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Navigating The Complexity of Ownership From The Lens of Sanction By Extension

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The Comprehensive Guide to Ultimate Beneficial Owner (UBO)

31 August, 2023

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The financial industry is highly regulated, ranking among the world’s most strictly governed fields. The same level of oversight is applied to the financial dealings of multinational firms. Several pieces of anti-money-laundering legislation have been passed in recent years, increasing the difficulty of maintaining regulatory compliance in the financial sector. Authorities in many countries have been brainstorming new strategies to combat the global expansion of money laundering. 

Government agencies learned the hard way that the absence of beneficial ownership transparency was a gap in the existing due diligence mechanism after the Panama Papers Leak. Lack of transparency over beneficial ownership was a significant issue that enabled criminals to launder money through offshore accounts. 

In 2016, regulators began pushing back with new laws regarding UBOs and companies’ disclosure of related data. It is essential, not just to adhere to FinCEN requirements, to determine who the genuine Ultimate Beneficial Owner is. Without UBO checks, an organization could be linked to money laundering and terrorist financing, just like Singapore-based DBS Bank Limited. They were accused of not taking anti-money-laundering measures sufficiently. The firm was charged a $25,000,000 penalty for other alleged financial wrongdoings. Now, proper due diligence is crucial more than ever. 

What is UBO?

A corporation’s Ultimate Beneficial Owner is the person or entity with the company’s most significant direct or indirect financial interest. This person is the ultimate beneficiary of the company’s actions, even if they do not have hands-on management responsibilities. Compliance with anti-money-laundering (AML) legislation and limiting the risk of financial crimes depend on knowing who the Ultimate Beneficial Owner is. 

As defined by the Financial Action Task Force, “UBO is the natural person who ultimately owns or controls a customer and the natural person on whose behalf a transaction is being conducted.“. It also includes people with ultimate effective control over a legal entity or arrangement, as limited by FATF’s beneficial owner rules.

  • Individuals who hold at least 25% of the company’s shares; 
  • Individuals who account for at least 25% of the vote,
  • Investors who receive at least 25% of a company’s profits, 
  • Authorized representatives, 
  • Guardian of minors,
  • A company’s owners might be hidden from public view by appointing corporate or nominee directors.

Importance of UBO 

Those subject to regulation must have complete confidence in the parties they deal with. Validating the real identities of legal people is essential to regulatory compliance, whether clients or business partners. It also helps prevent monetary loss and safeguards the company’s reputation.

The United Nations Office on Drugs and Crime states that more than $2 trillion is made illegally yearly. If a company’s UBOs are exposed, they may try to cancel their identities to avoid legal ramifications rather than admit to engaging in criminal activities. By remaining anonymous, criminals can engage in activities like tax evasion, money laundering, embezzlement, and corruption. Disclosure of beneficial owners enhances the financial system’s safety and openness.

The Difference Between Beneficial Ownership and Legal Ownership

Beneficial ownership and legal ownership diverge in the realm of rights and control over assets. Legal ownership stands as the official recognition of ownership, granting legal rights and obligations. In contrast, beneficial ownership encompasses the actual perks derived from an asset, such as profits and decision-making authority. While legal ownership is on paper, beneficial ownership underscores tangible benefits. This contrast holds weight in trading, anonymity, concealing assets, tax avoidance, influencing transparency, and accountability.

Some of the reasons why beneficial and legal ownership are different are as follows:

Trading

For security and convenience reasons, many people who possess securities prefer to trade them under their broker’s name. This practice is legitimate and frequent in the banking industry. 

Anonymity

Some people conceal their true identity by registering their assets under someone else’s name for security and privacy reasons. Famous people, politicians, and others who don’t want their home address made public could re-title their property in someone else’s name. There is no law against this.

Concealing Assets

Some people have assets registered differently to avoid losing property after a divorce or lawsuit. Financial fraud, including the use of beneficial ownership, is prohibited.

Tax Avoidance

Some individuals and businesses prefer to split ownership of their assets among several names to reduce their taxable income. Using beneficial ownership in this way is prohibited since it is used to avoid paying taxes.

Money Laundering

Money laundering hides the genuine ownership of assets and the origin of funds gained illegally. The Ultimate Beneficial Owner of illicitly acquired assets may be concealed, or their involvement with money laundering may be hidden by having those assets registered in another legal owner’s name. Terrorist groups might also benefit from money launderers. Both individuals who engage in money laundering and those who help it by failing to enforce internal anti-laundering policies face legal consequences.

How to Identify The UBO?

