Beneficial Ownership and M&A: How to Avoid Compliance Pitfalls

In the world of mergers and acquisitions, due diligence on beneficial owners is both a strategic imperative and a legal necessity. Conducting thorough UBO (Ultimate Beneficial Ownership) due diligence helps companies avoid compliance pitfalls, manage risks, assess deal value, and ensure regulatory adherence.

This article explores the role of beneficial ownership due diligence in deal-making, highlights common compliance pitfalls, and outlines how automation can enhance corporate governance and M&A compliance.

Why UBO Due Diligence Matters in M&A

Effective UBO due diligence enables companies pursuing business expansion through acquisitions to:

• Manage Legal Risks: Identifying beneficial owners behind target companies helps mitigate compliance, financial, and reputational risks.
• Reassessing Acquisition Costs:  Discovering deficiencies in UBO compliance helps teams adjust acquisition costs to cover the amount required for remediation.
• Ensure Regulatory Compliance: Regulations, such as the U.S. Corporate Transparency Act, requires acquisition vehicles to disclose their UBOs.

Moreover, newer regulations, like the Hart-Scott-Rodino (HSR) Act in the U.S., impose even broader disclosure requirements on M&A transactions, mandating ownership structure transparency in pre-merger notifications.

Common Compliance Pitfalls in M&A Due Diligence

Most often, mergers and acquisitions have tight timeframes. As a result, any delays in M&A due diligence can have multiple negative consequences, including increased costs, tied-up capital, or a failed sale. 

At the same time, shortcuts in M&A due diligence related to beneficial owners can lead to even more dire consequences, including unwanted legal liabilities and compliance pitfalls. 

Pitfall #1: Failure to Identify Beneficial Owners in Complex Structures

When a target company has a complex corporate structure with entities across jurisdictions, the identities of its actual beneficial owners can be obscured under several layers of ownership. 

Meanwhile, local regulations, like the new EU transparency rules, may add to the complexity by setting additional guidance on identifying individuals with substantial control in complex structures. 

Pitfall #2: Inheriting Legal Liabilities

When ultimate beneficial owners are hidden behind the corporate veil or not fully disclosed, an acquiring company faces risks of violating sanctions regimes or anti-money-laundering regulations. 

In the most serious cases, organizations may even incur criminal liability as a result of M&A deal-making. As demonstrated by the recent ruling by the Court of Cassation of France, criminal liability does not disappear in mergers and can be transferable to the acquiring company.

Pitfall #3: Penalties for Incomplete or Inaccurate Disclosures

Failure to properly report UBOs in acquired legal entities can lead to penalties under corporate transparency regulations. Depending on the jurisdiction, non-compliance consequences may include:

• Monetary fines
• License suspension
• Entity dissolution
• Criminal liability

How to Streamline UBO Due Diligence in M&A

Given the time-sensitive nature of M&A transactions, legal teams must work efficiently to conduct due diligence, including UBO verification. Organizations can enhance their M&A processes by implementing the following best practices:

1. Centralized UBO and Entity Data Management

Maintaining a single source of truth for corporate records ensures role-based access to entity data, eliminating bottlenecks and expediting due diligence.

2. Mapping Ownership Structures

Using organizational charting tools allows teams to visualize ownership relationships, analyze complex structures, and identify indirect ownership connections.

3. Workflow Automation

Automated solutions streamline document review, enhance workflow efficiency, and generate compliance reports in seconds, reducing manual workload.

Automating UBO Compliance with Entity Management Software

Automating UBO due diligence is the key to ensuring accuracy in M&A regulatory compliance and speeding up deal cycles. It helps teams process massive amounts of entity data in less time and facilitates UBO tracking and reporting across jurisdictions.

When organizations implement M&A entity management best practices with modern tools like Athennian, their teams can streamline deal-making with.

• Centralized Cloud-Based Database for UBO Records: Athennian provides organizations with a cloud-based database for all corporate records, allowing instant role-based access to UBO data from anywhere on any device.
• Automation Tools for UBO Disclosures: Working in Athennian, compliance teams can create UBO records within minutes and push data into reports in just a few clicks.
• Audit Trails: Athennian facilitates due diligence with audit trails, offering a record of changes and version control for corporate records. 
• Org Charting Module: Working in Athennian, legal teams can create org charts for complex structures in a few clicks, map ownership relations, and display ownership data.
• AI Tools for Managing Beneficial Ownership Records: Athennian offers specialized AI-based tools for creating entity and people's records within minutes, saving hours on routine tasks.

Real-World Examples: Avoiding UBO Compliance Risks in M&A

In one instance, the Athennian platform was implemented by a global investment firm, spanning operations across North America, the EU and the APAC region. The company was rapidly expanding its portfolio across sectors and jurisdictions and struggled with inefficiencies during AML checks on beneficial owners.

After transitioning to Athennian, the company was able to centralize data management, locate key data instantly, update corporate records in real-time and maintain compliance standards. Their Compliance Officer reported saving approximately 20% of the time with AML-related tasks, allowing them to verify UBO data instantly within the platform.

Ensuring UBO Compliance for Successful M&A Transactions

Shortcuts in UBO due diligence can backfire by leading to compliance pitfalls, while shortcuts offered by automation contribute to M&A success. Advanced entity management tools like Athennian help teams save time on due diligence, identify and manage UBO data with ease, and ensure ownership transparency in M&A.

Ready to streamline beneficial ownership due diligence with Athennian's entity management solutions? Discover Athennian's automation tools for UBO compliance—request a demo today!