Ultimate Beneficial Owner (UBO) is a legal term connected to know-your-customer (KYC) and anti-money laundering (AML) laws implemented by nations worldwide. It is a crucial component of an organization's compliance and due diligence operations. The ultimate beneficiary of an organization's business activities is the person or thing that ultimately benefits from the firm's commercial activities. It's essential for an organization to put in place several ways how to mitigate UBO risks.

Banks, financial institutions, and other relevant organizations must know who they are doing business with, hence the acronym UBO. Any organization that does business following AML/CFT regulations is obligated to be aware of and give information on the UBOs pertinent to their commercial dealings. Companies who do not comply risk receiving significant fines for failing to provide this information.

What do UBO Requirements Entail?

UBO Check is now required for all organizations conducting business with commercial consumers, per the EU. According to Europe's Fourth Anti-Money Laundering Directive, beneficial ownership information is necessary. As a result, some member states have passed laws to implement the reporting requirements. The EU 5. AML Directive (5AMLD) mandates that member states create public databases for terrorist activity, corporate obligations, and other legal requirements.

UBO specifications have also been stated by the Financial Action Task Force (FATF). FATF established guidelines for beneficial ownership starting in 2003, and in 2012, 198 governments approved these tightened guidelines. FATF, however, emphasizes several issues, including ownership rule transparency. According to FATF, effective ownership regulations are overly complicated and opaque. Institutions must therefore implement better technologies and practices that provide a more futuristic method to speed up the process.

UBO Institutional Standards

Undoubtedly, one of the crucial inquiries regarding UBO is: What are the unique UBO policies and processes that firms must adhere to? Each nation first establishes requirements for institutions. These commitments and compliance standards must be complied with by organizations. Additionally, the following are the fundamental guidelines that each institution should adhere to develop a successful UBO program:

Understanding Know Your Business Environment

Know Your business is one of the main procedures a company should execute. Knowing your business partners will help you recognize and stop such risky circumstances in the future. Define all personnel data, especially those about the executive staff. Verify the administrative personnel information and your company's registration.

AML Name Screening implementation

Another precaution taken against potential money laundering and terrorist financing threats is performing AML / KYC checks on all people with whom the institutions are associated. Businesses may manage their consumers by screening sanctions, PEP, and harmful media data with AML Name Screening Software.

Identifying the Most Beneficial Owner

Determine your company's ultimate beneficial owners, then conduct AML/KYC checks on everyone who qualifies as a UBO.

How to Recognize a UBO

Obtain Credentials

Businesses must provide current information on all pertinent business details, including the full name, registration number, address, and official status. For clarity and to prevent duplication, the KYC Registry also has to contain the words of every member of top management.

Chain of Ownership research

Companies should evaluate who owns shares or interests in the firm, and to what extent, whether they are natural persons or legal entities. Find out the interest's proportion and if it's direct or indirect.

Identify the Primary Beneficial Owner (UBO)

You may pinpoint the ultimate beneficiaries by knowing the percentage of shares, control, and ownership each person has in the company.

Checks for Know-Your-Customer (KYC) and Anti-money Laundering (AML)

The registry for UBO identification should be updated at least once every five years with the necessary AML/KYC checks.

Mitigate UBO Risks

Once you are aware of a company's UBO status with certainty, it's critical to determine whether any risks exist. You can make plans for the future once the risk level has been identified. UBOs are divided into three risk levels, ranging from low to high.

Low-risk UBOs can prove their identity by signing a declaration attesting to the accuracy of their information. For thorough verification, additional checks against identity papers can be made.

Before deciding on the degree of involvement, more investigations should be conducted in cases of medium- to high-risk UBOs. Additional data must be gathered, such as political exposure, unfavorable media coverage, and legal enforcement actions, if the ultimate beneficial owner demonstrates indicators of involvement in terrorism or money laundering activities.

To evaluate any differences between income and overall net worth, it is essential to look into an entity's financial or funding sources. Determining the nature of the business connection and its intended use is also crucial.

Businesses may find it costly and time-consuming to get this information, so many turn to outside firms with in-depth industry knowledge and extensive company information databases for assistance. Along with many other checks, Cedar Rose will submit requests for any new information not included in common databases.

Also Read:

• Why Identifying a Company's Ultimate Beneficial Owner (UBO) is Important
• Why Founders & Investors Need To Embed Corporate Governance

Managing Risks Related to Reliance on UBO Registers

We have included five areas of best practice below to help businesses manage the risks associated with depending on company and UBO registers:

• Evaluation of jurisdictional risk Businesses should consider the degree of beneficial ownership transparency and the efficacy of UBO registrations in the jurisdiction of incorporation when working with corporate clients. 

• The UBO register's data should be one of many sources for UBO identification and verification. Such reliance is prohibited by MLD4 and Regulation 28.9 of the Money Laundering, Transfer of funds, and Terrorist Financing (Information on the Payer) Regulations 2017 (MLR 2017). For example, for high-risk clients, firms should look at ownership changes, filing history, formation documents, and share registers. Businesses can also use several sources to verify ownership structure and ultimate ownership. Similarly, companies could use more stringent standards for high-risk clients to authenticate the identification of UBOs. These requirements include a face-to-face encounter, supplementary documentation confirming the name, address, date of birth, or even a source of wealth and its plausibility. 

• When it is challenging to identify the UBO(s), record-keeping practices should make sure that businesses can sufficiently show that they used all available resources. Additionally, companies must show that any additional measures adopted, such as confirming the identification of the senior individual in charge of managing the corporate customer, are sufficient to manage the relationship's risks. The business shouldn't engage with a customer if the stakes are deemed excessive by the firm's risk appetite statement.

• Ownership changes should be considered during ongoing due diligence and monitoring of commercial connections. Continuously keeping track of updates to the company and UBO registers, reviewing financial statements, or (where available) subscribing to alerts from a UBO register will improve a firm's capacity to recognize ownership changes, maintain the accuracy of KYC information, and react to any changes in relationship risk.

• Employees in charge of due diligence, such as compliance workers and relationship managers, should receive training. Employees will be able to apply additional due diligence steps when necessary and comprehend the transparency and constraints of the UBO registers. As a result, lowering the firm's risks associated with money laundering.

Challenges with UBO Registers' Reliability

The Fourth Anti-Money Laundering Directive (MLD4) of the European Union (EU) imposed a need on EU member states to establish central registers of beneficial owners to promote helpful ownership transparency. To show their support for the Financial Action Task Force (FATF) Recommendations 2012 for International Standards Combating Money-Laundering and the Financing of Terrorism and Proliferation, many nations outside of the EU have also adopted a central registry. 

While it is evident that this increased transparency can help financial institutions overcome some obstacles they encounter when attempting to detect UBOs, it still needs to be determined how reliable these public registers and the data they include will be.

The FATF released a Best Practices on Beneficial Ownership for Legal Persons report in October 2019, examining the flaws and difficulties frequently encountered when UBO registries are implemented in different nations. This research also emphasized that only 11 out of 25 countries at the time of publication met the requirement for "Transparency and beneficial ownership of legal persons" with a rating of "Largely Compliant." The audit also outlined some issues with UBO registers' dependability, including:

• The registry does not validate or keep track of the given data; it just serves as a repository for documents;
• The registry's operation might not be watched over;
• There might be no comparison with additional sources (such as tax identification), or
• The registration might only include data on current ownership, not absolute ownership.