With the global fight against money laundering and terror financing intensifying, proper due diligence has never been more necessary. When you don’t perform due diligence, you might pay $25 million for anti-money laundering violations, as Deutsche Bank Subsidiary DWS did. That’s why there’s an industry-wide expectation for banks and companies to know the individuals they do business with.
Enter Ultimate Beneficial Owner (UBO).
Finding the ultimate beneficial owner of a company requires extensive manual research. When documents are unavailable even after hours of manual research, financial executives find it a nightmare to confirm the ownership interest.
To navigate these challenges, it’s essential to understand the meaning of UBO, how to identify the ultimate beneficiary, and the various ultimate beneficial ownership regulations.
Who is an ultimate beneficial owner (UBO)?
An ultimate beneficial owner is a person or group of people who own or have control over a company, legal entity, or partnership trust. They are the ultimate beneficiaries when the company initiates a transaction. A UBO doesn’t control the day-to-day affairs but is accountable for the operations and financial transactions. When you identify the UBO, you ensure compliance with anti-money laundering (AML) regulations.
UBOs are essential for preventing financial crime, keeping things transparent and ensuring the financial system runs smoothly. According to the International Monetary Fund (IMF), money laundering amounts to more than $800 billion, approximately 2-5% of the world’s GDP.
As a result, the Financial Action Task Force (FATF) stresses the need to identify UBOs to reduce terror financing and money laundering.
Ultimate beneficial owner (UBO) vs legal owner (LO)
Definition
UBO: The person who ultimately benefits from the ownership, even if it is held under another name.
LO: Individual or entity whose name is officially listed as the company's owner.
Visibility
UBO: Often remains behind the scenes and may not be publicly known.
LO: Publicly recognized and appears on official records and documents.
Control
UBO: Influences or controls the company despite not being the named owner.
LO: Holds legal title and makes decisions about the company as per ownership laws.
Purpose
UBO: Designed to retain actual control and benefits, possibly for privacy or risk management.
LO: Legally recognized for property rights, liability, and taxation.
Regulatory focus
UBO: Increasingly scrutinized to prevent money laundering and ensure transparency in financial transactions.
LO: Must comply with ownership regulations, tax obligations, and reporting requirements.
Examples
UBO: Harry James holds 40% of shares in ABC Corp through a trust, which gives him control and allows him to benefit from the company's profits.
LO: The trust, managed by a trustee, is the legal owner of Harry Smith’s shares in ABC Corp according to official records.
Importance of ultimate beneficial ownership
Maintains transparency
UBO maintains transparency in the business environment, ensuring you’re held accountable for your actions and reducing instances of money laundering, terror financing, and tax evasion. When criminals launder illegal funds, they conceal their identities to avoid AML measures. They conduct fraudulent transactions using proxy companies called shell companies. While shell companies are legal entities, criminals misuse them. When you identify UBOs, you prevent working with shell companies.
One notable example is Pandora Papers, which had over 810,000 shell companies with over $11.3 trillion in funds accumulated because of tax evasion.
Protects your business from risks
UBOs are critical for risk management and protecting your company’s integrity. Knowing who is in control avoids or at least reduces your risks of criminal activity. With UBOs, you conduct a proper check on the business, preventing interaction with new and dangerous partners engaged in illegal activities. Identifying and understanding UBOs is no longer a compliance matter; it’s a business necessity.
Ensures legal compliance
Moreover, understanding UBO is essential for compliance with various rules and government regulations. Adhering to UBO legislation ensures you do not breach the legal requirements or face hefty fines and legal consequences. You show stakeholders that you run your business legally and with the right intentions. That way, you don’t expose your company to lawsuits and ruin its image.
What is UBO legislation?
The laws governing UBO legislation vary from country to country. For example, the fourth EU Anti Money Laundering Directive (AMLD4) defines individuals or entities with a share of 25% or more as UBOs, while the directives are different in the United States. In the US, the requirement for the UBO is regulated by the Corporate Transparency Act (CTA), and the person controlling more than 50 percent of the company is the UBO.
