EU’s 5th Anti-money Laundering Directive, and is not tailored to investment funds. The report recommends that the register takes steps to review the definition to ensure that “all beneficiaries of investment funds – the real natural persons who are the end-investors – are accurately identified, disclosed and recorded in the [RBE]”. [56]

Investment funds organised as legal arrangements

Parties can establish legal arrangements to govern their relationship in pursuit of a common purpose or to create rights and obligations with respect to specified assets. A trust is a legal arrangement typical to common law systems and has uses including creating a fiduciary obligation and oversight when transferring assets, for example, for estate planning or charitable donations. [57] Arrangements do not typically have a separate legal personality. [58]

For trusts or similar arrangements, international standards, including the FATF, define all parties, that is, settlor(s), trustee(s), protector(s), (likely) beneficiaries – including any individual that exercises significant control, or is likely to benefit – as beneficial owners. [59] For other arrangements similar to trusts, this includes the natural person(s) holding equivalent or similar positions, as in trusts. [60]

This approach of identifying all parties as beneficial owners has been taken particularly due to the flexibility and opacity of legal arrangements, which sometimes make it difficult to establish who benefits from or exercises control over an arrangement. In jurisdictions where investment funds are organised as arrangements, this FATF definition could lead to comprehensively identifying all parties who own, control, and benefit from investment funds. [61]

For example, private investment funds are usually arranged in the form of limited partnerships or trusts. In these cases, one party is generally in charge of managing the fund (e.g. a general partner or a trustee), whilst investors (e.g. limited partners, or settlors and beneficiaries) provide funds for investment without having day-to-day control over the investment and other decision making. If limited partnerships and trusts are not considered legal entities in a jurisdiction, the definition of the beneficial ownership of trusts and other legal arrangements could be applied to a private investment fund: identifying all the parties as beneficial owners.

However, this is dependent on whether a regime’s disclosure requirements comprehensively cover all forms of arrangements, including domestic and foreign trusts, limited partnerships, and trust-like arrangements, as discussed below. It also depends on whether any thresholds are adopted based on interests held in the trust, as has been done in the Republic of Ireland (Box 7).

Box 7. Coverage of investment funds in the EU – Republic of Ireland

In Ireland, the Statutory Instrument No. 233/2020 on the Registration of Beneficial Ownership of Certain Financial Vehicles Regulations 2020 [62] (hereinafter the “Regulations”) applies BO disclosure requirements, with some exceptions, to an “applicable financial vehicle”, which is defined as including an Irish Collective Asset-Management Vehicle (ICAV) and an investment fund established as a unit trust. Generally, a unit trust is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Investors receive units or shares in the unit trust that represent their proportional ownership in the fund. The value of these units may fluctuate based on the performance of the underlying assets. [63] Both ICAVs and unit trust funds are required to file their BOI with the Central Bank of Ireland (as registrar) for inclusion on the Register of Beneficial Ownership of Certain Financial Vehicles.

With regards to unit trust funds, the Regulations prescribe a threshold for the purposes of identifying a beneficial owner. According to the Regulations, a beneficial owner of a financial vehicle that is a unit trust (which also covers UCITS within its scope) is: a natural person who owns or is ultimately entitled to control more than 25% of the units in the trust; or any other natural person exercising ultimate control of the trust by direct or indirect ownership, or by other means, which includes trustee and settlor. The requirement to include the details of senior managing officials (such as directors of the management company) where no beneficial owner can be identified does not apply to unit trust funds.

Although the Republic of Ireland has covered investment funds within the scope of its BOT regime to comply with the EU’s 5th Anti-money Laundering Directive, it is highly unlikely that anyone would be identified and reported as beneficial owner(s) of such funds (whether ICAV or unit trusts) by meeting the required threshold of more than 25%, as discussed above, or by being a natural person(s) exercising control over the trust by other means. In the case of Ireland, the Regulations also appear to have limited the meaning of “control by other means” to the identification of a trustee and settlor whilst excluding beneficiaries or class of beneficiaries from within the scope of this definition.

