Role of UBO in Anti-Money Laundering

The Role of UBO in Anti-Money Laundering (AML) and Know Your Customer (KYC) Procedures

An essential element of effective KYC and AML is understanding who the ultimate beneficial owner or UBO is for any entity you do business with. The UBO is the natural person who ultimately owns or controls an organisation, even if their name isn’t listed on official documents. Identifying the UBO helps ensure that no shady characters hide behind corporate shells to move illegal funds. In this post, we’ll look at best practices for finding and verifying the identity of UBOs to strengthen your compliance program. Staying on top of UBO is well worth the effort for safeguarding your small business and the financial system.

Grasping the Concept of UBO

UBO, or Ultimate Beneficial Owner, is defined as the natural person who ultimately owns or controls an institution when a transaction is being initiated. This ownership or control can be direct or indirect and is usually defined by a minimum stake in the capital or voting rights of the entity.

Understanding who has the ultimate control of an entity is a vital part of detecting and preventing money laundering and terrorism financing. It also shields businesses from being exploited for other forms of criminal activity.

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The Significance of UBO in AML and KYC Procedures

Unearthing the UBO of a business entity aids in tracing the flow of funds back to their source, revealing hidden connections that could expose a company to financial crime, fraud, bribery, or corruption risk. In the context of AML and KYC procedures, identifying a UBO can:

  • Establish customer identity
  • Understand the nature of the customer’s activities
  • Assess money laundering risks associated with the customer

Decoding UBO Legislation

The increasing prominence of money laundering and terrorism financing has made the identification of UBOs a top priority for regulators worldwide. Institutions within the scope of AML and Anti-Terrorist Financing regulations are required to disclose the UBO’s identity for any business transactions.

However, the definition of a UBO varies between jurisdictions. The rule of thumb is that an individual who holds a minimum of 10-25% (dependent on jurisdiction) of capital or voting rights in the underlying entity is considered a UBO.

The process of identifying UBOs involves several steps:

Acquiring the organization’s credentials: Companies must supply full and up-to-date information that includes the firm’s registration number, name, address, official status, and the names of top management employees.

Researching the ownership chain: Determine the natural or legal persons who have a percentage in shares or interests and if their ownership is direct or indirect.

Identifying and verifying the UBOs: Identify the total percentage of shares, management control, and ownership stake of every individual and determine which (if any) falls under the definition of UBO.

Performing an AML and/or KYC check: All UBOs must go through the appropriate AML/KYC checks in a uniform and efficient way.

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Risk Assessment of UBOs

UBOs fall under different categories of risk. Ranging from low to high, they demand different approaches:

Low risk: UBOs in this category can confirm their identity by signing a statement listing their details. It is also sufficient to perform a visual check against identification documents.

Medium to high risk: If the person identified shows any signs related to terrorism or money laundering, further investigation is required.

The Scale of Offenses

According to the International Monetary Fund (IMF), money laundering and terrorism financing amounts to around 1,000 billion EUR – between 2.5 and 5 per cent of the world’s GDP. In the past few years, the number of reports featuring indications of money laundering or terrorism has increased dramatically.

Unveiling Corporate KYC

Just as individual accounts require identification, due diligence, and monitoring, corporate accounts require KYC procedures as well. These procedures are often referred to as Know Your Business (KYB).

While each jurisdiction has its own KYB requirements, here are four general steps to implement an effective program:

Retrieve Company Vitals: Identify and verify an accurate company record such as information regarding register number, company name, address, status, and key management personnel.

Analyze Ownership Structure and Percentages: Determine the entities or natural persons who have an ownership stake, either through direct ownership or through another party.

Identify Ultimate Beneficial Owners (UBOs): Calculate the total ownership stake, or management control, of any natural person and determine if it crosses the threshold for UBO reporting.

Perform AML/KYC Checks on Individuals: For all individuals that are determined to be a UBO, perform AML/KYC checks.

Why UBO Information Is Critical for AML and KYC Compliance

  • It helps determine whether a client may be a politically exposed person (PEP) or subject to sanctions. If the UBO is a PEP, it could indicate a higher risk.
  • It provides insight into the client’s ownership and control structure. Complex structures with ownership layers can make hiding illicit activity easier.
  • It allows you to understand the source of funds and wealth of the UBO. Unexplained wealth could be a sign of corruption or other financial crimes.
  • It helps identify conflicts of interest and prevent financial system abuse. For example, a UBO could control multiple apparently unconnected accounts.
  • It allows risk profiles to be correctly assigned. Without UBO data, accounts are often designated higher risk due to the unknowns, requiring more monitoring.

Accurately identifying and verifying UBOs may require significant effort and resources, but it’s well worth it.

Challenges in Obtaining Accurate UBO Data

Obtaining accurate beneficial ownership (UBO), data can be challenging for many businesses. As you work to onboard new clients and stay compliant with AML and KYC regulations, keeping on top of who owns and controls the companies you do business with is vital.