These laws require you to carry out various obligations to identify and include details of your clients’ UBOs. Non-compliance attracts fines, legal consequences, and reputational damages.
How is a UBO identified?
Verify the ownership information
Start by collecting and verifying ownership information about the company. Collecting this information depends on the jurisdiction and fraud regulations standards. You need to collect information like:
- Registration number
- Name
- Official status
- Address
- Top management
This data helps you comply with Anti Money Laundering/Counter-Terrorist Financing (AML/CTF) regulations.
Review relevant documentation
Verify the complete document chain to identify whether the ownership stake is direct or indirect. Investigate who owns what percentage of shares or interest in the company. Subsequently, determine individuals having significant share or control over the company. Often, you need to go beyond the immediate shareholders. You need to evaluate who indirectly influences the company and its decisions.
Conduct customer due diligence (CDD)
Research to confirm the data obtained in the process. Customer due diligence involves checking the data from other sources, such as the government or other databases, to spot inconsistencies. Ownership structures, especially in large corporations, can be deeply layered. Advanced analytics tools can help you uncover these layers.
Perform KYC
After identifying the UBOs, perform a full Know Your Customer (KYC) verification. Effective KYC processes check the authenticity of the UBO’s identity and prevent fraudulent activities. If the established UBO is a high-risk customer, perform enhanced due diligence (EDD) monitoring.
Onboard by MVSI is the perfect solution covering all your KYC needs, including checking ownership structure, document verification, AML, UBO verification and corporate registry check.
What are the potential risks of UBOs for companies?
While UBOs are essential for the corporate structure, they bring their unique set of risks:
Financial risks
Not adhering to the UBO legislation can result in costly fines and unnecessary lawsuits, severely impacting your day-to-day business operations.
Operational risks
Wrong beneficial ownership information is even more detrimental because it completely jeopardizes your core business functions, like securing financing and banking processes. Why? Financial institutions conduct heightened due diligence because for them, you’re a high-risk customer.
Exposure to money laundering
Money launderers and criminals use UBOs to disguise the source of their illicit funds. Hiding their identities allows them to transfer their money freely around the world.
Risk of reputation
A fundamental risk of ignoring UBO is reputation damage. Inaccurate UBO identifications paint your business as untrustworthy and non-compliant, eroding the trust of your stakeholders and customers.
UBO in different industries
Financial sector
All financial institutions prioritize UBO identification for risk assessment and AML compliance. Continuously monitoring transactions is a must to ensure compliance.
Non-profit organization
Ultimate beneficial ownership (UBO) identification increases accountability and the donor's confidence (encouraging them to donate more).
Real estate
UBO prevents money laundering and maintains the legitimacy and compliance in property transactions.
Healthcare
UBOs increase accountability in healthcare investment and prevent unlawful undertakings, such as investment in healthcare organizations and institutions, drug stores, and other related ventures. Identifying UBOs brings transparency, avoids conflicts of interest, and ensures ethical and legal healthcare services.
Technology
UBO data is vital for the tech industry, especially in determining the authenticity of investors. As investors pump more funds into tech companies, knowing the UBOs provides transparency in the ownership structure.
Luxury goods
Ultimate beneficial ownership transparency reduces black-market transactions and limits fraudulent activities in the luxury goods market. Identifying UBOs in high-end art, jewelry, and automobile transactions is essential.
Legal services
Legal persons must meet AML standards and check their clients’ ownership information carefully. Failure to do so can lead to legal consequences and reputation damage.
UBO: Your key to business success
Knowing and recognizing the beneficial owner is a legal obligation and an essential aspect of risk management. Knowing who your business partners are can shield your business from legal problems, monetary losses, and reputational damage.
Moreover, the dynamic changes in the regulatory environment should not come as a surprise. Criminals are using new technologies and innovative methods for money laundering, tax evasion, and terror financing, making it essential to stay proactive no matter what.
To navigate the UBO maze with ease, try our automated solution today.
