Did you know that unregulated entities are a major concern for being involved in economic and financial crimes? And that more than half of criminal organizations exploit commercial institutions to their advantage? Counter fraud laws are important and here is why you need to consider each one of them, including UBO regulations.
It is not news for anyone—firms are expected to know their customers and business partners to cut any connections with fraudulent and sanctioned parties. Any institution that abides AML and Anti-Terrorist Financing Act must acclaim their ultimate beneficial owner aka UBO.
But what is the meaning of UBO and is it really necessary to retrieve their identity? If so, how to protect your company from high fines imposed by complex legislation?
Getting to know your UBOs
UBO (Ultimate Beneficial Owner) is an individual who benefits the most and has the ultimate effective control over an arrangement, a legal or a natural person on whose behalf the transactions are being made. To put it simply, it is the ultimate beneficiary regardless of the chain of control.
UBO check: who is impacted?
If doing any business that involves a second party, financial and trading institutions and organizations are subjected to mandatory ultimate beneficial owner check and disclosure.
These entities are banks, brokers or dealers in securities, currency exchange officers, brokers in commodities, FX and binary options brokers, hedge funds, casinos, futures commission merchants, blockchains, digital lenders.
The legislation and regulations to UBO identification and verification are quite intricate and not always straightforward. EU’s AMLD4 (Fourth Anti-Money Laundering Directive) states that having more than 25% of the shares, interest or being a beneficiary of at least 25% of the legal entity’s capital gains you the status of a UBO.
It also claims that the ownership information has to be updated and to be accessible to obliged entities, authorities and public persons with a proven legitimate interest (ex. journalists or NGO).
The core reason for UBO identification is to prevent financial malintent such as money laundering and terrorist financing being hidden behind the closed doors of corporations and legal entities.
By now frauds using off-shore islands and so-called tax havens is almost a cliche. Multiple investigations of bankruptcy or VAT frauds and other mala fide practices lead into disclosing another one of the “ghost firms”. Criminals make up fake addresses, registration numbers, PO boxes, emails, anything to help them create an illusion of an entity with no connections to themselves.
The suspicions arise once companies fail to submit financial statements and come up with vague excuses. That is how the importance of manifesting the UBO came into question and the result of non-compliance are penalties from up to one million euros.
How do we check if there is a UBO in the room
First step: acquire the firm’s credentials
To verify their legitimacy and the accuracy of their records companies have to supply full and up-to-date information regarding register number, firm’s name, address, official status, and top management employees. The exact specifications might vary depending on the jurisdiction and fraud regulation standards.
Second step: research ownership chain
Identify natural or legal persons who have a percentage in shares or interests and determine if the ownership is direct or indirect.
Third step: single out the ultimate beneficiary
See to the total percentage of shares, management control, and ownership stake of every individual and calculate if one of them falls under the definition of UBO — has the most benefit.
Fourth step: perform an AML/KYC check
All of those who were deemed UBOs have to go through the full AML/KYC check.
Estimating your risks
You have to understand the risk categories UBOs fall into. Ranging from low to high, they demand different approaches:
For low-risk UBOs, it is enough to ask the client to confirm their identity and to sign a statement with the mentioning of all their details. To establish the identity of a low-risk client, it is sufficient to perform the standard visual check (by comparison of the client’s facial features shown on the ID’s photograph with the real facial features of the client) and authentication check (by verification of the provided ID’s authenticity and validity).
Mid to High risk
If the person is a PEP or if there are any signs related to terrorism or money laundering, further investigation is required. All business interaction before the case is settled is unsafe for you/your company, posing a risk of being involved in criminal activities. In such cases, according to the FATF recommendations, enhanced due diligence measures may include the following:
- Performing additional searches to collect identifying information from a wider variety of sources and using this information to assess the individual customer’s risk profile. Such factors as political exposure, adverse media reports and being subject to legal enforcement measures may contribute to the risk;
- Analyzing the source of funds or wealth involved in the business relationship to be satisfied that they do not constitute the proceeds of any crime and to register any discrepancies between the income, the source of wealth, and the overall net worth;
- Requesting additional information from the customer about the purpose and intended nature of the business relationship;
- Requiring the clients to provide updated information about any changes in substantial ownership at least annually.
This list is non-exhaustive, since every organization is required to determine the necessary safety measures in each particular situation, based on the latter’s specific risks.
It is important so any updates are made known of and transmitted to the registry within a month. To collect and register this information firms require separate departments and huge resources. That is why companies have started to use automated solutions that reduce manual labor, taking upon themselves the whole process, from gathering and compiling to submitting and updating the information on UBOs.