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How Regulation affecting Ultimate Beneficial Ownership Are Changing and How to Prepare Your KYC Team

UBO
March 4, 2022

Compliance professionals know very well that regulations are always changing. The only questions are which compliance hoops your organisation will need to leap through, and how high those hoops will be positioned.

Ian Henderson, CEO of Kyckr, shares his thoughts on how regulations affecting Ultimate Beneficial Ownership are changing, offering advice on how to prepare your KYC team.

There is a genuine need for ultimate beneficial ownership regulations and registries. Knowing who benefits from an organisation’s existence is key to snuffing out corruption.

However, the rules put the onus on institutions and their customers to comply. Meanwhile, those institutions have yet to receive the resources — namely, consistent, reliable national UBO registries — that they’ve been promised.

As of March 2020, only 5 of 27 EU Member States had implemented a free public registry containing UBO information, as is mandated by European Anti-Money Laundering Directives. American organisations face a similar lack of accessible registries.

Compliance professionals know very well that regulations are always changing. The only questions are which compliance hoops your organisation will need to leap through, and how high those hoops will be positioned. This makes identifying UBOs abnormally costly and time-consuming. UBO verification is an especially arduous part of compliance, as ownership structures can be complex and oftentimes global in nature.

Yet, this imperfect state of regulation is the framework that your organisation must work within. Understanding the nature of regulations, and how your organisation can overcome challenges to compliance, is key to reducing onboarding times, minimising strain on customer relationships, and avoiding hefty fines.

How UBO Disclosure Requirements Are Changing

Here’s the short story: UBO disclosure requirements are getting stricter across the board. Fines for failing to comply with UBO-related regulations are getting steeper and compliance costs are rising as a consequence.

And now the more detailed story.

Regulations on UBOs vary across borders and jurisdictions. While the legal concept of beneficial ownership dates as far back as the 1933 U.S. Securities Act, there’s been a marked emphasis on UBO disclosure requirements of late.

The following are specific examples of how UBO-related legislation is changing compliance requirements.

Notable Regulations in Europe

Directive (EU) 2015/849, also known as the 4th Anti-Money Laundering Directive or 4AMLD, requires all EU Member States to enact a national UBO registry. All legal entities were required to communicate specific information to their national UBO register.

We know that these registries have been slow to take shape. And yet, more UBO-related regulations continue to be issued to institutions in EU member states.

While the 4AMLD set out requirements for its members regarding UBOs,  including that companies must obtain and hold “adequate, accurate and current information” about their beneficial owners, the 5th AML Directive, which came into effect on 10 January 2020, went further by expanding the scope of UBO-related legislations and enacting “effective, proportionate and dissuasive measures or sanctions” for non-compliance.

Cyprus, long known for its opaque regulatory climate, has indicated that it will produce a national UBO registry. Other nations like Azerbaijan and the Czech Republic have taken tangible steps to comply with European AML Directives as well.

Despite these efforts, KYC specialists will tell you that UBO-specific data should be far more accessible and accurate than it currently is. Registries and registry networks that source up-to-date, accurate UBO documentation exist, but can be camouflaged by less reliable alternatives.

Some nations have also indicated that they may not make UBO information available at all. Such pushback against UBO verification mandates could be yet another challenge for compliance professionals.

And yet, as states and organisations rush to catch up to AML directives, new measures continue to emerge. The 6th AML Directive has come into effect in June 2021. The directive extends the criminal liability of money laundering offences to ‘legal persons’, or companies and incorporated partnerships and persons holding key positions within them. Therefore, placing more responsibility on senior management of larger firms as well as any employees that are directly involved in committing money laundering offences. Consequently, money laundering crimes are expected to be punishable by harsher penalties, including larger fines and stricter sanctions with a “maximum term of imprisonment of at least four years” for any money laundering offence.  

Expect a consistent trend with each new directive: more compliance requirements and stricter sanctions for non-compliance. 

Notable UBO-related Regulations in America

The United States Congress passed a legislative trifecta that follows in the steps of the EU’s AML Directives. 

On January 1 2021, it approved the Corporate Transparency Act (CTA) under the purview of the National Defense Authorization Act (NDAA). These acts were, in terms of UBO requirements, a continuation of the Anti-Money Laundering Act of 2020 (AMLA). 

This legislation enacts stronger compliance requirements. One of its specific aims is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the US government, per Bloomberg Tax

American organisations will need to report identifying information for each beneficial owner, as well as any applicant starting a corporation, limited liability company (LLC), or other business entity. It’s a significant step down the path already established by the EU.

