UBO Verification

Regulatory bodies across the globe have been working hard to develop ways to prevent the rising number of financial crimes such as money laundering. After the Panama Papers leaked, governments found that lack of beneficial ownership transparency was the major loophole in the due diligence systems. Thus, regulators started to implement rules on UBO verification in 2016. 

Who is the Ultimate Beneficial Owner? 

An Ultimate Beneficial Owner (UBO) is an individual or entity who holds a pivotal position either as a direct or a third-party beneficiary of the company. The Financial Action Task Force (FATF) defines UBOs as natural individuals having direct control over the firms’ clientele or those on whose behalf the firm conducts transactions. Thus, a UBO is the official owner of the business with whom other partner entities are linked or a group of people responsible for governing the company. 

Whom Does UBO Compliance Apply to? 

• Banks (both investment and commercial) 
• Brokerage and insurance firms 
• Money exchange platforms and credit unions
• Online marketplaces and payment service providers
• Firms operating in real estate, conducting large transactions 
• Jurisdictions in which Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance is legally binding for conducting business

What are the Main Red Flags of UBO?

Businesses should be aware of suspicious behavior showing potential signs of illicit activities. Some of the main red flags of a UBO includes:

• The business does not provide complete information about its transactions
• The firm has an unusual number of ultimate beneficial owners 
• The company conducts transactions with firms located offshore or in high-risk jurisdictions
• The business has untraceable invoices and unusual payments 
• The firm’s transaction amounts cross its overall wealth profile 

UBO Requirements in the EU

Financial institutions that are doing business with commercial customers in the EU must perform a UBO check. 

• The European Union’s 4th AML Directive (4AMLD) was the first to mandate UBO identification, and several member states have passed enabling regulations to enforce reporting requirements since then. While every EU member state has specific legislation, the rules must comply with the 4AMLD. 
• The EU’s 5AMLD added the requirements of setting up publicly available registers for businesses, trusts, and other authorized arrangements. 
• Under the 6AMLD, staff, and officials of firms — and entities working for those businesses — can be held criminally liable.

UBO Requirements in the US

In the US, similar disclosures pertaining to beneficial ownership are incorporated within the Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) final rule, which became effective on May 11, 2018. The CDD Rule outlines the requirements to conduct customer due diligence and imposes a new requirement for financial firms to identify and authenticate beneficial owners, subject to specific exclusions and exemptions.

The Corporate Transparency Act requires US firms to report UBO’s full official name, birth date, business address, current residence, etc., to FinCEN.

International UBO Standards

Many countries have entered into international agreements mandating beneficial ownership disclosures. The FATF set beneficial ownership standards in 2003, and 198 jurisdictions agreed to the standards in 2012. After two years, a policy declaration emphasized UBO transparency at the G20 Brisbane Summit. However, only two of the G20 effectively fulfilled beneficial ownership requirements due to the complexity of implementing the rules. The FATF report, evolving US and European regulations, and major corruption scandals have pressured G20 countries to have robust beneficial ownership disclosure systems.

Why is UBO Identification Essential?

• Mitigating the Risk of Fraud: UBO authentication helps the firm conduct the necessary due diligence, analyze the client’s risk profile, and track suspicious transactions. 
• Maintain KYC and AML Compliance: Identifying and authenticating UBOs is crucial to maintaining regulations. Compliance with KYC and AML regulations helps firms avoid heavy penalties. 
• Reputation Protection: The business image can be damaged if it is found to be linked with UBOs involved in controversies or financial crimes. Knowing what ultimate beneficial ownership is enables the business to take proactive steps to protect its reputation.

Establishing UBO Due Diligence

Four main steps to creating effective UBO programs include:

1. Obtain Company Details Collect and validate the company’s information, such as business name, identification number, address, status, or key management personnel, per jurisdictional requirements and the firm’s fraud prevention standards. 
2. Analyze Ownership Structure: Verify the individuals or entities with ownership interests, either through direct ownership or involvement with other entities.
3. Identify Beneficial Owners: Compute an individual’s overall ownership stake or managerial authority and check if it surpasses the UBO reporting threshold.
4. Perform KYC and AML Procedures: Conduct KYC and AML checks, including UBO verification on individuals identified as UBOs.

UBO verification might not seem challenging, but it can be time-consuming and costly without proper systems. Checking multiple databases, importing data, monitoring records, and doing complex reviews manually can delay the onboarding process, lead to human error, and redirect the staff time to do data entry. However, automating the business verification process helps firms maintain UBO compliance and prepare for the evolving regulations.