An Ultimate Beneficial Owner (UBO) is a natural individual who ultimately owns or manages a company. In the case of single transactions, they are essentially the party(ies) that benefit from a successful transaction. However, these persons don't have to be directly known or listed as owners.
With the ever-changing regulatory landscape, institutions need to identify the customers conduct business with. In the case of another company, they need to establish the ultimate beneficial owner (UBO).
This article discusses the purpose of UBO, why they need to be identified and the risks involved in not identifying them.
What is a UBO?
According to the Financial Action Task Force (FATF), A UBO is “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 persons who exercise ultimate effective control over a legal person or arrangement.”
The guidelines for establishing beneficial owners of an entity according to FATF include:
- Shareholders of an entity, including the holders of bearers' shares that may be transferred anonymously
- Individuals that own at least 25% of share capital
- Individuals with at least 25% ownership of voting rights
- Guardians of minors
- Individuals with the power of attorney
- Beneficiaries with at least 25% of an entity’s capital
- Corporate directors appointed to conceal real owners of an entity
Why are Ultimate Beneficial Owners (UBO) Important?
Criminals are on a constant lookout for ways to avoid AML measures when laundering money. One of the most common ways to do this is by concealing their identities, mostly through corporate entities like shell companies.
Although shell companies can exist for legal reasons, their anonymity is mostly leveraged by criminals to hide their identities and access the legal financial systems. According to reports, approximately $70 billion is lost yearly to company-related money laundering through shell companies. This led to the AML act in 2020 that banned anonymous shell companies, setting requirements for institutions to reveal their beneficial owners to relevant authorities.
This helps the government and companies doing business with such firms access the risk posed by shell companies and possible money laundering schemes. In a nutshell, identifying the UBOs ensures that the company is not run by criminals masquerading behind a legal entity.
Is Ultimate Beneficial Owner Check Mandatory for Institutions?
Yes, it is. Reputation is nearly everything in business, as significant companies will not want to be associated with criminal entities. This greatly impacts customer trust and that of the public as a whole. Dealing with illegal entities also contributes to negative adverse media.
Beyond that, it could also result in fines as the company will be judged to be breaching AML requirements. This is why a UBO check is mandatory for companies.
Carrying out an ultimate beneficial owner screening helps the institution identify who they are dealing with, carry out a proper risk assessment and make an informed decision to establish a strong business relationship, a controlled business relationship or none at all.
By law, not carrying out UBO checks is regarded as aiding criminals, which will lead to both fines and a negative reputation in the media. There are also defined punishments for companies operating in the regulated space who are under AML/ CFT obligations.
How to Establish Ultimate Beneficial Ownership As a Business
This should involve the following key steps:
1. Customer Due Diligence (CDD)/ KYC
Customer due diligence is a key step in establishing UBO. Institutions should seek to collect and verify information about their customers, including addresses and names of company directors, and incorporation information.
2. AML Transaction Monitoring
AML transaction monitoring can help institutions identify shell companies through irregular transaction patterns or those involved in high-risk countries.
3. Sanction/ Watchlist Screening
Screening customers against watch and sanction lists is a great way to identify suspicious shell companies at the point of transaction.
4. Politically Exposed Persons (PEPs) Screening
Politically exposed persons (PEPs) are individuals who are at high risk of being involved in money laundering activities. Sometimes, they may seek to mask their identities through shell companies, therefore, it is important that companies screen their customers to establish their PEP status. Appropriate enhanced due diligence is often required to screen such persons.
5. Adverse Media Screening
News outlets are a great way to identify beneficial owners who are involved in money laundering activities before it is revealed by official outlets. Therefore, implementing real-time negative news or adverse media screening is a great way to keep an eye out for who latest stories that may involve customers.