Including deriving benefit in the definition of beneficial ownership

Incorporating the concept of deriving benefit into legal definitions for the beneficial ownership of legal entities, rather than considering only ownership and control, may strengthen how definitions can be practically applied to investment funds. As Transparency International notes, “the very concept of an investment fund provides that the individuals investing in the fund and financially benefiting from it are not the same as those controlling the fund and making decisions on the types of investments, among others”. [64] The FATF does not explicitly include deriving economic benefit as one of the criteria to identify a beneficial owner of legal entities. In jurisdictions that opt for a narrow interpretation of this definition in their legislation, it is unlikely that investment funds will identify any individuals that meet these criteria as beneficial owners (see Box 7).

Some experts have argued that interpreting the FATF recommendations to include a natural person who benefits from a legal person in a jurisdiction’s BO definition is consistent with their language and purpose, and reflects a more holistic approach to their application in national legislation. [65] Failing to include deriving economic benefit leaves a gap in BO reporting frameworks that can be exploited, for example, enabling criminal organisations to benefit from capital gains on illicit funds via professionally managed investment funds. Therefore, remaining bound to a literal definition based on the FATF requirements is likely to be insufficient to achieve a number of policy aims, including AML, if no information is captured through complementary regulatory measures.

Furthermore, the concept of “benefitting from” is clearly included in the definition of beneficial ownership for legal arrangements, as beneficiaries are considered beneficial owners. As trusts can be run as businesses, and companies can also be primarily family affairs, many argue for parity between entities and arrangements, and to simply treat both under the umbrella term “corporate vehicles”. [66]

Several jurisdictions have already used a definition of beneficial ownership for legal entities that explicitly includes the concept of benefit within its scope. Countries such as Colombia, Czech Republic, El Salvador, Ghana, India, Indonesia, Japan, the Netherlands, and Slovakia have provided that beneficial owners include individual(s) who have rights to economic benefit from an entity. In these cases, the ability to benefit from a corporate vehicle is not necessarily tied to ownership of shares. It can include, for example, receipt of dividends, profits, and enjoyment of assets.

A provision like Ghana’s which includes the enjoyment of direct and indirect benefit outside of shareholding may allow implementers to capture a fuller picture of ownership and benefit in investment funds and other corporate vehicles (Box 8). It may also help prevent disclosure avoidance through the decoupling of ownership and voting rights, which is discussed below. There is also precedent in the definition of beneficial ownership as applied to PLCs, where the main focus has typically been on enjoyment of economic benefit rather than on control. [67]

Box 8. Legal definition including the derivation of benefit – Ghana

The Ghana Companies Act of 2019 includes the receipt of substantial economic benefits in its definition:

“‘beneficial owner’ means an individual

(a) who directly or indirectly ultimately owns or exercises substantial control over a person or company;

(b) who has a substantial economic interest in or receives substantial economic benefits from a company whether acting alone or together with other persons;

(c) on whose behalf a transaction is conducted; or

(d) who exercises significant control or influence over a legal person or legal arrangement through a formal or informal agreement” [68]

Are beneficial ownership transparency requirements for investment funds sufficient?

As the discussion on applying international standards for the definition of beneficial ownership suggests, current BOT requirements fall short of effectively capturing information on who ultimately owns, controls, and benefits from investment funds through those requirements. They may be insufficient to ensure effective transparency and oversight of investment funds for several reasons, as outlined below.

Thresholds in existing definitions may create a reporting gap

Common thresholds used in BO definitions for entities will likely result in a gap in the BO disclosure requirements for investment funds that could be exploited. This risk seems especially acute for private investment funds. For instance, a number of small private investment companies might be established to hold less than the prescribed threshold in an investment fund to avoid becoming reportable beneficial owners. To make the structure more complex, these investment companies might all be controlled by a master trust controlled by a criminal, however, due to the involvement of various intermediaries in the process, it will be difficult to determine this indirect ownership or control via other means. Although this is a common tactic recognised among all legal entities to avoid detection in the failure to disclose, it becomes even more challenging in the case of investment funds due to their shareholdings being particularly small and their use of intermediaries.

