Hiding who is the Ultimate Beneficial Owner (UBO) behind a company is never a good sign. Sure, some people may not want to be associated with the potential negative fallout of a company in the course of its business operations or maybe they don’t want all their finances under public scrutiny. However, when it comes to UBO we need to be aware that business could be for more nefarious purposes like money laundering, tax evasion, fraud, sanction evasion, and corruption.
To be on the safe side, you shouldn’t take such chances during bank customer onboarding or with your own company. Completing a UBO declaration form is a minor step in transparency for your company, but a giant leap for Anti-money Laundering (AML) and combating the financing of terrorism (CFT).
Who is an Ultimate Beneficial Owner?
Under the European Union’s (EU) 4th Anti-Money Laundering Directive (4AMLD) along with making increased provisions for identity verification, strict guidelines were set in place for Ultimate Beneficial Owner disclosure. For financial institutions and Business-to-Business (B2B) operations, recognizing the ultimate beneficial owner is a standard part of Know Your Business (KYB) verification and AML compliance risk assessment. An ultimate beneficial owner is anyone that has by 10 to 25% capital ownership and/or voting rights in a company (depending on where you live) under SWIFT guidelines.
The ultimate beneficial owner is the person that ultimately benefits from any business transactions. During new bank or B2B customer onboarding, businesses need to complete a UBO declaration. In the chance that they provide a faulty or incomplete declaration, steps are taken during KYB verification to identify the ultimate beneficial owner.
Document verification of all acquired business credentials including UBO declaration:
- Researching the ownership chain
- Identify and verify the UBO’s
- Perform comprehensive AML risk assessment
These four steps may look simple, but in reality, these four steps can take months to complete! And if your business doesn’t perform accurate document verification, all the other steps will be in vain. Months wasted, money wasted and still, you can end up onboarding a fraudulent business with a fake Ultimate Beneficial Owner.
Though a UBO declaration is a legally binding document, it is still not enough to deter fraudsters, money launderers, sanctions, and tax evaders. Add in the fact that often UBO declarations are either filled with dated data or reported late to regulators, the effectiveness of a UBO declaration is somewhat tame. And this is why completing a comprehensive UBO/AML check is your business’s only hope for AML compliance.
What to Look For When Screening an Ultimate Beneficial Owner?
Before the completion of a UBO declaration, real-time identity verification of the person submitting the documents needs to occur. Then along with their personal documents and credentials, the business documents need to be verified as well. Researching the ownership chain is when things can get a bit messy and/or reveal questionable links.
And that’s why during researching the ownership chain you need to identify all owners both past and present to establish whether the business has passed through some questionable hands and if the current owner(s) actually have legal ownership. Aside from share capital and voting rights, UBOs can be:-
- Beneficiaries of at least 25% of an entity’s capital
- Anyone with the power of attorney for the company and asset holders
- Guardians of minors and beneficiaries who are minors
- Under 4AMLD, even upper management need to be screened
- Corporate directors or nominee directors are appointed to conceal the true owners of a given firm
- Shareholders, including the holders of bearer shares that can be transferred anonymously
And this is one reason why a UBO declaration may not be enough. In long-established organizations, current directors or even shareholders may not be fully aware of who truly controls what. This is why checking all avenues of potential ownership while researching the ownership chain is necessary.
- Avenues of Potential Ownership
- Direct and indirect ownership
- Ultimate owner – actual and perceived, independent of the company
- Corporate group – all companies with the same ultimate beneficial ownership as the subject company
- Subsidiaries and sister companies
- Corporate organization structure
- Beneficial ownership vs. perceived ownership
- Ownership assessments conducted from the top-down or bottom-up approaches
- Corporate ownership structure (LLB, INC, Partnerships, etc.)
- Shareholders and investors
- Varying definitions of ownership such as creative licenses and patents
Under the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and the oversight of the Financial Action Task Force (FATF), further considerations were made for publicly available company Ultimate Beneficial Owner lists and national registers. International co-operation between banks, regulators, and businesses would be established to support identity verification of UBOs including those of trusts. And private bank UBO registers that are accessible to the relevant authorities.
Why is Global ID Verification of UBOs Important to AML/CFT?
According to the FATF, which has the scope to ensure obligations concerning UBO declaration, identification and reporting are met, UBO’s identity verification is important for transparency of ownership. Which is vital to AML compliance certification and combating the financing of terrorism. Due to the complexities and widespread growth of some ownership structures, global ID verification becomes a crucial part of UBO onboarding, accurate KYB verification, and up-to-date company-based UBO registries and centralized UBO registries.
Without accurate global ID verification, none of the data in any of these registries would be valuable. B2B customer onboarding is a waste of time and digital identity security would be threatened when existing databases get corrupted. Therefore, international cooperation and access to business and centralized UBO registries are a must.
Professional services like lawyers and accountants are responsible for their own UBO registers and enjoy higher-tiered access to centralized UBO registries. But, in many cases, that access and existing information is limited to their jurisdiction and clientele. Plus, digital identity security isn’t something they signed up for and many are concerned about data protection and access.
As much as the FATF and Financial Intelligence Units (FIU) around the world are doing their part for enforcement through fines and sanctions, global ID verification is still a challenge for banks, finance, and legal professionals. Perceived ownership, bearer shareholders, and nominee directors can make Ultimate Beneficial Owner verification complicated. Especially, when these hidden actors give their stand-ins all the rights and responsibilities of ownership while still collecting their benefits.
