Verification knowledge hub
In this article, we explain who UBOs are and why it’s important to verify them—with a step-by-step guide on how to do it.
Regulators all over the world have been working to develop ways to confront the spread of money laundering. After the Panama Papers leaked, government institutions found out about the loophole in the existing due diligence system: a lack of beneficial ownership transparency. Among other problems, murky beneficial ownership information allowed criminals to transfer illicit funds offshore. In 2016, regulators started to fight back by implementing rules on Ultimate Beneficial Owners (UBOs) and the information that needs to be provided about them by businesses.
We at Sumsub have prepared a guide explaining UBOs and the ways to identify and verify such individuals.
A UBO (Ultimate Beneficial Owner) is an individual who has the ultimate effective control over an arrangement. Depending on the jurisdiction, one can be defined as a UBO if they own a substantial part of a company (e.g., 10-25%) and have voting rights.
AML-obligated entities (brokers or dealers in securities, currency exchange officers, brokers in commodities, FX and binary options brokers, hedge funds, casinos, futures commission merchants, blockchains, and digital lenders) have to establish and monitor the UBOs of their company-clients.
Rules for UBO identification and verification differ from region to a region. For example, the EU’s AMLD4 (Fourth Anti-Money Laundering Directive) states that having more than 25% of shares constitutes UBO status—whereas in the US, an entity is considered a UBO if it controls over 50%.
There are situations when a person can hold a company’s shares but receive no benefit from them. In such cases, the beneficiary isn’t a UBO because they don’t enjoy benefits such as the:
Finally, someone can be a non-beneficiary owner—and therefore a non-UBO— if they hold shares for someone else (e.g., parents holding the shares of their children).
Companies that comply with Anti-Money Laundering (AML) regulations have to identify UBOs. The core reason is to prevent financial crime, such as money laundering, being conducted through shell companies.
The procedure of UBO verification can be separated into four steps.
To verify the legitimacy of a company and the accuracy of its records, full and up-to-date information regarding its register number, name, address, official status, and top management employees needs to be collected. The required information might vary depending on the jurisdiction and fraud regulation standards. Generally, the following information should be collected:
The provided information has to be verified by reliable documents or data or a combination of both.
Documents or registry information can help identify natural persons who have a percentage in shares or interests in a firm, and whether this control is direct or indirect. In case shares are held by intermediary legal entities, the full ownership structure should be analyzed until controlling natural persons are ascertained.
A company should learn about the total percentage of shares, ownership stake or possible indirect control of every individual and calculate if one of them falls under the definition of UBO.
All of those deemed as UBOs have to go through the full Know Your Customer (KYC) check, which we explain below.
To identify a UBO, companies need to implement KYC. This includes establishing a proper Customer Due Diligence (CDD) procedure, which is the process of collecting, verifying, and monitoring information provided by customers.
If it turns out that an established UBO is a high-risk customer, then Enhanced Due Diligence (EDD) monitoring should be conducted.
Companies also have to implement Anti-Money Laundering (AML) screening to check whether their customers are featured within any sanction lists (OFAC, UN, HMT, EU, DFT, etc.), PEP lists, adverse media, and so on.
Even after the onboarding stage, customers should be monitored on an ongoing basis in case they end up on a sanctions list later on.
CDD checks have to be continuous as there’s always a chance that a customer’s profile changes over time. For example, a UBO can be sanctioned, get involved in high-risk transactions, or make changes to their personal information.
The 4th EU Anti-Money Laundering Directive (4AMLD), implemented in 2017, requires all member states to create public registers for beneficial owners.Therefore, companies have to share information about their UBOs, while regulated institutions have to verify UBOs upon commencing business relationships.
In 2020, the 5AMLD came into effect, with even stricter regulations on UBOs. It requires UBO lists have to be accessible to the general public, while information regarding trusts must be available to authorities. Other parts of the directive also aimed to create a higher level of business transparency.
A UBO stands for Ultimate Beneficial Owner. A UBO is an individual who has major control over a business.
It’s important for companies to identify UBOs for several reasons. First, it prevents criminals from using shell companies to hide their identities, which in turn prevents money laundering. Second, companies have to identify and verify the UBOs to comply with AML regulations.
Any individual opening a business account has to complete a certification, which includes their name, address, and other personal information.
This is when information provided by a UBO gets verified and screened against a variety of sanctions, PEPs lists and adverse media.
If a company doesn’t comply with regulations, it can be subject to fines and other penalties (e.g., license revocation and fines).
A UBO is a person who has ultimate control over a business and owns at least 25% of its shares. A Beneficial Owner is anybody who owns shares and benefits financially from a company.
A beneficial owner is someone who has direct or indirect control over an organization. Shareholding may not constitute beneficial ownership, especially if the shares controlled are beneath the UBO threshold.