Screening for ultimate beneficial ownership (UBO) is fraught with challenges, with information often hard to find or hidden within complex structures. As compliance teams look to protect against the risk of financial crime or reputational damage, what's the best practice approach for identifying the UBO?
- The process of identifying the UBO is fraught with challenges, with different record-keeping standards across jurisdictions and often opaque ownership structures.
- A best practice approach to identifying the UBO begins with reliable access to robust, verifiable and complete UBO data to map out and visualize holistic ownership hierarchies.
- With stringent regulations governing UBO, combined with jurisdictional inconsistencies, what can companies do to comply?
Global anti-money laundering (AML) and financial crime legislation places the onus squarely on organizations to understand exactly who they are doing business with.
However, complex and often opaque business structures can make it challenging to unwrap full ownership hierarchies so that associated entities can be screened for potential risk.
When the Panama Papers were leaked in April 2016, the use – and misuse – of offshore companies became the subject of intense global scrutiny.
The following year, in November 2017, a second data leak – the Paradise Papers – lifted the lid on the innermost workings of the international tax haven industry.
The leaked data and documents exposed the offshore financial affairs of a range of international entities and individuals, as well as the organizations that advise them.
The heightened global attention that ensued shone a spotlight on ongoing and pervasive criminal activity linked to the use of complex ownership structures that mask the ultimate beneficial owners or UBOs of companies.
Prior to these leaks, the Financial Action Task Force (FATF) recommendations of 2012 had advised that companies should hold adequate, accurate and timely information about their beneficial ownership. Since then, we have seen the requirements surrounding the identification of the UBOs of legal entities moving up the regulatory agenda.
The FATF’s recommendations are now echoed in laws and regulations across the globe, but complying with these regulations can be far from straightforward.
Identifying the UBO
The process of identifying UBOs is fraught with challenges, the most widespread of which include:
- Understanding differing legal requirements, as well as different methods of defining and recording ownership across jurisdictions.
- Accessing sufficient publicly available information on UBOs and/or collecting business ownership information that is fragmented, stored in different forms and locations, or difficult to find.
- Unraveling complex and often opaque ownership structures.
- Where a potentially higher risk relationship is identified, ascertaining whether investigating beneficial ownership to a lower ownership threshold is necessary.
- Evaluating whether or not ownership thresholds should be aggregated and individuals considered UBOs based on, for example, family relationships, when individually they would not meet relevant thresholds.
- Keeping information up to date in a dynamic environment.
A possible solution, at least in terms of accessing reliable UBO information, is for state mandated UBO registries to be established and maintained by government agencies, but once again, significant international variations in the creation of these are evident.
For example, France, Germany and the United Kingdom have established central registers, but Ireland is still considering a registry and the Netherlands only expects to have its registry up and running in 2020.
Singapore and Hong Kong, meanwhile, require companies to hold a register of their beneficial owners, but in the United States, the creation of a nationwide database of beneficial ownership was originally provided for by the recent Counter Terrorism and Illicit Finance Bill and subsequently removed from the Bill when a fresh draft went before Congress in June 2018.
These examples serve to highlight, once again, the regional inconsistencies that complicate the UBO landscape on an ongoing basis.
Accessing complete UBO data
Given the stringent regulations governing UBO, jurisdictional inconsistencies and other ongoing challenges, how can companies ensure compliance?
This diagram from OCEG illustrates some of the challenges encountered when identifying the UBO.
A best practice approach begins with securing reliable access to robust, verifiable and complete UBO data, so that compliance teams can map out and visualise holistic ownership hierarchies.
Once UBOs have been identified within applicable jurisdictional thresholds, they should then be screened for:
- Inclusion on global sanctions, watch and enforcement lists.
- Political exposure (any links to PEPs).
- Any links to financial crime, including money laundering, bribery, corruption or fraud.
Where heightened risk is detected, enhanced due diligence should be carried out.
While this approach sounds simple enough on paper, widespread challenges such as those outlined above add layers of complexity to the process of identifying and screening UBOs.
Compliance teams are often stretched, both in terms of time and financial resources, and therefore urgently need to find the right tools to cut through the opacity that can surround beneficial ownership.
Only then can they begin to form a clear and holistic view of potential risk, remain compliant, and protect themselves against potentially devastating financial and/or reputational damage.