The Hidden Hand: Unmasking Beneficial Ownership in case of Trust 

Saket Kejriwal, Assistant Manager | corplaw@vinodkothari.com

Background

The structure of a trust inherently creates a separation of roles, typically involving three distinct parties viz. the author/settlor, trustee, and beneficiaries. While the control/operations rests with the trustee, economic benefit lies with the beneficiaries, and the settlor may continue to exert influence through the trust deed or reserved powers, this makes it difficult to clearly identify who actually “owns” or “controls” the trust. This intrinsic separation of legal control, economic interest and potential influence renders trusts far more opaque than other conventional structures like companies or partnerships.

Adding to this complexity is the fact that trusts may be structured in different forms. Based on the degree of control and rights- trusts may be discretionary, where the trustee has full discretion to identify the beneficiaries, or non-discretionary, where the beneficiaries have identifiable and pre-determined rights in the trust property. In discretionary trusts, beneficiaries may not have a defined share or enforceable claim at any given point, making it unclear whether they can be treated as beneficial owners at all. In non-discretionary trusts, although the beneficiaries are identifiable, the trustee continues to hold legal title, again blurring the line of who truly “owns” the trust.

For Regulated Entities (“REs”), including Banks and NBFCs, identification and onboarding becomes more complex when the customer is a non-individual entity. The extent of verification varies by entity type, and trusts in particular create added challenges because of the reasons cited above.

Relevance of Identifying Beneficial Owners (‘BO’)

Before discussing how REs should identify a trust’s BO, it is important to understand why they must do so. Under para 9 and 10 of the RBI KYC Directions, 2016, every regulated entity is required to frame a Customer Acceptance Policy which, at a minimum, mandates that no account-based relationship or transaction may be undertaken unless full Customer Due Diligence (‘CDD’) is completed. The same is based on R.10 of The FATF Recommendations.

As defined under para 3(b) Clause (v) of RBI KYC Directions, 2016, “Customer Due Diligence means identifying and verifying the customer and the beneficial owner using reliable and independent sources of identification”. Further, clause 3 under explanation to the above para extends this requirement to “Determining whether a customer is acting on behalf of a beneficial owner, and identifying the beneficial owner and taking all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.”.  Similar to what is prescribed under Rule 9(1) of PML Rules, 2005. 

As part of CDD, REs are required to identify customers and their BOs, which in turn places a corresponding obligation on customers to truthfully disclose their ownership structure and furnish relevant documents that establish the identity of a natural BO. This process obliges REs to verify the authenticity and completeness of the information and documents submitted, use these findings to determine whether to establish the business relationship and to appropriately assign a risk rating.

However, in practice, BOs may be reluctant to provide their KYC documents due to privacy concerns, fear of scrutiny, or because complex structures were intentionally designed to keep the BO’s identity concealed. 

Difference between BO and SBO

While the concept of a BO and the concept of a Significant Beneficial Owner (SBO) under the Companies Act both aim to identify the natural persons behind an entity, the two frameworks differ significantly in scope and approach. The SBO definition focuses on identifying individuals who hold a prescribed level of ownership or control, and it does not provide a structured fallback if no individual meets that threshold. 

In contrast, the BO identification under the Rule 9(3) PML Rules follows a cascading approach i.e. REs must first identify natural persons with ownership, then those who exercise control through other means. Further, only when neither approach detects a clear individual do the rules require identifying the senior managing official as the BO of last resort. This ensures that BO identification cannot be left blank, every entity must ultimately map to a natural person for AML purposes, even where no SBO exists, so that transactions are not carried out in benami or opaque structures.

Identification of the natural person behind the trust

As per para 3(a)(iv) clause (d) of RBI KYC Directions, “Where the customer is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10 percent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership”. A similar definition is provided under Rule 9(3) of PML Rules, 2005.  

Aforesaid definitions originates from The FATF Recommendations which clearly defines that in context of legal arrangements i.e. Trust, beneficial owner includes: “(i) the settlor(s); (ii) the trustee(s); (iii) the protector(s) (if any); (iv) each beneficiary, or where applicable, the class of beneficiaries and objects of a power; and (v) any other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above.” 

In a discretionary trust, the trustee has full discretion, whereas in a non-discretionary trust, beneficiaries have fixed rights and the trustee has limited discretion. This influences who can practically be identified as exercising control.

