Since the inception of AML regulations, obligated organizations have been required to validate the identities of only natural persons through a vigorous KYC (Know Your Customer) process. But as the authorities gained in-depth knowledge of money laundering schemes, they found an important loophole that criminals had exploited for years. Apparently, many illicit financial activities are being made by maintaining the anonymity of shell company owners. This anonymity allows fraudsters to conceal substantial amounts of suspicious transactions and avoid getting caught.

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    Regulators worldwide are attempting to fix the legal shortcoming by introducing a KYB, also known as KY3P (Know Your Business or Know Your Third Party) procedure. The most important part of this process is establishing the UBO (ultimate beneficial ownership). As a result, financial institutions that are engaging with customer entities must ask for transparency about beneficial ownership. 

    Continue reading the article to unwrap everything you need to know about the importance of ultimate beneficial ownership. 

    What is Ultimate Beneficial Ownership?

    An ultimate beneficial owner (UBO) is a natural person (or persons) who owns or controls a legal entity and benefits from its profits. A natural person can also be considered a UBO when they own a bank account or receive a transaction. They are also subjected to regulatory checks but normally don’t raise an AML risk. 

    Meanwhile, many consumer-entities often have their UBO anonymous or hidden by a complex corporate infrastructure. While it’s not illegal for the UBO to not be a direct and well-known entity owner, it poses an opportunity to hide financial fraud. For this reason, legal persons automatically pose a higher AML risk than natural persons and should be subjected to more rigid checks. 

    What is the difference between UBO and BO?

    You’ll often notice that “ultimate beneficial owner” and “beneficial owner” are used interchangeably. However, there’s a slight difference between these terms. 

    A beneficial owner has a similar definition. They can be described as a natural person with some ownership privileges and shares in the company. Both UBO and BO can gain profits and privileges related to the ownership of shares. However, the main difference is that the ultimate beneficial owner receives a much higher return and exercises significant control over the company.

    What are the UBO criteria?

    Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, has laid out specific criteria to identify beneficial owners of a legal entity:

    • Individuals who own at least 25% of the capital or share capital.
    • Individuals with at least 25% of the entity’s voting rights
    • Persons with the power of attorney
    • Legal guardians of minors
    • Corporate directors specifically appointed to conceal the true owners
    • Holder of anonymous shares, including bearer shares

    Why Is Ultimate Beneficial Ownership Important?

    Regulated entities need to know exactly who they are engaging with. Whether these are their clients or business partners, validating the true identities of these natural or legal persons is crucial to complying with regulations, avoiding financial loss, and protecting their reputation.

    The reason is that when a company engages in illicit activity, it seeks to avoid legal repercussions by concealing the beneficial owners’ identities. The UN Office on Drugs and Crimes estimates that global illicit proceeds total more than $2 trillion annually. 

    The anonymity allows for tax evasion, money laundering, corruption, embezzlement, terrorist financing, and other crimes. Bringing beneficial owners to light increases transparency and the security of the financial system. 

    That’s why governments seek to put an end to these offences by issuing stringent AML regulations that prevent the regulated sector from being exploited for financial crimes. 

    UBO Regulations around the World

    The tax evasion scandal exposed by the Panama Papers in 2016 demonstrated an enormous lack of transparency in the financial sphere. The 11.5 million leaked documents linked multi-millionaires, world leaders, politicians, and criminals to 214,448 offshore entities. Many of these entities turned out to be shell companies used for various illicit activities, from bribery to money laundering. 

    The Panama Papers have prompted many extensive investigations around the world. As a result, numerous well-known public figures lost their jobs or were incarcerated, and dozens of countries worldwide have recovered $1.36 billion in unpaid taxes and fines. 

    The scandal had a tremendous impact, encouraging legislators to fix gaping legal holes that allowed fraud to thrive. The European Commission was one of the first ones to react. In 2017, it included a requirement for beneficial ownership transparency in the 4th EU Anti-Money Laundering Directive (AML 4). The directive requires all member states to establish public registries for beneficial ownership. As a result, companies had to provide up-to-date information on their beneficial owners. Meanwhile, regulated industries have to check this information once they start a relationship with a customer entity. 

    The US, greatly involved in the Panama Papers scandal, still lags in beneficial ownership regulations. Its first AML regulation, which demands beneficial ownership transparency, will potentially come into effect later in 2022 or early 2023. The Corporate Transparency Act (CTA) will require small legal entities, both domestic and foreign, to file information about themselves and the individuals who formed, own, and control them with a division of the US Treasury Department. Violations of the act could result in civil and criminal liability with up to five years in prison as well as civil and criminal fines of up to $250,000. 

    The demand to investigate UBOs of customer-entities has become increasingly prevalent and is now required in 51% of high-income economies. In 2020, a total of 64 countries had this requirement imposed. However, it is still not implemented often enough in low-income economies. Only 14% of developing countries have a regulation concerning the UBO establishment.  

    How to Establish a UBO?

    ultimate beneficial ownership ownership procedures list

    For the UBO investigation to be efficient, a regulated organization should implement an efficient KYB strategy as part of its AML compliance. The strategy should involve the following procedures:

    • Due-Diligence. Organizations should collect identifying information about their customer entity, such as the names and addresses of company directors. By checking beneficial ownership registrars, an organization can establish a company’s UBO. In case the established UBO poses a high level of risk, an organization might need to perform enhanced due diligence before proceeding with business relationships or implementing ongoing monitoring.
    • PEP screening: As the Panama Papers demonstrated, politically exposed persons may use shell companies to hide their illicit activities. They are also considered to be at greater risk of bribery and other financial crimes. Thus, organizations should screen their clients to establish their PEP status.
    • Sanctions screening: Sanctioned individuals are more susceptible to the use of shell companies as a way to illegally obtain access to financial services, requiring the organization to screen their clients against sanctions lists. 
    • Adverse media screening: A customer entity’s reputation can be assessed by monitoring adverse news pieces written about it. Media stories can quickly demonstrate a person’s risk status when involvement with criminal activities is uncovered. 
    • The regulations require performing these procedures not only at the beginning of the relationship with a client but also throughout the whole customer lifecycle. Thus, it’s very important to continue checking relevant registrars for up-to-date information. 

    How Ondato can help you trace the ultimate beneficial owner 

    Identifying who benefits from a company’s profits is a complex and resource-intense process. Industries that are obligated to establish UBO of their customer-entities may seek to automate the process to minimize the burden. Any industry can do it by implementing Ondato OS into their daily compliance operations.

    Ondato OS is a complete compliance solution that streamlines KYC, KYB, and AML processes. By delegating the heavy lifting to our system, you will be able to save time and money while improving the performance of your compliance strategy.

    From due diligence to adverse media screening, Ondato helps speed up all KYB processes. Our system provides a comprehensive overview of each client and assesses their risk score. It enables you to manage the data of your clients throughout their lifecycle and automatically check relevant registries for up-to-date information.

    Ondato can detect any UBO by quickly reviewing a significant amount of data. Here is a complete list of the information that our system may acquire on the company of interest:

    • Basic registration 
    • Share Capital
    • Official and calculated beneficiaries
    • Shareholding and shareholders
    • Directorship and managers
    • Activity field
    • Amount of employees
    • Export and import 
    • Real estate
    • Movable assets
    • Subsidiaries
    • Pledges
    • Litigations
    • Debts to third parties
    • Tax debts

    You can learn more about business onboarding with Ondato OS here.