One strategy could be to use a risk-based approach to setting thresholds, such as analysing a corporate vehicle’s turnover or assets under management and setting differential thresholds in which the higher the value, the lower the percentage reporting threshold becomes. Lower thresholds are commonly recommended in cases where corporate vehicles that are higher risk, such as those operating in the extractives sector, [69] and are used for PLCs. [70] The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has considered an approach along these lines for AML requirements for investment funds, which contemplates requiring registered investment advisers with more than USD 100 million in assets under management (who are not subject to other exemptions) to establish AML programmes, and that they begin submitting suspicious activity reports (SARs) to law enforcement and establish certain record-keeping and reporting practices. [71] Whilst this approach targets CDD regulations, it could also be applied to BO disclosure to a central register. CDD measures for investment funds could also form part of a broader regulatory approach.

Reporting senior managers is part of but does not replace full beneficial ownership information

In the context of AML standards, if no natural person is identified as the beneficial owner of an investment fund through ownership and control (e.g. via voting rights), senior managing officials may then be identified and reported as beneficial owners, since they have control over the management of the fund. This approach has been adopted by certain central registers. For example, in Denmark the BO guidance provides that if an investment fund has no beneficial owners or no beneficial owners are identified by applying the legal definition of beneficial ownership, the members of the investment fund’s board of directors or management must be recorded as beneficial owners with the Danish Business Authority. [72]

Moreover, there is an argument for always including fund managers in BO disclosures for investment funds, even where other beneficial owners are also identified, due to their unique control relationship to these corporate vehicles. This is consistent with recommendations about how to effectively implement BOT for SOEs. In any SOE, it is always recommended to capture information about the state or state agency involved in its management, in addition to the usual information required about natural persons, to be able to comprehensively understand their ownership and control. [73]

Since many jurisdictions explicitly exclude senior management from the definitions of the beneficial ownership of legal entities obliged to report to a central register, it may be necessary to create a BO definition specifically for investment funds in primary or secondary legislation that allows them to be reported. This measure can be considered alongside registration requirements. For example, all funds could be required to have a licensed or registered management professional and reference to the location of this information made in the BO register. Or, where permitted, disclosures of the fund manager could apply to the BO register if they are unregistered or unlicensed (see Box 10).

However, the identification of only senior officials as beneficial owners may defeat the purpose of identifying who ultimately owns or controls an investment fund for many policy aims. Therefore, whilst practical, this approach should be used only after the legal definition of beneficial ownership – as specified in international standards – is reconsidered and ideally made fit for the purpose of investment funds in each jurisdiction’s context. To ensure that BOI is not limited to senior managers, it may be necessary to lower the threshold, to incorporate the concept of “benefitting from” into the BO definition, or both. However, this should be balanced against the practical considerations that can complicate BO reporting for investment funds and existing disclosure requirements.

For instance, documented cases suggest that the risk of misuse of retail funds, such as mutual funds, is lower than that of private funds, regardless of their form of incorporation. Setting very low thresholds to identify a large number of beneficial owners of a retail fund based on controlling ownership and benefit by a fund’s investors may therefore have limited utility in mitigating risks of misuse. Other mechanisms such as SARs and KYC/CDD checks by obliged entities may be as effective for AML oversight, for example to detect whether the bank account a customer uses to invest in a commercial contains funds from questionable origins. In contrast, given higher risk of misuse among private funds, making all parties of such funds reportable as beneficial owners may be a more straightforward and proportionate solution.

