The financial sector is one of the most tightly regulated industries in the world. Likewise, the financial dealings of international corporations are also heavily regulated. