How to Identify UBOs: Ultimate Beneficial Owners

How important is it to comply with Anti-Money Laundering (AML) regulations? Consider what happened to the largest regional bank in the U.S. On February 15, 2018, U.S. Bancorp was fined US$613 million in penalties for violations of the Bank Secrecy Act and a faulty anti-money laundering (AML) program.

In the face of terror attacks, drug trafficking and other nefarious activities, money laundering is a growing concern that cuts across borders and societies. This leads to the importance of banks and financial institutions (FIs) taking their UBO (Ultimate Beneficial Ownership) compliance with utmost seriousness. Globally, cases such as the Paradise Papers, Unaoil and VimpelCom reiterate the need for deep, complex, thorough customer due diligence.

The objective is clear: financial institutions should identify and verify who their customers are and where their funding originates with the ultimate goal of preventing money laundering or terrorist financing. Not only is knowing your business clients an important risk mitigation strategy, it also is increasingly becoming a legal requirement such as the 4AMLD requirements in Europe, or the FinCEN Final Rule in the US.

To accomplish these objectives, financial institutions must be capable of identifying the beneficial owners of every legal entity customer.

Who Are UBOs and Why Do They Matter?

A UBO refers to any person with direct or indirect ownership or control of an entity. Obtaining accurate beneficial ownership information is crucial to:

• Ensure that the FIs perform screening and provide risk rating for all the required parties against Politically Exposed Persons (PEPs) or as having negative news associated with the UBOs.
• Ensure FIs do not do business with sanctioned customers associated with the UBOs.
• Understand the potential risk that a UBO poses to an FI through its relationship with multiple customer and vendors.

But, contrary to popular belief, identifying the ultimate beneficiary of an account – especially one concealed through a complex web – is not easy. Specifically, there are eight key challenges that FIs have to deal with:

1. Corporate transparency is severely hampered by fragmented and inconsistent data held in national registers around the globe.
2. Entering into a contract or business relationship with a company without full knowledge of beneficial ownership, past or present, introduces significant risk to an organization.
3. Legal corporate structures with multiple layers of ownership increases the number of entities to be verified.
4. A tendency to perform reactive, document-centric and manual processes that cannot help actively manage risk and compliance.
5. A lack of standardized documentation across various countries, making the job of supporting compliance obligations and validating ownership much more difficult.
6. In jurisdictions where it is easy to transfer ownership, the financial institution may not be aware of changes, which may impact the client risk profile and risk appetite of the bank to do business with the customer.
7. Complicated by layers of structures, corporate vehicles and jurisdictional laws, financial institutions may find it difficult to detect changes in profiles or suspicious patterns.
8. Data silos also hinder detecting beneficiary exposure making it crucial to use technology to link data and information stored in different repositories.

Effective and Advanced Ways for Identifying and Verifying UBOs

When onboarding a new business customer, FIs must perform customer due diligence (CDD) and, in some higher risk cases, enhanced due diligence (EDD). The process requires validating company vitals, identifying the beneficial owners and verifying the UBOs. One of the biggest challenges that FIs face is collecting UBO information. The multi-jurisdictional nature of the regulatory market can make it very difficult in terms of whether you go to a 25 percent level, a 10 percent level or even a 2 percent level share of an institution’s voting rights. Recently, FIs have started to adopt emerging technologies, such as Artificial Intelligence and Machine Learning, to identify UBO information. However, some of the more complex trust structures are likely to always remain challenging when it comes to establishing who the UBOs are.

To overcome this challenge, organizations need a robust framework to manage risk and compliance. That’s where a strong RegTech partner with proven KYB and KYC capabilities comes to the fore. Automating data collection, storage and integration for easy information retrieval is one of the key elements to making UBO due diligence faster, more efficient and more reliable. This can provide a holistic view and situational awareness of relationships.

A clear, structured design of data sets that is well-defined for ease of use, flow, processing, and reporting is critical for this automation to work. Using an Application Programming Interface (API) within the system can help integrate workflow and content management, enabling faster onboarding and a robust due diligence process to meet both business and regulatory requirements.