Separating ownership, benefit, and control creates ambiguity

Corporate law historically made voting power proportional to economic ownership. The core principle is that when economic power equates voting power, it will naturally lead to the best possible decisions being made to secure or optimise a shareholder’s economic interests. [74] However, certain mechanisms now allow for the separation of ownership from control, especially voting rights. Arguably, the ability to separate certain rights traditionally associated with ownership of corporate vehicles is something that BOT aims to provide better visibility over. This is a consideration for developing a substantive definition of beneficial ownership that includes deriving benefit, and is relevant for investment funds.

The phenomenon of separating ownership from control has been referred to as morphable ownership. It has in the past allowed for the avoidance of large shareholder disclosures and has affected takeover battles and control of public companies in multiple countries. [75] It is less clear whether morphable ownership through investment funds is being used to avoid BO disclosures to central registers, but it is possible; more research is needed. Financial interest can be severed from legal ownership through means of arrangements, such as loan agreements, call option agreements, pledge agreements, licensing agreements, and power of attorney. These commercial transactions are often confidential and are prime examples of instruments that can be exploited for ownership fronting: the undisclosed or unlawful use of a nominee in place of a true ultimate beneficial owner.

This precedent in corporate law may also help explain the reasoning behind the FATF’s tiered approach for determining beneficial owners of legal entities in CDD: the first is any natural person(s) with a controlling ownership interest, and the remaining tiers continue to focus on control, whilst eschewing other forms of financial interest that allow for deriving benefit. It also points to why a definition based on global AML standards can fall short when applied to investment funds, which offer a means by which significant economic benefit can be enjoyed without a natural person maintaining direct control over investment decisions.

Hedge funds, a type of private investment fund, are a key example. Derivative markets have made it possible for investors in hedge funds to separate the ownership and voting interest attached to shares between multiple individuals or institutions. For example, two actors may use a swap to shift the voting rights attached to certain shares to one investor, whilst the original shareholder maintains economic benefit. In this situation, the investor is essentially borrowing the voting rights, whilst the person holding the economic benefit could avoid being identified under CDD checks as a beneficial owner because they do not actively have control. [76] Similarly, the frequent use of the limited partnership form for investment funds is in part due to the ability to have limited partners who are passive investors receiving benefit without exercising control, the arrangement of which depends upon the partnership’s specific contract.

The regulation of derivatives has tightened to some extent since the 2008 financial crisis. For example, it led to the introduction of Swap Execution Facilities in the US, which allow for transparency and provide records and auditable trails of trades. [77] However, such facilities and other regulations are not universal in either the US nor other countries, and more research is needed to better understand how these facilities are or can be used, if at all, in policy areas relevant to BOT, including AML.

Some corporate vehicles may have no disclosure requirements

Whilst most legal entities are covered by BO disclosure requirements in most jurisdictions, a lack of disclosure requirements for legal arrangements may hinder reporting for some investment funds, making them implicitly but not explicitly exempt. For instance, in a number of jurisdictions trusts are considered private arrangements that are not required to be registered with any authority to be legally recognised, unlike companies. Even if they are required to register, the level of information required to be disclosed does not always extend to complete BOI. [78]

Similarly, in the case of investment funds that are organised as limited partnerships, a lack of existing disclosure requirements could be an issue, especially for those jurisdictions where the BO disclosure requirements do not apply to all types of corporate vehicles. Experience in the UK implies that an investment fund that is organised as a limited partnership in a country where some or all limited partnerships do not have a separate legal personality, there may be no requirement to disclose beneficial owners of an investment fund to the BO register. Even in countries where limited partnerships are required to disclose their beneficial owners, there can be gaps in who is disclosed (Box 9).

Box 9. Coverage and reporting obligations for limited partnerships – United Kingdom

In the UK, Scottish Limited Partnerships (SLPs) have a separate legal personality whereas this is not the case for English Limited Partnerships (ELPs). Although both SLPs and ELPs are required to be registered with the Registrar (Companies House) to come into existence, only SLPs are required to disclose their BOI on the central register, the People with Significant Control (PSC) Register. Moreover, in the PSC Register, only general partners of a limited partnership fund vehicle organised as a SLP are required to be registered, and limited partners are only required to be registered if they exercise significant influence or control in their own right, i.e. the enjoyment of benefit does not lead them to being reportable beneficial owners.