The UBO must be located through a series of steps that may include:

  • Understanding the business structure: To start, learn everything about who owns and runs the company, directly as well as indirectly. 
  • Analyzing the supporting paperwork: For clues as to who the UBO is, look at shareholder agreements, trust deeds, and partnership contracts. These records may reveal essential facts regarding the company’s management and ownership.
  • Performing due diligence: Investigate the business, its owners, and any associated parties to spot warning signs that could lead to further scrutiny.
  • Tracing the ownership chain: Find out who controls the company by following the money trace. For this purpose, reviewing trust deeds, share registers, and other legal documents is necessary.
  • UBO Authentication: Once the UBO has been located, their ownership stake and identification must be confirmed using external resources such as public documents and databases. It is critical to follow these procedures precisely to get the right Ultimate Beneficial Owner.

Influencing Factors on Compliance

Some recent developments that may impact the organization’s compliance and risk management are:

Russia-Ukraine conflict: In 2023, the war will likely continue as before. Sanctions avoidance tactics led to stricter oversight in the United States and Europe. Firms must revise risk management and due diligence procedures for business with Russian clients or suppliers.

Production-side supply-chain elements: Due to political changes, manufacturing supply chains have relocated to other nations, often through local alliances. Check the beneficial ownership of any foreign partnerships with foreign legal persons.

Cryptocurrencies: The OECD unified a reporting standard for crypto-assets, including beneficial ownership reporting, to narrow tax avoidance gaps.

Be wary if a business or a client of yours operates in an industry affected by the following:

  • Energy sources and petroleum-based goods
  • Wheat farming and industry
  • Processing of metals, including iron, aluminium, and copper
  • Appliances and electronics
  • Corporations dealing with money, such as banks
  • Services related to money and finance, such as insurance and investment advice
  • Digital currency services

Read more: How to Collect & Verify Beneficial Owner’s Information for Compliance

UBO Reporting Requirement 

Businesses are required by law in many countries to disclose details about their UBOs to the appropriate authorities. The rules and regulations in a region may call for different reports. Among the most often seen report formats are:

Creating a Centralized Registry for UBO Data

UBO data must be registered with a government agency in some regions. This may make it simpler for authorities to detect and keep tabs on UBOs, increasing transparency.

Regulatory Filings and Annual Reports with UBO Information

UBO data may be required for various industries’ annual reports and regulatory filings. The ownership structure of a corporation will always be up to date if this is done.

The Sharing of UBO Data with Banks and Other Businesses

As part of due diligence, firms may need to reveal UBO information to banks or other companies. By doing so, firms can avoid unknowingly helping in committing financial crimes or conducting business with potentially dangerous individuals or organizations. Knowing and following the reporting regulations relevant to the company and legal system is paramount.

Challenges to Identifying and Verifying UBOs 

Several obstacles must be overcome, which adds extra work and time to discovering and certifying a UBO. Among these challenges are:

Complex Ownership Structures 

A company may have several layers of ownership or control. Because of the complexity of the company’s ownership structure and the relationships between the many organizations, identifying the Ultimate Beneficial Owner can be challenging.

Lack of Transparency 

It might be challenging to get up-to-date information on a company’s UBO because of lax laws in some jurisdictions. The need for clarity may hamper the identifying and verifying procedure.

Shareholders and Directors Up for Election

Identifying the UBO can be even more difficult for nominee directors and shareholders. When these middlemen are selected to work on behalf of the UBO, it becomes more complicated to determine who the actual owner is.

Restricted Access to Data

A company’s UBO data is not readily available or is held by a third party. This can make collecting the data needed to identify and verify the UBO appropriately challenging.

Despite these obstacles, businesses must identify and validate the UBO; otherwise, the company could face severe legal and financial repercussions.

Step-by-Step Ultimate Beneficial Owner

Each country where a firm operates has its regulations that must be followed. However, several consistent steps must be taken to create an effective UBO program strategically.

  • Check The Company’s References

Company information like name, address, legal standing, key personnel, and verification of record correctness must be provided.

  • Determine Who Owns What and How Much

Knowing who owns shares in the company and how they are invested is essential.

  • Identify Beneficial Owners

Businesses can spot a UBO by calculating the overall percentage of shares, ownership stake, as well as managerial control held by the entity or natural person in question and then checking to see if any of those factors bring them under the purview of a UBO.

  • All UBOs Should be Subjected to AML/KYC Checks

The procedure of conducting UBO checks can be simplified, making it easy for compliance and legal departments. The onboarding process is lengthened due to the inefficiency of manual data screening. Re-screening and re-evaluation due to human error increases the time it takes to launch a company. In addition, employees need help with data entry rather than resolving sophisticated compliance issues.

