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Company Check Jun 05, 2023

Ultimate Beneficial Ownership (UBO) In KYC/AML Compliance

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Beneficial ownership holds a special place in the KYC/AML process. Legislation regarding beneficial owners is becoming more stringent in recent years — which represents a new compliance challenge for companies and needs their close attention. 

In essence, the requirement to identify the beneficial owner means that when cooperating with third parties, the company must know who is really “in the driver’s seat”. Oftentimes the real owners are hidden under the long chain of offshore companies, brokers, custodian banks and other financial institutions. Such practices — while not illegal per se — may be a shield for tax fraud, money laundering and other illegal activities.  

So why do you need to search for beneficial owners? And what is the best software to help with this task?

 

What Is Beneficial Ownership?

As beneficial ownership is carried out through various means, defining beneficial owners may vary depending on the case or jurisdiction. 

However, in simple terms, the ultimate beneficial owner (UBO) is an individual who actually controls the business and makes decisions. The beneficial ownership can be exercised by:

  1. Holding a significant share of the company’s capital (25% and higher).
  2. Holding more than 25% of voting rights.
  3. Having the right to select the members of the board.

Other examples include the right of a veto on business decisions, close personal links to the management, etc. 

The criteria of beneficial ownership are specified under domestic laws and vary across the countries. An effective legal framework should reflect the multi-jurisdictional nature of the issue, i.e. that owners may benefit from different national disclosure regimes. Thus, legislators need to ensure that UBOs are identified regardless of their residence or nationality. 

Not every BO is a UBO. The latter implies significant power over the organisation, whereas BO is a term that refers to any person who holds shares in a company. 

 

Legal and Beneficial Ownership

Let's start with a fairly clear concept: a business can have one or more legal owners. This is true for any organisational and legal form of the company. For example, in a joint-stock company, the legal owners are shareholders, i.e. legal entities or individuals who own shares in the authorised capital. In an LLC, the legal owners are members. When a company issues membership certificates or shares, they are signed by the legal owners.

However, the legal owner will not always be a real owner. It is a fairly common practice for companies to choose a "nominal owner" under whose signature the shares are issued, but he has no real influence on the management of the company. A person who has such influence is a beneficial owner.

 

Why does legal and beneficial ownership differ?

It is not unusual for businesses to have different legal and beneficial ownership. This fact does not mean that the organisation is hiding something or breaking the law.

For instance, beneficial ownership may not be disclosed due to anonymity, as share registries are publicly available in many countries. The need for financial confidentiality, in this case, is justified, and third parties can request the information if they need it.

Nevertheless, there could be “bad faith” reasons for hiding the owner, such as money laundering.

Asset management

When a person cannot manage their assets, trust is created. This allows, for example, to donate property or a significant amount of money to a child, and parents will manage this asset until the child comes of age.

The beneficial interest is a concept worth mentioning regarding trusts. It means that even though the individual isn't legally the owner of the property, they may still benefit from or earn income from it.

Anonymity

Individuals who own many assets and properties may not disclose this information publicly for security reasons or to avoid excessive media attention.

Tax reasons

In the case of taxes, there could be legitimate and illegitimate reasons to conceal ownership. Tax structuring is a legitimate reason, but unfortunately, assets can be hidden to avoid paying taxes.

Money laundering

Oftentimes, the real owner hides because illegally obtained funds were used to purchase the property.

AML regulations require financial institutions to verify both legal and beneficial owners, especially when dealing with new clients. This is in order to detect and prevent potentially fraudulent business activities.

 

How to Protect Your Business

Inadequate beneficial ownership check has negative consequences both for businesses and entire countries. Corruption schemes under the cover of shell companies cost developing countries up to a trillion US dollars a year.

Investigations such as the Pandora Papers and Troika Laundromat proved that companies can have extremely complex beneficial ownership structures. This results in unfortunate cases, when financial institutions onboard sanctioned individuals or persons involved in money laundering. Mistakes are extremely costly, with maximum penalties in Europe up to €5 million fine or up to 30 years of imprisonment. To avoid risks, your company needs to carry out proper beneficial ownership verification.

So what beneficial owner information is pertinent to the compliance process? What do you need to know before onboarding a new client or entering into a business relationship?

You can think of gathering information as the layers of an onion that you peel back to get to the root.

Publicly available data is on the surface. This is the name and address of the enterprise, type of activity, and registration numbers.

However, to grasp the nature of the business, you need to find out its beneficial ownership structure and identify all the people who influence decisions and benefit from the legal entity.

Here's the information to check about UBOs:

  • Name and date of birth.
  • Role and position in the organisation.
  • Physical address.
  • Passport data, social security number.

 

Why Verify Beneficial Ownership With LIGA UNITED?

LIGA UNITED provides functionality to check beneficial ownership. 

Users can see complex beneficial ownership structures in a convenient visual format. With LIGA UNITED, you will be able to identify real beneficial owners and key roles in a company, speeding up the onboarding of new customers.  

Our information base includes:

  • Dossier on millions of British companies.
  • Access to worldwide registers and sanction lists. 

The system is regularly updated with new information, and company files are always up-to-date. LIGA UNITED provides many other advantages for businesses:

  • Identify risks in time, avoiding fines for dubious business connections.
  • Save time and human sources by automating beneficial ownership check.
  • Supplement the beneficial ownership records in your company with valuable data.

 

Who Oversees Beneficial Ownership Compliance?

At the global level, standards for beneficial owners checks are developed by the Financial Action Task Force (FATF). This international body brings together 37 countries to prevent financial fraud and money laundering.

The organisation issued several guides for authorities and financial institutions to avoid the risks associated with beneficial owners and not to become part of criminal schemes.

A key recommendation by the FATF is that governments must establish effective control mechanisms and regulations, so that information on beneficial ownership is collected timely and properly. This requires, among other things, the creation of open registers, which both the financial sector and civil society can access. Data transparency is key to preventing financial crime.

At the EU level, the main regulatory document in the matter of beneficial ownership is the 4th EU Anti-Money Laundering Directive. The document was adopted in 2015 to prevent tax evasion, terrorist financing and other financial crimes.

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Frequently asked questions.
What is beneficial ownership?

The Ultimate Beneficial Owner (UBO) is a natural person or entity that really owns and controls something — businesses, foundations, trusts, etc.

In many cases, legal owners of the organisation, whose names are formally specified on papers, act on the behalf of UBOs and don’t have the ultimate control. 

Different ownership is legal, but it can also be used for money laundering and tax fraud. Therefore, it is critical to identify legal owners and UBOs before onboarding a new client or signing the contract. In many countries, businesses are legally obliged to conduct such checks.

How to make UBO checks cost-effective?

In KYC/AML compliance it is essential to understand who are the beneficial owners of entities that your business is dealing with. 

The regulations become more complex each year, which makes it nearly impossible for companies to handle compliance manually. Automated solutions can assist in solving the problem.

LIGA UNITED solution is a key to bringing AML/KYC procedures in your company to the next level, by speeding up the checks and eliminating the risk of human errors. Automating the workflow is also needed to reduce costs. Order a free demo now to check out the LIGA UNITED benefits for your company.

What is a beneficial interest?

A beneficial interest is the right to get benefits from assets held by another individual. The term is commonly used in relation to trusts. For instance, a child can get money from the trust, even though it is legally controlled by their parents. The type of trust and the rules vary depending on the agreement.

Real estate is another example of beneficial interest. Even though a lessee rents an apartment, office etc., they don’t own the property. Renters use the benefits provided under the rental agreement while the asset remains in the lessor's hands.