In the PSC register, it has been identified that in several instances either intermediaries, such as banks or other companies in the ownership chain that qualify as a “Relevant Legal Entity”, [79] are registered as beneficial owners of investment funds rather than the natural person(s), or no beneficial owners are stated to be identified. [80] The UK tax authority considers assets in funds held by the general partner on behalf of the partnership as held on trust. Therefore, investment funds set up as limited partnerships may be deemed registrable – including the disclosure of their beneficial ownership - to the Trust Registration Service. [81]

Some beneficial ownership disclosure regimes specifically exempt investment funds

A number of countries exempt some or all investment funds from disclosing their BOI to a central register. Many countries treat investment funds in the same way as PLCs for the same public policy reason that there should be a regulator maintaining equivalent information that would be adequate, accurate, and up to date, and that is readily available, when required. [82] However, before taking a decision as to whether or not to grant an exemption to any type of investment funds from BO disclosure requirements, the question of whether existing transparency and reporting requirements are adequate for understanding ownership, control, and derivation of benefit, and what this is intended to be used for, should be considered. For instance, in the US, certain investment funds are exempt from BO disclosure requirements provided they are operated or advised, for example, by a SEC-registered broker-dealer, a SEC-registered investment company, or a SEC-registered investment adviser (Box 10).

Box 10. Beneficial ownership disclosure exemptions for private investment funds – United States

In September 2022, FinCEN issued its first of three final rules (hereafter, the “Final Rules”) implementing the Corporate Transparency Act’s (CTA) requirements to report BOI to FinCEN. The Final Rules have important implications for private investment funds depending on how they are structured, including reporting their BOI to FinCEN. Private fund managers must assess their compliance and reporting requirements under the Final Rules for all the funds they advise. The impact of these rules varies based on factors such as a fund manager’s SEC-registration status, their location, and the type and location of the funds they manage.

In the context of funds, a fund manager (whether an individual or a legal entity) registered with the SEC may be exempt, whilst the fund itself may or may not be. Exemptions apply to funds operated or advised by a bank, Federal or state credit union, SEC-registered broker-dealer, SEC-registered investment company or investment adviser, or venture capital fund adviser. It is worth noting that FinCEN did not create a blanket exemption for state-registered investment advisers. If the fund manager is not SEC-registered and is relying on exemptions like those for private fund advisers, foreign private advisers, or family offices under the Advisers Act, they will not be exempt entities under the CTA requirements.

Moreover, it is possible for a fund manager and the fund to be exempt, whilst the portfolio companies in which the fund invests are not exempt. Portfolio companies wholly owned or controlled by a pooled investment vehicle do not qualify for the subsidiary exemption. Whilst this exemption applies to wholly owned subsidiaries of registered investment companies, it generally does not apply to subsidiaries of private investment funds. Therefore, certain entities, such as blocker entities, feeder fund entities, and similar private investment vehicles are likely to be subject to the CTA reporting requirements.

Private investment funds advised by a registered investment adviser and relying on specific exceptions (i.e. the Section 3(c)(1) or 3(c)(7)) under the Investment Company Act may be exempt, but their subsidiaries may not be. Additionally, if a private investment fund is a real estate vehicle relying on Section 3(c)(5)(c) of the Investment Company Act, it may not be exempt. Finally, fund managers and venture capital firms should include research on beneficial owner reports filed or exemptions claimed by any potential portfolio company investment as part of any diligence process. Once an investment is made, relevant updates must also be filed in a timely manner.

