Ultimate Beneficial Owner (UBO)

In recent years, the fight against money laundering and terrorist financing has stepped up, with stricter regulations to ensure financial transparency around business ownership.

Many international businesses and entities are found to use company structures as a front for financial fraud and terror financing activities. Organised crime is often masked in a complex web of ownership structures to dodge the identity of Politicians/PEPs, sanctioned entities, criminals, terror organisations and drug lords.

Why should you run UBO checks?

Companies and financial institutions are expected to know who they are doing their business with, and comply with KYB (Know Your Business) requirement. This requires detection of the ownership structure and their business relationships.

Use of offshore tax havens, shell firms, investments in cash-intensive sectors like bullion and real estate, Trusts with no specific purpose, layers of shareholding (for instance, through subsidiaries or intermediaries), are some ways fraud and crime are concealed. Fraudsters also make use of fictitious addresses and fake identities; avoid the deposit of annual financial statements, to conceal their identities and get away in the case of investigations.

Such illegal and dishonest practices are part of financial fraud that has given rise to the need for UBO legislation across the world.

What is an Ultimate Beneficial Owner (UBO)?

UBO is an acronym for ‘Ultimate Beneficial Owner’, i.e. the person or entity who is the ultimate beneficiary of the company.
The FATF provides for the definition of the ‘Ultimate Beneficial Owner’:

“the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.”

The FATF focuses on two types of UBO, based on “ultimate ownership” and “ultimate effective control”. The definition also extends to a beneficiary under life insurance or other investment-linked insurance policy.
The beneficial owner is thus;

–   the person you are doing business with, who may be the legal owner of the entity, or
–   the person, or group of persons, who own/s or controls that business.

A company may have more than one beneficial owner or group of owners, to conceal the identity of absolute controlling person or interests.

The “ultimate beneficial owner” of a legal entity is thus:

–   one who holds 25% or more of share capital; or
–   one who exercises 25% or more of the voting rights; or
–   a beneficiary of 25% or more of the legal entity’s capital; or
–   a ‘nominee director’appointed on behalf of another person and used to conceal the identity of the true owner of the company or some illicit activity; or
–   a company or other legal entity who is a ‘corporate director’, who may be used to construct  complex and opaque corporate structures across multiple jurisdictions to facilitate illicit activity; or
–   a holder of ‘bearer shares’ which do not require registration of the owner, and can be transferred simply with changing hands of the share certificate. This anonymous ownership may be used for tax evasion, money laundering or illegal activities.

Global regulations have come into effect only in 2017-2018, and require that such individuals as listed above, be identified by taking due diligence measures of client screening.

Ultimate Beneficial Owner (UBO)

To whom does the law apply?

The UBO compliance law applies to;

–   Financial transactions, financial institutions (commercial banks, investment banks, insurance companies, brokerages and investment companies), and companies that deal with money (credit unions, money transfer            businesses, payment services, online marketplaces, gambling and gaming companies).
–   Other companies, like real estate and bullion trading, where transaction above threshold limits, may trigger the requirement of UBO reporting.
–   Jurisdictions where regulators have explicit AML/CTF laws, and KYC rules.

Regulated entities are required to retrieve, maintain and disclose such UBO information. Non-compliance can lead to heavy fines and severe reputational damage.

The EU 4MLD provides for the most extensive rules of ultimate beneficial ownership. It extends the above definition to one who exercises the right to appoint or remove the directors, or one who has the right to exercise control over the company’s operations.

In the absence of any of these criteria not met, the management is treated as beneficial owners.  EU member countries are required to maintain up-to-date ownership information in a central registry.

What your Company needs to do?

Your organisation needs to follow procedures and processes to collect information about all individuals with significant ownership or control at the time of onboarding or new business relationship. UBO is part of KYC-KYB process, where you need to collect, store, update, and file the information correctly and completely with the Beneficial Ownership Register or other Register in your jurisdiction.

–   Implement Customer Due Diligence that includes ‘beneficial ownership’ information.
–   Implement an AML/CFT program with UBO Screening.
–   Maintenance of a Register with ownership information.
–   Enhanced due diligence based on risk assessment & country risks
–   Transactions of UBOs to be monitored, and reported for suspicious transactions or behaviour.

The beneficial ownership information to be collected from individuals is:

–   Name (and title for the controlling individual(s),
–   Date of birth,
–   Address; and
–   Social Security number, or passport number with country of issuance, or other national ID

For a business entity, the following information is collected:

–   Name of business,
–   Address,
–   Type of business,
–   Registration number,
–   Country of operation,
–   Structure of directors and ownership, shareholding, etc.

Consequences of UBO non-compliance

Where UBO information is not compiled at the time of KYC or UBO screening has not been performed, the company may face huge penalties, from jail time to fines, or both.

Besides the penalties, as a company, you may face the loss of reputation and lose out on customer confidence. Another more serious consequence gaining traction is de-risking, where institutions may develop severe business relationships with you or banks may close your account to minimise their risk exposure.