Enhancing financial transparency: A new step to combat money laundering
In a strategic move aimed at strengthening the integrity of the financial system and protecting it from illicit activities, the Saudi Ministry of Commerce has issued a guide on “customer due diligence” and identifying the “beneficial owner.” This guide represents a mandatory practical framework for the commercial sector and aims to close loopholes that criminals might exploit to conceal their identities and the sources of their illicit funds, in accordance with local regulations and international standards for combating money laundering and terrorist financing.
International context and national commitments
The issuance of this guide comes within the framework of the Kingdom of Saudi Arabia’s commitment to implementing the highest international standards in the field of financial transparency. As a member of the Financial Action Task Force (FATF), the Kingdom continuously works to align its legislation with the group’s recommendations, which consider identifying the beneficial owner a cornerstone of any effective anti-money laundering system. Complex legal entities, such as holding companies and trusts, are often exploited as fronts to conceal funds generated from organized crime and corruption, making it essential to identify the natural person who controls or effectively benefits from these entities.
The importance of the measure and its impact on the Saudi economy
The importance of this measure extends beyond security and oversight; it also encompasses strengthening the Kingdom's investment environment in line with the goals of Vision 2030. A transparent and reliable financial system enhances the attractiveness of the Saudi market to both foreign and domestic investors, reduces reputational risks, and ensures a level playing field. Domestically, the guide will contribute to raising awareness and compliance levels among businesses, protecting them from unintentional involvement in suspicious financial transactions and safeguarding the national economy from illicit financial flows.
Who is the true beneficiary and how is it determined?
According to the guide, the “beneficial owner” is defined as the natural person who has or exercises effective and ultimate control, directly or indirectly, over the client or the person on whose behalf the transaction is being conducted. The guide has established clear criteria for identifying this person:
- Ownership standard: Any natural person who owns a controlling ownership stake of 25% or more of the shares or capital of the legal entity is identified.
- Control criterion: If no person meets the ownership percentage, or if there are doubts, the person exercising control is sought through other means, such as the ability to appoint or dismiss board members.
- Last resort: If the true beneficiary cannot be identified through the two previous criteria after exhausting all possible means, the identity of the natural person holding the position of senior management officer is identified and verified.
Risks of misuse of legal entities
The report highlighted that international reports have documented an increase in the exploitation of legal entities and structures (such as companies, associations, and NGOs) in money laundering and terrorist financing schemes. Criminals use complex, multi-layered ownership structures to conceal their identities, making it difficult for authorities to trace the flow of funds. The report emphasized that compliance with due diligence procedures is not merely a routine matter, but rather the first line of defense for protecting the financial system.
Obligations of non-financial businesses and professions
The guidelines require establishments, particularly in sectors such as precious metals and gemstones trading, to take reasonable measures to verify the identity of the beneficial owner using documentation and data from reliable and independent sources. These obligations include:
- Understanding the ownership structure: The organization must understand the client's ownership and control structure to determine who the true beneficiaries are.
- Identity verification: Gathering and verifying detailed information about the true beneficiary (name, nationality, date of birth, identity data).
- Continuous monitoring: In ongoing business relationships, the beneficial owner's data should be reviewed and updated periodically to ensure its accuracy.
The effective implementation of these measures enhances the ability of organizations to manage risks related to their customers, and contributes directly to national and international efforts aimed at drying up the sources of financial crime and maintaining a safe and stable global economy.