Whilst these exemptions may seem to be reasonable, it is important for policymakers to first determine the extent to which they provide for adequate oversight to achieve the jurisdiction’s policy objectives(s). Consideration should be given to whether BO data about certain investment funds is already available and reasonably accessible from other sources, such as regulated stock exchanges. For example, in the case of investment funds listed on recognised stock exchanges, some of the relevant questions that need to be asked include: what BOI is available from these stock exchanges; how easily this information is accessible; whether the information is kept up to date; and whether the available information is sufficient or adequate to identify beneficial owners. [83]

Furthermore, it is important to determine the extent to which registered investment brokers, companies, or advisors are effectively supervised and monitored in a jurisdiction to ensure that they are complying with their required obligations, including obtaining and maintaining adequate, accurate, and up-to-date BOI. As discussed in this paper, there have been recent cases where investment companies have been involved in hiding the origin of illicit funds and their beneficial owners. [84] Where a fund is buying or selling assets over the counter rather than through regulated exchanges, the risks may be higher, as there are likely to be fewer and less standardised reporting requirements in place.

Finally, as noted above, certain types of investment funds, such as private investment funds that involve a smaller number of investors and often high-net-worth individuals, might be assessed by a country as being more of a risk compared to other types, such as mutual funds. They may also be less subject to oversight under existing AML frameworks. This higher risk related to private investment funds has also been identified in this paper based on the documented cases of misuse of investment funds.


[47] Ramandeep Kaur Chhina, Beneficial ownership transparency of trusts (s.l.: Open Ownership, 2021),; Emma Howard and Stephen Abbott Pugh, Defining and capturing data on the ownership and control of state-owned enterprises (s.l.: Open Ownership, 2023),; Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies.

[48] Emile van der Does de Willebois, Emily M. Halter, Robert A. Harrison, Ji Won Park, and J.C. Sharman, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It (Washington DC: The World Bank, 2011), 29-30,; Tymon Kiepe and Peter Low, Beneficial ownership in law: Definitions and thresholds (s.l.: Open Ownership, 2020),

[49] Adam Hexner, Andres Knobel, and Alexandre Taymans, NEBOT Paper 4: The Beneficial Ownership Definition for Companies – Challenges and Opportunities (s.l.: Civil Society Advancing Beneficial Ownership Transparency, 2023), 14-17,; David Szakonyi and Maíra Martini, In the Dark: Who is behind Luxembourg’s 4.5 trillion-euro investment funds industry? (Berlin: Transparency International, 2021), 8,

[50] Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. The FATF’s definition should also apply to any beneficial owner of a beneficiary under a life or other investment-linked insurance policy. FATF, International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: The FATF Recommendations (Paris: FATF, 2012–23), 120–21,

[51] FATF, The FATF Recommendations, 121.

[52] The recently revised FATF Recommendation 24 has set out (by way of an example) a maximum threshold of 25% to identify the beneficial ownership of legal persons, which is to be determined based on the jurisdiction’s assessment of risk.

[53] “Luxembourg Register of Beneficial Owners – An Update”, Dechert LLP, 12 September 2023,

[54] “Not so open Lux: Authorities in the dark over Luxembourg private investment fund beneficiaries”, Transparency International, 8 February 2021,

[55] Luxembourg Law, “Loi du 10 juillet 2020 instituant un Registre des fiducies et des trusts”, Chapter 1, “Définitions”, Article 1(3), Journal officiel du Grand-Duché de Luxembourg, 13 July 2020,

[56] Szakonyi and Martini, In the Dark, 10.

[57] Ramandeep Kaur Chhina, An introduction to trusts (s.l.: Open Ownership, 2021),

[58] In some jurisdictions, trusts can at times be treated as legal entities. For example, in South Africa trusts are treated like legal persons in contractual relations, various aspects of taxation, and estate planning, despite the theoretical assertion that trusts are not legal persons. See: P.A. Olivier, S. Strydom, and G.P.J. van den Berg, Trust Law and Practice (Durban: LexisNexis South Africa, 2021); Johann Krige and Anneke Wolmarans, An introduction to trusts in South Africa: A beneficial ownership perspective (s.l.: Open Ownership, 2022),

[59] FATF, The FATF Recommendations, 121.

