In recent years, there has been a flurry of changes made to Anti-Money Laundering (AML) regulatory requirements across the globe related to customer identification and company ownership disclosures to strengthen the fight against financial crime.
What is an Ultimate Beneficial Owner?
Ultimate Beneficial Owner, or UBO, is a term used for an individual or entity that is the ultimate beneficiary of the company and
- has at least 25% stake in the legal entity's capital
- has at least 25% voting right in the general meeting of shareholders
- is a beneficiary of at least 25% of the legal entity's capital.
In most cases, if a shareholder owns or controls 25 percent or more of the shares or voting rights of a legal entity or company, it is considered a UBO, although the threshold varies among jurisdictions and regulatory authorities.
Uncovering UBOs is a critical piece in any anti-money laundering program. As financial crime expert Graham Barrow points out, “High end or large-scale money laundering is almost always done through legal entities, mainly “shell” companies. That is, companies that are set up solely for the purpose of moving money through the financial system. Allowing the people behind those companies to stay hidden gives them a “free pass” when using the financial system.”
A History of UBO Policy Recommendations
The Financial Action Task Force (FATF) is a global organisation committed to combating terrorist financing and money laundering by developing policies and setting international standards for more than 200 countries and jurisdictions around the world. In 2012, FATF made recommendations related to the transparency and beneficial ownership of legal persons and arrangements. More specifically, the recommendations state:
“Countries should take measures to prevent the misuse of legal persons [and legal arrangements] for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions.”
Subsequently, FATF released guidance and best practices related to transparency and beneficial ownership in 2014 and 2019. For FATF’s recommendations to become legally binding, they need to be translated into national laws. Therefore, as FATF honed their guidance and recommendations, many jurisdictions also began to amend AML regulations and implement more robust policies surrounding UBO reporting.
Current UBO Regulatory Requirements by Region
As the table shows, some regions have been more advanced in their requirements around UBOs but even in the EU, progress towards publicly available UBO register data has been patchy. In March 2020, Global Witness found that only five EU Member States have implemented a public register which is free to access and 67% of the Member States do not yet have a centralised register of the beneficial owners of companies which is available to the public.
The US has lagged behind the rest of the world in mandating the availability of UBO data and the passing of the AMLA has been one of the largest reforms of anti-money laundering legislation in the US since the Patriot Act in 2001.
Regardless of location, regulated institutions around the world are required to establish adequate AML frameworks that include comprehensive customer identification programs, thorough customer due diligence (CDD) and ongoing monitoring. Barrow recognises that an important element of these requirements is the need to incorporate a robust review of UBO information to ensure that a complete client profile is maintained in order to adequately prevent and detect money laundering risk. “Those with criminal intent will attempt to mask their ownership of a company when they do not wish to appear on any paperwork. It is the role of regulated firms, on a risk-sensitive basis, to delve into the ownership structures to ensure that those appearing on the paperwork, truly are the ultimate owners of the company.”
What information needs to be collected about UBOs?
In order to comply with KYC and AML regulations, regulated firms must identify the beneficial owner(s) and verify their identity.
The information to be collected from individuals is:
- Name and title of the controlling individual(s)
- Date of birth
- Passport number with country of issuance or other national ID or Social Security number
From business entities:
- Name of business
- Type of business
- Registration number
- Country of operation
- Directors and ownership structure, shareholding, etc.
The Challenges of Manual Searches
For European banks, Customer Due Diligence for large corporates, including UBO checks, takes 37 hours on average – nearly a whole working week. With no standardised method of obtaining UBO data, the process is time-consuming and costly and more prone to human error, using data that is less reliable. Three main differences among registries in various jurisdictions create difficulties for regulated institutions in creating an effective and uniform approach to UBO information searches.
Company registries in various countries may limit access to information via payment mechanisms or record keeping practices. As with many government departments, information requests can be a lengthy and expensive process. Barrow notes, “Many corporate registers across the world are inaccessible to anyone other than those who are registered with them, which cuts this off as a source of information to banks and others who need to know. This means they often have to rely on third-party confirmation, either by a certified copy or simply a letter outlining the ownership structure, on which they then need to exercise judgment as to whether it is credible or not.”
Differences in speed and responsiveness of the platforms and technology used across jurisdictions can also create barriers in obtaining up-to-date, accurate and useful information. Features such as language translation and overall user-friendliness can make a big difference in how the information obtained can provide value when conducting AML due diligence.
There is a significant amount of variability in the completeness of data types and availability across various jurisdictions, especially where no UBO registries exist. Among those where registries have been implemented, oftentimes there is little standardisation across registers in terms of classifying and storing data.
Can Technology Streamline the Sourcing of UBOs?
Technology can offer solutions to the discrepancies found among company registries while providing a streamlined and automated approach to obtaining and verifying UBO information. “RegTech, suitably configured, cannot just automate the process but present it in a way that is easy to understand for the human being at the receiving end.” says Barrow. “As more and more corporate registers open up to scrutiny, the role of technology will become ever more important in making connections and properly identifying customer risk.”
While anti-money laundering regulatory changes aim to improve transparency related to beneficial ownership information, it will continue to be the responsibility of regulated firms to ensure that accurate and timely information is used and maintained throughout the KYC and due diligence process. Firms that begin to implement automated, reliable processes can tap into the benefits provided by RegTech, avoid the challenges and costs of manual searches, and experience a clear advantage from the start.
 LexisNexis (March 2020) True Cost of Financial Crime Compliance Study