Definition
In the context of Anti-Money Laundering (AML), a Legal Person refers to any entity other than a natural person (a human being) that has legal capacity recognized by law. This includes corporations, companies, partnerships, organizations, trusts, and other entities that can own property, incur liabilities, and enter into contracts independently of the individuals who own or control them. AML frameworks define Legal Persons specifically to identify and regulate these entities to prevent misuse in money laundering and terrorist financing.
Purpose and Regulatory Basis
Role in AML
Legal Persons are critical in AML because they can be used to obscure the true ownership and control behind financial transactions, facilitating money laundering, terrorist financing, and other illicit activities. Criminals often use complex structures of Legal Persons to hide beneficial owners, launder illicit proceeds, or evade sanctions. Therefore, AML regulations require the identification, verification, and ongoing monitoring of Legal Persons and their beneficial ownership.
Key Global and National Regulations
- Financial Action Task Force (FATF): Sets international AML standards, emphasizing the need for transparency in Legal Persons, beneficial ownership identification, and public availability of relevant information.
- USA PATRIOT Act: Requires financial institutions to identify the beneficial owners of Legal Persons opening accounts and perform enhanced due diligence to prevent misuse in terrorism financing and money laundering.
- European Union Anti-Money Laundering Directives (AMLD): Mandate member states to maintain registers of beneficial ownership for Legal Persons and enforce transparency measures.
- Other national laws typically mirror or expand upon these requirements to ensure Legal Persons cannot operate anonymously or without scrutiny.
When and How it Applies
Real-World Use Cases and Triggers
- Corporate Account Opening: Financial institutions must verify the identity of Legal Persons and their beneficial owners before account opening to comply with CDD (Customer Due Diligence) requirements.
- Cross-Border Transactions: AML screening is essential when Legal Persons are involved in international trade or financial transfers, where layered ownership can mask illicit funds.
- Sanctions Screening: Legal Persons are screened against sanctions lists to prevent them from facilitating prohibited financial activities.
- Risk Assessments: Regulators may require enhanced review of Legal Persons that exhibit risk factors such as complex ownership, offshore incorporation, or involvement in high-risk sectors.
Examples include shell companies used to launder money through fake invoices or firms exploited to circumvent sanctions by obscuring ownership.
Types or Variants of Legal Persons
Legal Persons encompass diverse forms depending on jurisdiction and regulatory frameworks:
| Type | Description | Example |
| Corporations/Companies | Entities incorporated under company law with legal identity separate from shareholders | Private limited companies, public limited companies |
| Partnerships | Entities formed by two or more persons agreeing to share profits and liabilities | LLPs (Limited Liability Partnerships) |
| Trusts and Foundations | Legal arrangements where trustees hold and manage assets for beneficiaries | Family trusts, charitable foundations |
| Associations | Groups formed for a common purpose without profit motive | Non-profit organizations, clubs |
| State-Owned Enterprises | Legal Persons owned or controlled by governments | National oil companies |
| Shell Companies | Legal Persons with no significant operations, often used to hold assets or conduct transactions for concealment | Offshore companies creating complex structures |
These types differ in governance, ownership transparency, and susceptibility to misuse.
Procedures and Implementation
Steps for Compliance by Financial Institutions
- Identification and Verification: Collect and verify company documentation (articles of incorporation, registration certificates) and identify beneficial owners who ultimately control or own the Legal Person.
- Due Diligence: Conduct Customer Due Diligence (CDD), including understanding the nature and purpose of the Legal Person’s business.
- Risk Assessment: Assign risk profiles based on ownership complexity, jurisdiction, business sector, and past adverse information.
- Ongoing Monitoring: Continuously monitor transactions and update information on the Legal Person and beneficial owners.
- Record-Keeping: Maintain records of identification, transaction histories, and suspicious activity reports (SARs).
- Reporting: File Suspicious Transaction Reports to Financial Intelligence Units (FIUs) when red flags emerge related to Legal Persons.
- Training and Controls: Implement internal controls and provide staff AML training focused on identifying risks from Legal Persons.
Institutions often deploy AML software systems to automate screening and flag high-risk Legal Persons and ownership structures.
Impact on Customers/Clients
From a customer perspective, Legal Persons face:
- Verification Requirements: Clients must provide detailed documentation about their entity and disclose beneficial owners.
- Restrictions and Enhanced Scrutiny: Complex ownership or offshore jurisdiction Legal Persons trigger enhanced due diligence, potentially delaying onboarding or transaction approval.
- Transparency Obligations: Legal Persons may be obliged to report changes in ownership or control to regulators.
- Relationship Management: Ongoing monitoring means clients must be responsive to compliance inquiries, impacting operational flexibility.
- Privacy Concerns: Balancing transparency with confidentiality of commercial and personal information is a sensitivity area.
Duration, Review, and Resolution
- Duration: AML obligations on Legal Persons are ongoing as long as the entity exists and maintains financial relationships.
- Periodic Reviews: Institutions review their clients’ Legal Persons periodically, adjusting risk profiles and verifying updated information, often annually or triggered by material changes.
- Resolution: If misuse or suspicious activity is detected, institutions may terminate business relationships, freeze accounts, and refer cases to authorities. Legal Persons may be dissolved or face legal action.
Reporting and Compliance Duties
Institutions must:
- Report suspicious transactions linked to Legal Persons promptly.
- Maintain accurate records of Legal Persons and beneficial ownership.
- Ensure compliance with local and international AML regulations.
- Cooperate with regulators and law enforcement in investigations involving Legal Persons.
- Face penalties such as fines, sanctions, or reputational damage for non-compliance.
Regulators also require institutions to audit AML programs and demonstrate due diligence in managing Legal Person risks.
Related AML Terms
- Beneficial Owner: The natural person(s) who ultimately control or benefit from a Legal Person.
- Customer Due Diligence (CDD): The process of identifying and verifying Legal Persons and beneficial owners.
- Shell Company: A Legal Person used primarily to conceal ownership or facilitate illicit transactions.
- Trust and Company Service Providers (TCSPs): Intermediaries who form and manage Legal Persons.
- Suspicious Activity Report (SAR): Reports filed on suspicious transactions involving Legal Persons.
Understanding Legal Persons is foundational to these and other AML concepts.
Challenges and Best Practices
Common Challenges
- Complex Ownership Structures: Chains of ownership across jurisdictions that obscure beneficial owners.
- Professional Secrecy and Legal Privileges: Gatekeepers such as lawyers or bankers may withhold information under professional secrecy.
- Lack of Transparency: Absence or inaccuracy of registers on Legal Persons.
- Multijurisdictional Coordination: Difficulties in obtaining ownership information when Legal Persons operate internationally.
- High-Risk Jurisdictions: Use of offshore financial centers that provide anonymity.
Best Practices
- Maintain updated, centralized registers of Legal Persons and beneficial owners.
- Collaborate internationally for information sharing and enforcement.
- Utilize technology solutions for enhanced due diligence and monitoring.
- Engage gatekeepers and professional intermediaries as partners in transparency.
- Implement risk-based approaches focusing resources on higher-risk Legal Persons.
Recent Developments
- Expansion of public beneficial ownership registries globally following FATF calls for transparency.
- Increasing use of technology such as blockchain analytics and AI to detect suspicious Legal Person structures.
- Enhanced regulation of TCSPs to curb misuse.
- Greater scrutiny of complex trust arrangements and foundations.
- New regulations expanding AML obligations on Legal Persons under recent AMLD versions and updates to the USA PATRIOT Act.
These trends aim to close gaps exploited by criminals and improve financial system integrity.