[60] FATF, The FATF Recommendations, 121.

[61] For example, the UK tax authority considers assets in funds held by the general partner on behalf of the partnership as held on trust. Therefore, investment funds set up as limited partnerships may be deemed registrable – including the disclosure of their beneficial ownership – to the Trust Registration Service. See: “Fund managers may urgently need to register express trusts with HMRC”, Osborne Clarke, 23 August 2022,

[62] European Union (Modifications of Statutory Instruments No. 110 of 2019) (Registration of Beneficial Ownership of Certain Financial Vehicles) Regulations 2020.

[63] The Regulations further define “unit trust” to mean “(a) a unit trust scheme within the meaning of the Unit Trusts Act 1990 (No. 37 of 1990), or (b) an undertaking for collective investment in transferable securities (within the meaning of the UCITS Regulations), that is constituted of a unit trust (within the meaning of the UCITS Regulations) and authorised under those Regulations”. Generally, a unit trust is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Investors receive units or shares in the unit trust that represent their proportional ownership in the fund. The value of these units may fluctuate based on the performance of the underlying assets.

[64] Szakonyi and Martini, In the Dark, 8.

[65] Hexner et al., NEBOT Paper 4, 15.

[66] UK Government, “Chapter 2: Enhancing transparency of trust information available on the Register of Overseas Entities”, Transparency of land ownership involving trusts (Closed consultation), Department for Business & Trade, Department for Levelling Up, Housing & Communities, HM Revenue & Customs, and HM Treasury, 27 December 2023,; Open Ownership, Open Ownership Principles for effective beneficial ownership disclosure (s.l.: Open Ownership, 2023),

[67] Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies; Kadie Armstrong and Jack Lord, Beneficial ownership transparency and listed companies (s.l.: Open Ownership, 2020),

[68] Ghana Government, Ghana Companies Act of 2019, Act 992, First Schedule: Definitions, Section 383, 2019, 301,

[69] For example, see: Extractive Industries Transparency Initiative (EITI), EITI Standard 2023 (Oslo: EITI, 2023), 19,

[70] Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies.

[71] Financial Crimes Enforcement Network, “Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers”, Federal Register 80, no. 169, Proposed Rule, 1 September 2015,

[72] See: “Vejledning om reelle ejere”, Erhvervsstyrelsen (Danish Business Authority), 1 November 2017,

[73] Howard and Abbott Pugh, Defining and capturing data on the ownership and control of state-owned enterprises, 8.

[74] Henry T. C. Hu and Bernard S. Black, “The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership”, Southern California Law Review 79, (2006): 811–908, University of Texas Law, Law and Econ Research Paper No. 53,

[75] Hu and Bernard “The New Vote Buying”.

[76] Hu and Bernard “The New Vote Buying”.

[77] Gordon Scott, “Swap Execution Facility (SEF): Definition, Goal and How It Works”, Investopedia, 11 July 2022,

[78] Jurisdictions such as Namibia, South Africa, the UK, and members of the EU register trusts and apply BO disclosure requirements to them.

[79] A legal entity is relevant if it meets any one or more of the five PSC conditions set out in the definition of beneficial ownership and: it keeps its own PSC Register; or it is subject to Chapter 5 of the FCA’s Disclosure and Transparency Rules (DTR5); or it is a company traded on a regulated market in the UK, the European Economic Area, or specified markets in Israel, Japan, Switzerland, and the US.

[80] “DB IMPACT INVESTMENT FUND I, L.P.”, UK Persons with Significant Control Register, last statement dated 23 June 2023,; “DUKE STREET CAPITAL VI FUND INVESTMENT LIMITED PARTNERSHIP”, UK Persons with Significant Control Register, registered 17 January 2006,

[81] Osborne Clarke, “Fund managers may urgently need to register express trusts with HMRC”.

[82] Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies.

[83] Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies.

[84] Kumar, Private Investment Funds in Latin America, 12-15.

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