Lack of Transparency

Some business structures like trusts, foundations and shell companies can make the actual owners and decision-makers clear. Nominee directors and shareholders are often listed on official documents to hide the real UBOs. This lack of transparency makes verifying identities and performing proper due diligence easier.

Complex Ownership Structures

Large conglomerates and multinational corporations often have complex ownership and control structures spanning many countries and entities. Unravelling who the UBOs are at the top of a large, tangled corporate tree can require significant time and resources. Some UBOs may control businesses through indirect ownership in the form of shares in other companies.

Outdated or Inaccurate Information

UBO registries and business records are only sometimes kept up to date. People always buy, sell and transfer shares and ownership stakes in companies. Unless businesses diligently update their records and report changes to relevant authorities, the UBO information on file can quickly become outdated and unreliable.

Lack of Cooperation

Some clients may be reluctant to disclose full ownership details and corporate structures. They may see it as private information or fear it could be used against them somehow. The KYC process is far more complex when clients are uncooperative in providing UBO data. In some cases, you may need to decline or exit the relationship.

Implementing Effective KYC Procedures With UBO Data

Collecting accurate Ultimate Beneficial Owner (UBO) data is crucial to implement effective KYC procedures. UBO refers to the natural person(s) who ultimately owns or controls a legal entity. Knowing your UBO helps determine the true identity of who benefits from a business relationship or transaction.

Verify UBO Information

When onboarding a new client, ask for official documentation to verify the UBO’s identity. This may include government-issued IDs, proof of address, and information on how they obtained ownership or control of the entity. Cross-check the details against reliable data sources to ensure there are no discrepancies.

Monitor for Changes

Require clients to notify you of any changes in UBO or ownership structure. UBO information can change for various reasons, and KYC data must be kept up-to-date. Review UBO details regularly, at least annually, and more frequently for high-risk relationships.

Enhanced Due Diligence

For high-risk clients or jurisdictions, enhanced due diligence on UBOs is necessary. This may involve independent research to corroborate the information provided and in-person meetings. Be very wary of complex ownership structures with opaque UBOs, which can indicate potential money laundering or other financial crimes.

Ongoing Monitoring

Monitor your clients’ activity and transactions to detect suspicious behaviour immediately. Unusual activity from an account with undisclosed or hard-to-identify UBOs poses severe risks. Regular scrutiny of UBO details, account activity, and transactions is vital for effective anti-money laundering controls.

Updating UBO Information to Meet Regulatory Requirements

To stay compliant with anti-money laundering (AML) and know your customer (KYC) regulations, you need to regularly update your clients’ ultimate beneficial owner (UBO) information. UBO refers to the natural person who owns or controls a legal entity like a company.

Regulators require businesses to understand who their UBOs are and verify their identities. Failure to do so can result in hefty fines and penalties. Many countries have mandated that companies obtain and periodically refresh UBO data in their AML and KYC compliance programs.

The issue of UBO or controllers has become more critical internationally. It plays a central role in transparency, the integrity of the financial sector, and law enforcement efforts. Beneficial owners are always natural persons who ultimately own or control a legal entity or arrangement, such as a company, a trust, a foundation, etc.

When to Update UBO Information?

You should update your clients’ UBO information at least once every 12 months or if there are any significant changes with the UBO or company ownership structure. Some indicators that UBO data may need updating include the following:

  • The UBO sells or transfers a large portion of its ownership or voting rights to the company.
  • The identity or personal information of the UBO changes (e.g. name change due to marriage or divorce).
  • The company goes through a restructuring, merger or acquisition.
  • Negative news surfaces about the UBO that could impact their control or ownership of the company.
  • The UBO becomes subject to regulatory or law enforcement actions.
  • The company’s activities or business model changes substantially.

The Role of RegTech in UBO Identification

Understanding the significance of correctly identifying Ultimate Beneficial Owners (UBOs) is a crucial part of establishing a solid foundation for Know Your Customer (KYC) practises. The truth is that it’s actually quite hard to do. As criminals get better at hiding their illegal assets using complicated corporate structures, financial institutions will have to regularly update their KYC processes to stay ahead. In order to create a comprehensive solution, they will have to use all the tools that are available to them.

It’s important to recognise that UBO (Ultimate Beneficial Ownership) goes beyond being a regulatory requirement – it’s actually crucial for businesses to understand. Mitigating financial crime risks, protecting your organization’s reputation, and ensuring regulatory compliance are all important steps to take.

Conclusion

Updating stale or outdated UBO data helps ensure you have accurate and up-to-date information about who truly owns and controls your client companies. Regular reviews of UBOs also enable you to detect any suspicious changes in ownership or control that could signal money laundering or other financial crimes.