The concept of “Ultimate Beneficial Owner” (or UBO) is critically important in corporate law and anti-money laundering. However, the term isn’t always easy to define. Moreover, once a definition is settled on, determining a company’s Ultimate Beneficial Owner can often be even more challenging - particularly when fraudulent parties attempt to mask illicit activity. Yet as governments and businesses around the world take more action in identifying and tracking UBOs for crime prevention and risk management purposes, having the tools to do this properly becomes all the more critical.
What is a UBO?
Ultimate Beneficial Owner(s), or UBOs, are the ultimate beneficiary or beneficiaries of a company or legal entity. It’s important to understand that UBOs can be defined differently depending on jurisdiction. In broad terms, a UBO can be defined as someone who retains a minimum of 10-25% (again, depending on the jurisdiction) of the voting rights or capital of the entity in question.
Ultimate Beneficial Ownership is important to identify because it provides insight into a business’s proper ownership structure and control. The concept of UBO has become increasingly important in recent years due to its role in corporate law and Anti-Money Laundering (AML) regulations.
To fully comply with laws, businesses must be able to accurately identify their UBOs and ensure that all necessary information is properly reported. However, identifying a company’s UBO can be difficult. That said, there are various ways it can be done depending on the specific circumstances.
For example, if another entity owns a company – as in another corporation or trust – it might require additional research to determine who actually holds the majority stake in the organization. Additionally, some companies may have multiple layers of ownership, further complicating identifying the Ultimate Beneficial Owner.
In its simplest iteration, an Ultimate Beneficial Owner is the natural person(s) who benefit from a company’s activity or a financial transaction.
For example, a software business owner would clearly be that company's Ultimate Beneficial Owner, but this can extend further. As the regulatory body Financial Action Task Force (FATF) states in their Guidance on Transparency and Beneficial Ownership, the term “also includes those persons who exercise ultimate effective control over a legal person or arrangement.” This can mean shareholders or other individuals not on the books, who have sway over the company or reap its rewards, are also of interest.
It is important to note that the term ultimate beneficial owner does not include legal entities but seeks to get at the identity of an actual human being benefiting from control/ownership. So if the software business is owned by a chain of various LLCs and shell companies, determining the UBO would mean finding the person at the end of that chain.
In the United States, the importance of beneficial ownership continues to become more pronounced in the fight against illegal activity. The Anti-Money Laundering Act of 2020 (AMLA) is an update to the 1970's U.S. Bank Secrecy Act (BSA) and directly impacts the Anti-Money Laundering (AML) regime.
Since then, FATF has established guidance for determining or establishing Ultimate Beneficial Ownership. Per the guidance, UBOs might:
- Own a minimum of 25% share capital
- Exercise a minimum of 25% voting rights
- Be beneficiaries of a minimum of 25% entity capital
- Have power of attorney (POA)
- Be nominee or corporate directors appointed to shelter or shield true firm owners
- Be shareholders – even if their shares can be anonymously transferred
Note, what constitutes “substantial control” is not defined in the statute and will need to be defined by regulation. To this end, FinCEN released its first regulatory action in April 2021, announcing the proposed implementation of beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA) - a part of the AML Act of 2020. Such provisions would require companies to disclose UBO information to a corporate registry managed by FinCEN. This is a massive step in the U.S. context and, as legal analysts point out, is “aimed at shell companies that act as “Russian nesting ‘Matryoshka’ dolls” to hide illicit activities.”
Importance of UBO
The importance of UBO screening for businesses cannot be overstated. They’re an important part of corporate law and Anti-Money Laundering regulations. Screenings allow businesses to identify their beneficial owners, verify their identities, and prove they’re not involved in illegal activities like money laundering or terrorist financing.
By verifying the identity of beneficial owners, organizations protect themselves from potential risks associated with dealing with unknown entities and individuals. The process also helps prevent fraud by ensuring all parties involved in transactions have been properly identified and verified beforehand.
Finally, UBO screenings keep companies in compliance with legal requirements set forth by the Financial Action Task Force (FATF). This is a critical step for international organizations operating across multiple jurisdictions where different rules may apply depending on the country or region.
Ultimately, UBO screenings provide businesses with valuable insight into the backgrounds of prominent figures, which can help them make more informed decisions when engaging in financial transactions or other activities involving third parties. Conducting thorough due diligence on customers using an effective UBO screening process means a business can reduce risk exposure while protecting itself from any potential liabilities arising from improper dealings with unknown entities or individuals.
UBO in the EU
The European Union's Anti-Money Laundering Directive (AMLD) put regulations in place to ensure that financial institutions and other businesses can identify the Ultimate Beneficial Owners (UBOs) of companies they deal with. This is essential to preventing money laundering, terrorist financing, and other criminal activities.