How to Prepare for the Future

Keep up to speed with regulatory obligations in your territories

We’ve seen how AML regulations are changing at a breakneck pace. Our AML Fines Report 2021 showed that there’s no grace period for compliance.

Monitoring changes in your territorial regulations and keeping pace with new directives is key to avoiding compliance-related fines. 

Establish clear and consistent UBO verification policies to comply with regulatory obligations.

Knowing the latest regulations is the first step and KYC specialists must continually adapt to the newest regulations in a way that does not disrupt their existing processes. Though regulatory obligations change, your KYC specialists’ approach to AML compliance must be logical and repeatable. 

New regulations may somewhat alter their approach to finding accurate UBO documents, verifying those documents, and reporting any potential issues to the appropriate parties within your organisation. However, your specialists’ fundamental approach to these processes should be largely consistent so as to avoid confusion that can lead to errors, oversights, and fines.

While UBO registries and the general regulatory landscape may be inconsistent, your internal approach to compliance doesn’t have to be.

Utilise tools that can simplify the UBO verification workflow

If you don’t have a capable technological framework on your side, you’re likely to either get whacked by regulators, lose customers because of rote onboarding processes, or suffer both of these fates. 

Even if your manual compliance processes are thorough, they’re undoubtedly onerous. The scarcity of UBO registries means that UBO identification and verification can add weeks to a single customer’s onboarding time.

Cutting-edge tools provide usable visual data sourced from the available UBO registries. Data can be organised based on the segment of the ownership framework that you want to review. 

Effective technology can reduce your operational costs, the time your KYC analysts spend on identifying UBOs, the time that customers wait to onboard while helping your organisation remain compliant. 

Conclusion 

Your analysts may spend as many as 8 hours identifying the UBOs for a single organisation with a complex ownership structure. Is there a way to streamline the process of verifying UBOs and significantly reduce the time associated with it?

As we are all aware, we can expect regulations to become more stringent, not less so. Consider the value of technology that can provide more accessible, actionable, and reliable UBO documentation to your KYC specialists.

As fines for non-compliance increase and customers grow increasingly impatient with tedious onboarding processes, organisations that fail to embrace tech-driven UBO solutions will fall behind. 

UBO
March 4, 2022

Compliance professionals know very well that regulations are always changing. The only questions are which compliance hoops your organisation will need to leap through, and how high those hoops will be positioned.

Ian Henderson, CEO of Kyckr, shares his thoughts on how regulations affecting Ultimate Beneficial Ownership are changing, offering advice on how to prepare your KYC team.

There is a genuine need for ultimate beneficial ownership regulations and registries. Knowing who benefits from an organisation’s existence is key to snuffing out corruption.

However, the rules put the onus on institutions and their customers to comply. Meanwhile, those institutions have yet to receive the resources — namely, consistent, reliable national UBO registries — that they’ve been promised.

As of March 2020, only 5 of 27 EU Member States had implemented a free public registry containing UBO information, as is mandated by European Anti-Money Laundering Directives. American organisations face a similar lack of accessible registries.

Compliance professionals know very well that regulations are always changing. The only questions are which compliance hoops your organisation will need to leap through, and how high those hoops will be positioned. This makes identifying UBOs abnormally costly and time-consuming. UBO verification is an especially arduous part of compliance, as ownership structures can be complex and oftentimes global in nature.

Yet, this imperfect state of regulation is the framework that your organisation must work within. Understanding the nature of regulations, and how your organisation can overcome challenges to compliance, is key to reducing onboarding times, minimising strain on customer relationships, and avoiding hefty fines.

How UBO Disclosure Requirements Are Changing

Here’s the short story: UBO disclosure requirements are getting stricter across the board. Fines for failing to comply with UBO-related regulations are getting steeper and compliance costs are rising as a consequence.

And now the more detailed story.

Regulations on UBOs vary across borders and jurisdictions. While the legal concept of beneficial ownership dates as far back as the 1933 U.S. Securities Act, there’s been a marked emphasis on UBO disclosure requirements of late.

The following are specific examples of how UBO-related legislation is changing compliance requirements.

Notable Regulations in Europe

Directive (EU) 2015/849, also known as the 4th Anti-Money Laundering Directive or 4AMLD, requires all EU Member States to enact a national UBO registry. All legal entities were required to communicate specific information to their national UBO register.

We know that these registries have been slow to take shape. And yet, more UBO-related regulations continue to be issued to institutions in EU member states.