The Risks and Challenges of Real-Time Identity Verification of Ultimate Beneficial Owner
Let’s start with the fact that not all the information concerning UBOs is available to public registries. Because the FATF does not call for public beneficial ownership registries for legal entities or trusts. Neither are banks and select financial bodies required outside of the regulators to provide information on their clients. Though everyone is encouraged to share in the spirit of international cooperation, in reality, access is somewhat limited. And that is the number one challenge.
Limited data and access
For B2B customer onboarding this makes real-time identity verification almost impossible as data needs to be sourced for accurate identity and document verification. Bank customer onboarding fares are no better as their document verification services usually involve human verification of physical documents and/or put too much trust in the legal power of the UBO declaration. That results in…
1. Long B2B customer onboarding process
Part of the KYB verification requires an assessment of risk for the UBOs for AML compliance. Now, after a long wait for data that may be outdated, all the information previously submitted may be useless. To top it off, the risk assessment itself may not check all the necessary watch or sanction lists. So now you have an…
2. Inaccurate risk assessment with outdated data
Therefore, in completing UBO verification, timeliness matters. It matters to digital identity management, B2B customer onboarding, and AML screening. Real-time identity verification with global access should be possible at every stage of the UBO verification process. And in your risk assessment should check for:
- Politically Exposed Person(s) (PEP) and Office of Foreign Asset Control (OFAC) sanction lists
- United Nations, UK, EU, and Australian (DFAT) Sanction lists
- Specially Designated National (SDN)
- Inspection lists
- Local Government, Federal and International Law Enforcement Databases
- Spam lists
- Adverse Media Watchlist
- Deep web
Further action on your part will be based on their perceived level of risk. Low risk can proceed as normal, but medium needs further investigation while high-risk clients should have continuous monitoring and screening to mitigate risk. Remember, though high-risk clients may be eventually fined or criminally charged if breaches are found, so will you if you fail to report in a timely and efficient manner.
KYB Verification Process to Determine Ultimate Beneficial Owner
The Financial Crime Enforcement Network (FinCEN) Customer Due Diligence (CDD) rule which amends the Bank Secrecy Act (BSA), is meant to identify and verify the identity of the beneficial owners of companies opening accounts. Part of a CDD compliant KYB verification process is having automated monitoring systems, document verification, examiners, and regulatory reports. Ensuring continued protection and success in your CDD program relies on international cooperation and database access.
Though FinCEN and the FATF will only require the completion of CDD and regulatory reports. When it comes to KYB/AML compliance, your company can end up facing fines due to following minimal compliance guidelines and improper risk assessments. Therefore, half measures should never be an option. Especially where B2B and bank customer onboarding are concerned. For your KYB verification process to achieve true AML compliance you need: –
- Global identity verification with real-time identity verification
- Automated and frictionless B2B customer onboarding process
- Ongoing transaction and behavior monitoring
- The secure internal and external communication system
- PEP and sanction list screening
- Adverse media watchlist screening
- Access to all the relevant watchlists and UBO registries
- Automated and mobile compatible systems and methods
- Expert staff training and oversight
- Document verification services
- Digital identity security system and management
- Timely regulatory reporting
As long as this list may seem, it does not cover instances where you have to make risk-based decisions such as extending credit or lowering the UBO threshold for specific clients. The best thing for your business is to keep the lines of communication open between the regulators and examiners to ensure you are making the right decision concerning the ultimate beneficial owner.
Five Ways IDMERIT Keeps UBOs In Check
Clearly, a UBO declaration is not enough for valid identity verification of ultimate beneficial owners. Nor will it offer any long-term protection against fraud, money laundering, terrorism financing, sanction evasion, or corruption. Coupled with long onboarding processes with outdated data that provides inaccurate reports, it is no wonder companies are having a hard time with UBO verification.
We can ease the burden and confusion of Ultimate Beneficial Owner checks and KYB verification in five ways:-
1. Start with Global ID Verification
This isn’t the 90’s. If you can’t verify identity across the globe through multiple devices, why even offer identity verification services? As we have seen in the news with Russian sanction evaders, many have businesses and/or residences in other countries. You need identity verification services that work with a modern global era.
2. Document Verification Services
How do you properly validate ID? Through our document verification services. Using our identity verification API, IDMscan can give you global ID verification in real-time using biometric data and by scanning passports, drivers’ licenses, etc to validate ID.
3. In-Depth Risk Assessment
We’ll check emails, domains, and IP addresses to give you a clearer and more comprehensive risk assessment. Use IDMtrust to identify high-risk clients easier with ongoing behavior monitoring to ensure up-to-date and accurate risk scoring.
4. Digital Identity Security and Management
Managing and protecting your own database comes at a cost. Not to mention it doesn’t provide access to all the necessary watchlists for proper risk screening. Instead of worrying over access and security, use IDMaml which provides all the access you need to the necessary global watchlist to meet AML compliance.
5. Automated Real-Time Identity Verification for UBO’s
B2B customer onboarding and Ultimate Beneficial Owner verification do not have to be months in the making. You can have real-time identity verification as part of your KYB verification process that meets the CDD requirements with IDMkyb. The best benefit of this is no more fines for outdated and late reports.
Using these five services provided by IDMERIT you are already beyond the minimal requirements for the FATF and FinCEN. But if you are truly serious about document verification services and want comprehensive digital identity security, talk with one of our CSRs today and we’ll help you keep all sanctions evading UBOs in check.