To address the issue, some countries have implemented national registers and electronic identification systems, effectively reducing risk while providing greater transparency into who owns what in Europe’s corporate landscape.
4AMLD
The Fourth Anti-Money Laundering Directive (4AMLD) is an EU law introduced in 2015 to strengthen the European Union’s fight against money laundering and terrorist financing. It requires financial institutions to identify and verify UBOs of their customers, making it more difficult for criminals to hide behind corporate structures when engaging in illegal activities. The greater transparency makes it easier and faster for regulators and law enforcement agencies around Europe to track down those responsible for criminal activities across borders.
5AMLD
The Fifth Anti-Money Laundering Directive (5AMLD) is a critical piece of European Union legislation designed to strengthen the EU’s Anti-Money Laundering and Counter-Terrorism financing framework. It mandates that companies accurately identify UBOs and keep accessible records for competent authorities.
5AMLD helps ensure several things in the effort to prevent money laundering and other criminal activity, including:
- Requiring transparency when it comes to corporate ownership structures
- Making it more difficult for criminals to hide behind shell companies
- Providing regulators with access to information about beneficial owners so they can better monitor suspicious transactions
Companies must have systems that allow them to quickly verify UBOs whenever required if they want to remain compliant with 5AMLD regulations and avoid potential non-compliance fines.
6AMLD
The 6th Anti-Money Laundering Directive (6AMLD) is European Union legislation implemented in July 2018. The directive further strengthens the EU’s fight against money laundering and terrorist financing by introducing tougher rules for financial institutions, including banks, payment services providers, and other entities involved in financial transactions.
6AMLD requires companies identify and collect information on UBOs, including:
- Name
- Date of birth
- Nationality
- Country of residence
It also introduces stricter due diligence requirements for customer onboarding processes and mandates the monitoring of existing customers for suspicious activity. Risk intelligence solutions can help organizations automate due diligence processes while ensuring compliance with regulatory requirements like those set out in 6AMLD.
Identifying UBOs
There are several ways to determine who a company’s UBO is. The most common method involves examining ownership documents such as articles of incorporation, shareholder agreements, trust deeds, and other relevant documents.
Once a UBO is identified, the following processes can identify any potential risks associated with the UBO:
- Customer Due Diligence (CDD) - A critical component of Anti-Money Laundering compliance. It involves the collection and analysis of customer data to determine if they’re involved in any suspicious activity or transactions.
- AML Monitoring - A key element of Anti-Money Laundering compliance that helps organizations detect suspicious customer activity. This includes keeping track of customer transaction history over time, and flagging any unusual patterns or activities that may indicate money laundering or terrorist financing attempts.
- Perpetual Know Your Customer (KYC) - A process designed to help financial institutions keep up-to-date information about customers at all times to comply with Anti-Money Laundering regulations (AML). As part of the process, banks must periodically collect updated documents from clients regarding identity and address details, and proof of ownership for companies where applicable.
- Politically Exposed Persons (PEP) Screening - Essential when it comes to Anti-Money Laundering Compliance because PEPs pose a higher risk due to potential conflicts between personal interests and public duties held. Their high profile and access make PEPs more prone to bribery or corruption schemes involving large sums of money moving across borders undetected by authorities.
Yet we have also noted before that even these new provisions have shortcomings for actual AML implementation, as any registry will not be publicly available and institutions working in the financial sector still must make the determinations of who the UBO is on their own. Plus, criminals will always seek ways to stay ahead of the regulatory curve. Therefore, it’s vital that institutions not only “know their customers” but also “know their UBOs” for customers that are legal entities.
Whether it’s knowing if you’re dealing with a politically-exposed person, or determining if you’d be running afoul of OFAC’s 50% Rule by unknowingly providing business to a sanctioned individual, identifying UBOs is a must.
Ongoing KYB & KYC Tools
Companies must accurately identify UBOs to comply with corporate law and Anti-Money Laundering regulations. To do this, many organizations are turning to ongoing KYB & KYC tools – like Sigma Ratings’ platform – to automate due diligence processes and monitor data in real-time. With these solutions, it’s now possible to quickly screen potential customers against global watchlists and regulatory databases and continuously monitor existing customer relationships for any changes in ownership structure or suspicious activity.
Sigma Ratings’ analytics capabilities, combined with machine learning algorithms, enable faster detection of high-risk customers without sacrificing accuracy or efficiency. Fully configurable alerts allow you to set alerts when key information changes, rather than rely on point-in-time reviews.
With the tools at Sigma Ratings, we hope to provide actionable ways to make critical determinations regarding UBOs. By using methods like network analysis, risk scoring, and data aggregation and risk taxonomy, we know we can simplify the process for our customers, no matter how complex an ownership chain is. Reach out today for trial access to Sigma’s tools.
