The concept of “Ultimate Beneficial Owner” (or UBO) is a critically important one in corporate law and anti-money laundering. However, it is a term that is not always so easy to define. Moreover, once a definition is settled on, it can often be even more difficult to actually determine who the ultimate beneficial owner of a company is - particularly when fraudulent parties attempt to mask illicit activity. Yet as governments and businesses around the world take more action in identifying and tracking UBO’s for crime prevention and risk management purposes, having the tools to properly do this becomes all the more important.
In its simplest iteration, an ultimate beneficial owner is the natural person(s) that benefits from a company’s activity or a financial transaction. For a simple example, the owner of a software business would clearly be the ultimate beneficial owner of that company. But this can extend further. As 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 that reap its rewards.
It is also 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 is becoming more pronounced in the fight against illegal activity. We have written before about the Anti-Money Laundering Act of 2020 and its impact on the U.S. BSA/AML regime. There, we can find a more statutory definition of beneficial owner which is an individual who:
(i) “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise” exercises substantial control over the entity or
(ii) owns 25% or more of the ownership interests.
However, what constitutes “substantial control” is not defined in the statute and will need to be defined by regulation. To this end, FinCEN released their first regulatory action in April 2021 announcing 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 huge 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.”
Yet we have also noted before that even this has its shortcomings for actual AML implementation, as the aforementioned 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 to find ways to stay ahead of the regulatory curve. Therefore, it is vital that institutions not only “know their customers”, but also know the UBOs of the customers that are legal entities. Whether it’s understanding 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 the UBO is a must.
With the tools at Sigma, we hope to not only provide an understanding of the concept but also actionable ways to make those critical determinations. By using methods like network analysis, risk-rating and data aggregation, we know we can make this process simpler for our customers no matter how complex the ownership chain of theirs.