Now, in the case of a discretionary trust, the above framework is usually manageable because the trustee, who exercises control, may not object to being identified as a BO. However, in a non-discretionary trust, the trustee does not exercise independent discretion. In such cases, the trustee may express reluctance to be classified as a BO because he does not “benefit” from the trust in an economic sense and may view BO identification as an unwarranted extension of responsibility. This confusion often results from equating BO with someone who derives economic benefit, whereas under AML laws the emphasis is on identifying at least one identifiable individual, ensuring that there is an accountable natural person whom authorities and REs can pursue in the event of ML/TF concerns, regardless of whether they receive monetary benefit.

It is therefore important to understand that the terms “beneficiary” and “beneficial owner” serve different purposes. The objective of identifying the BO is not to treat the trustee or settler as recipients of trust benefits, but to ensure that the RE can clearly trace the natural persons involved in controlling, directing, and/or benefiting from the trust arrangement. BO identification is a regulatory requirement aimed at preventing misuse of trusts for ML/TF purposes, not a determination of who is entitled to trust assets. When viewed this way, trustee and settler identification becomes a matter of transparency and risk assessment, not a reclassification of their legal or economic rights under the trust.

REs typically encounter two scenarios that require them to look behind the trust structure, first, when the trust is the direct customer, second, when the trust is recognised as a BO of another entity.

• Trust itself is the customer

When the trust itself is the customer, the BO identification framework is relatively straightforward. The PML Rules clearly prescribe that the following individuals must always be treated as BOs:

• the author/settlor,
• the trustee(s), and
• any beneficiary holding 10% or more interest, where such interest is defined or quantifiable.

These natural persons fall squarely within the definition of beneficial owners and should be identified and verified without debate.

Where specific beneficiaries cannot be identified, for example, in a public charitable trust, or in a private trust where beneficiaries do not meet the 10% threshold, the obligation to identify BOs does not fall away. In such cases, the RE must still identify:

• the author/settlor,
• the trustee(s), and
• any natural person exercising ultimate effective control, if any, .

Thus, the absence of identifiable beneficiaries does not dilute the requirement. 

• Indirect Identification (Trust as a BO / Shareholder / Partner of Another Entity)

Complexity increases when the customer is not the trust, but another legal entity, such as a company, LLP, or partnership, in which a trust holds a substantial stake. In such cases, identifying the natural person as BO requires a deeper “look-through” analysis.

The Interpretive Note to Recommendation 10 of The FATF Recommendations provides a structured cascading approach to determine BOs of legal persons. This approach should be applied sequentially:

Step 1: Identify the natural persons with controlling ownership interest

Determine whether any natural person ultimately owns or controls the entity through direct or indirect ownership (including ownership via the trust), if yes, identify the person(s) as BO.

Step 2: Identify natural persons exercising control through other means

If no natural person is identifiable through ownership, identify the natural persons exercising control of the entity through other means, such as through one or more juridical persons.

In such cases, the BO definition for trusts should not be imported from the definitions as discussed above i.e. all parties to the trust need not automatically be treated as BOs of the entity concerned.

Instead, the focus should be on identifying the natural person(s), whether trustee or settlor, who genuinely hold or exercise the relevant control over the underlying company, and evaluating them against the test of control.

Step 3: Identify the Senior Managing Official (SMO)

If no natural person can be identified under Step 1 or Step 2, the regulated entity must identify and verify aSenior Managing Official of the customer entity itself.

Intent behind this clause, might be to cater to conditions where the legal person is held by another legal person which is, in turn, held by a trust or where the trust is a charitable trust with no identifiable beneficiaries and no effective control exercised by the trustee, the chain may not yield any natural person with a controlling ownership or control interest. In such situations, the responsibility reverts to the customer entity itself, and the senior managing official (SMO) of the customer is identified as the BO for CDD purposes.

However, even in such cases, the SMO is identified purely for the purposes of AML laws, as discussed above. (see para 31 of the FATF Guidance on Beneficial Ownership of Legal Persons). 

Conclusion

It is important to clarify that being identified as a BO is primarily a regulatory formality for compliance. It does not alter a person’s rights, liabilities, or relationship with the trust or entity. The core objective is simply to ensure that there is a clearly identifiable natural person connected to the legal entity so that the RE can complete its due diligence and satisfy ALM requirements. Following are the limited obligations of being identified as a BO: 

• Provide basic KYC documents or Official Valid Document (OVDs) for verification of identity;
• Respond to any follow-up queries during onboarding or monitoring;
• Undergo periodic KYC updates, as requested by the RE.