UBO Law and Regulations 

EU UBO Requirements 

UBOs must be identified by EU financial institutions dealing with commercial clients. The 4th Anti-Money Laundering Directive (4AMLD) in the European Union was the first to mandate UBO identification, and other member states have since introduced enabling laws to enforce reporting obligations. For instance, the beneficial owners must be disclosed to Sweden’s Swedish Companies Registration Office. By Swedish law:

  • This applies to Swedish entities, foreign businesses in Sweden, and those who manage trusts and similar legal arrangements.
  • Beneficial owners can exercise majority voting authority over the board of directors or more than a 25% ownership share in the company.
  • Prescribes the reporting of any change in beneficial ownership as soon as the entity is made aware of the alteration in ownership.

Each EU member state has its laws; however, they must follow the 4AMLD. The 5th AML Directive mandated that member nations make registers of businesses, trusts, and other legal arrangements available to the public. 

EU’s 6th AML Directives expand the scope of criminal liability to include employees and officials of organizations as well as entities acting on their behalf. 

US UBO Requirements 

To ensure the same beneficial ownership disclosures are made in the United States, the Financial Crimes Enforcement Network (FinCEN) released the Customer Due Diligence final regulation on May 11, 2018.

FinCEN’s rule guidance states, “The CDD Rule establishes a new duty for certain banks, with certain caveats and exemptions: determining and confirming the identities of customers operating as legal entities.” 

Financial institutions are broadly defined in the rule to encompass such entities as futures commission merchants, commodity brokers, and mutual funds. Companies, partnerships, and business trusts are all legal entities that can be customers. According to the regulation, “beneficial owner” refers to those who own at least 25% of a company’s voting stock as well as have significant control over its management and daily operations. 

US businesses are required by the Corporate Transparency Act to provide FinCEN with the entire legal name, date of birth, current address, and identification number of the UBO.

International UBO Standards 

Disclosure of beneficial ownership is required under international agreements with other governments. Standards for beneficial ownership were first established in 2003 by the Financial Action Task Force (FATF), and in 2012, 198 governments agreed to adopt FATF guidelines. Two years later, at the G20 Brisbane Summit, a policy declaration highlighted UBO’s openness.

The declaration stated, “Legal entities’ beneficial ownership information should be readily available to government agencies (such as those in charge of law enforcement and prosecution, supervision, taxation, and financial intelligence) in a timely manner.”

According to a FATF assessment in 2016, only two of the G20 had substantially effective beneficial ownership regulations. While the FATF is committed to ensuring effective Beneficial Ownership transparency regulations are in place, it acknowledges its difficulty. A solution may be found using technologies and methods that expedite as well as enhance the process’s precision.

UBO Database and Technology Solution

Ultimate Beneficial Owners can be found with the help of several databases and technologies. Incorporating these ideas into an automated system helps speed up and improve the accuracy of the identification procedure. Examples of common approaches include: 

UBO Information Repositories

These databases collect information about UBOs from various sources, including business registrations and government documents. These databases are helpful since they make identifying the Ultimate Beneficial Owner easier and provide more details about them. 

KYC and AML Solutions 

Due diligence may be automated with KYC and AML systems, as can the identification and verification of UBOs. These solutions can also lessen the likelihood of financial crimes and help organizations comply with applicable legislation. 

Blockchain Technology

Blockchain technology may provide legally binding and verifiable property records. It can help firms keep track of UBOs by ensuring that ownership records are always up-to-date. It is crucial to find the correct technological answer for a company and ensure it abides by the necessary rules. 

UBO in Different Industries 

Identifying Ultimate Beneficial Owners is crucial in several sectors, including real estate, banking, and finance. With a better grasp of who gains from a transaction, financial crimes like money laundering can be avoided, and reputational harm can be avoided. 

Investigating potential partners or investors in these sectors is critical to verify they align with UBO rules and regulations.

Conclusion 

Identifying UBOs is essential for maintaining openness, controlling risks, and meeting legal requirements. Businesses can lessen the likelihood of financial crimes, reputational damage, and monetary implications by learning who the Ultimate Beneficiary is. 

To guarantee Ultimate Beneficial Ownership laws and regulations verify the company, businesses must follow best practices, interact with regulators, and implement the required technological solutions. 

However, ‘The KYB’ offers advanced UBO verification to identify actual beneficial owners in real-time, ensuring regulatory compliance. Expedite UBO verification, simplify ownership insights, and adhere effortlessly to regulations. Uncover ownership percentages, discern significant control, and trace direct/indirect ownership. Explore entity relationships, and gain vital insights for ownership comprehension. Verify fund legitimacy, screen UBOs against global sanctions, visualize ownership structure for informed decisions, streamline due diligence, meet AML compliance, and mitigate risks. Elevate business operations with The KYB’s comprehensive solution.

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