While the 4AMLD set out requirements for its members regarding UBOs,  including that companies must obtain and hold “adequate, accurate and current information” about their beneficial owners, the 5th AML Directive, which came into effect on 10 January 2020, went further by expanding the scope of UBO-related legislations and enacting “effective, proportionate and dissuasive measures or sanctions” for non-compliance.

Cyprus, long known for its opaque regulatory climate, has indicated that it will produce a national UBO registry. Other nations like Azerbaijan and the Czech Republic have taken tangible steps to comply with European AML Directives as well.

Despite these efforts, KYC specialists will tell you that UBO-specific data should be far more accessible and accurate than it currently is. Registries and registry networks that source up-to-date, accurate UBO documentation exist, but can be camouflaged by less reliable alternatives.

Some nations have also indicated that they may not make UBO information available at all. Such pushback against UBO verification mandates could be yet another challenge for compliance professionals.

And yet, as states and organisations rush to catch up to AML directives, new measures continue to emerge. The 6th AML Directive has come into effect in June 2021. The directive extends the criminal liability of money laundering offences to ‘legal persons’, or companies and incorporated partnerships and persons holding key positions within them. Therefore, placing more responsibility on senior management of larger firms as well as any employees that are directly involved in committing money laundering offences. Consequently, money laundering crimes are expected to be punishable by harsher penalties, including larger fines and stricter sanctions with a “maximum term of imprisonment of at least four years” for any money laundering offence.  

Expect a consistent trend with each new directive: more compliance requirements and stricter sanctions for non-compliance. 

Notable UBO-related Regulations in America

The United States Congress passed a legislative trifecta that follows in the steps of the EU’s AML Directives. 

On January 1 2021, it approved the Corporate Transparency Act (CTA) under the purview of the National Defense Authorization Act (NDAA). These acts were, in terms of UBO requirements, a continuation of the Anti-Money Laundering Act of 2020 (AMLA). 

This legislation enacts stronger compliance requirements. One of its specific aims is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the US government, per Bloomberg Tax

American organisations will need to report identifying information for each beneficial owner, as well as any applicant starting a corporation, limited liability company (LLC), or other business entity. It’s a significant step down the path already established by the EU.

How to Prepare for the Future

Keep up to speed with regulatory obligations in your territories

We’ve seen how AML regulations are changing at a breakneck pace. Our AML Fines Report 2021 showed that there’s no grace period for compliance.

Monitoring changes in your territorial regulations and keeping pace with new directives is key to avoiding compliance-related fines. 

Establish clear and consistent UBO verification policies to comply with regulatory obligations.

Knowing the latest regulations is the first step and KYC specialists must continually adapt to the newest regulations in a way that does not disrupt their existing processes. Though regulatory obligations change, your KYC specialists’ approach to AML compliance must be logical and repeatable. 

New regulations may somewhat alter their approach to finding accurate UBO documents, verifying those documents, and reporting any potential issues to the appropriate parties within your organisation. However, your specialists’ fundamental approach to these processes should be largely consistent so as to avoid confusion that can lead to errors, oversights, and fines.

While UBO registries and the general regulatory landscape may be inconsistent, your internal approach to compliance doesn’t have to be.

Utilise tools that can simplify the UBO verification workflow

If you don’t have a capable technological framework on your side, you’re likely to either get whacked by regulators, lose customers because of rote onboarding processes, or suffer both of these fates. 

Even if your manual compliance processes are thorough, they’re undoubtedly onerous. The scarcity of UBO registries means that UBO identification and verification can add weeks to a single customer’s onboarding time.

Cutting-edge tools provide usable visual data sourced from the available UBO registries. Data can be organised based on the segment of the ownership framework that you want to review. 

Effective technology can reduce your operational costs, the time your KYC analysts spend on identifying UBOs, the time that customers wait to onboard while helping your organisation remain compliant. 

Conclusion 

Your analysts may spend as many as 8 hours identifying the UBOs for a single organisation with a complex ownership structure. Is there a way to streamline the process of verifying UBOs and significantly reduce the time associated with it?

As we are all aware, we can expect regulations to become more stringent, not less so. Consider the value of technology that can provide more accessible, actionable, and reliable UBO documentation to your KYC specialists.

As fines for non-compliance increase and customers grow increasingly impatient with tedious onboarding processes, organisations that fail to embrace tech-driven UBO solutions will fall behind. 

Build your Customer Due Diligence and KYC processes on a robust foundation with Kyckr.

Make data work smarter, not harder.

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