It is now required that customers undergo beneficial ownership identification and verification as part of the KYC onboarding and remediation process. It is essential to the most recent wave of worldwide AML/CTF sanctions and regulations, as well as tax compliance legislation and standards.
Scandals such as the Panama Papers, Unaoil, and VimpelCom have not only brought attention to the essential importance of excellent customer due diligence, but they have also emphasized the importance of strong customer due diligence (CDD). Still, they have also fueled regulatory pressure for improved ownership disclosure and transparency. Failure to comply with the new, harsher system exposes companies and individuals to severe reputational and financial damage.
However, while the consequences are obvious, removing the intricate legal arrangements meant to conceal Ultimate Beneficial Ownership (UBO) offers considerable difficulty. There is also confusion regarding multiple beneficial ownership outlines, a lack of trustworthy ownership listings, disclosure fatigue, and purposeful non-cooperation, which are all obstacles to achieving success.
The fourth EU Anti-Money Laundering Directive
In many situations, or soon will be, a UBO check is required when conducting business with commercial clients. Beneficial ownership information is a necessity of the 4th AML Directive in Europe, and many countries are enacting legislation to enforce reporting obligations.
While each European nation will have to decide its own regulations, the laws must adhere to the 4thAML Directive; thus, they will be quite similar to the Swedish restrictions.
Final CDD Rule
Similar beneficial ownership disclosures are included in the forthcoming FinCEN Customer Due Diligence Final Rule, which goes into effect on May 11, 2018.
In this sense, financial institutions include institutions such as banks, financial advisers, mutual funds, futures commission traders, and commodities brokers. Customers who are legal entities include corporations, limited liability companies, limited or general partnerships, business trusts, and other similar entities.
Beneficial owners are those who have considerable ownership (Ownership Prong) or managerial control (Control Prong) over a legal organization. The Ownership Prong specifically refers to all people who, directly or indirectly, hold 25% or more of the legal company. At least one person has a “major duty to govern, manage, or steer the legal entity,” according to the Control Prong. A C-level executive, the President, General Partner, or someone who performs such tasks, for example, is a possible Control Prong designate.
UBO International Standards
While the 4thAMLD and the CDD Final Rule are still in effect, several nations have agreed to international treaties requiring beneficial ownership declarations. The Financial Action Task Force (FATF) established rules for beneficial ownership as early as 2003, and in 2012, 198 nations agreed to a reinforced set of FATF standards.
The FATF study, legal reforms in Europe and the United States, and significant corruption scandals like the Panama Papers all placed pressure on other G20 countries to implement an efficient, beneficial ownership disclosure system.
While change may not be as rapid as the FATF desires, it appears inevitable; legitimate governments do not want to be perceived as soft on corruption. There is a significant trend toward requiring beneficial ownership due diligence, whether it is to collect more tax income, prevent terrorist funding, increase transparency, or restrict the movement of unlawful cash.
UBO in Four Easy Steps
What particular UBO rules and procedures should your organization implement? Of course, you must follow unique compliance standards for each nation in which your business operates. However, in the grand scheme of things, many standard procedures are achievable due to considerable commonalities in information needs throughout the world.
To develop an effective UBO program, you must take four major steps:
- Obtain Company Vitals
Determine and confirm the accuracy of a company record, such as the register number, company name, address, status, and key management people. While the precise information you collect will vary depending on the jurisdiction and your fraud prevention requirements, you will need to collect it in a systematic manner and enter it into your workflows.
- Investigate the Ownership Structure and Percentages
Determine the entities or real people who have a stake in the company, either directly or via another party.
- Determine Beneficial Owners
Calculate any natural-total person’s ownership interest or management control to see if it exceeds the threshold for UBO reporting.
- Perform AML/KYC checks on all persons who are determined to be UBOs.
While four processes may not appear to be too onerous in principle, in practice, without a suitable system in place, UBO checks will add significant expenses, delays, and frustrations to both compliance teams and legal entity clients.
While theoretically viable, manual systems in which personnel do individual searches on various registrars, import data, track records, and complete sophisticated assessments are fraught with problems. It slows down the onboarding or monitoring process, causing clients to wait longer to conduct business. It is prone to mistakes since every keystroke is a potential mistake that must be re-entered. It is costly since staff time is required for each stage, and their knowledge is spent on data input rather than high-level compliance issues.
With growing AML/CFT compliance requirements, systems that automate the whole workflow for detecting and validating UBOs are the way of the future.
September 2021, published on Sanction Scanner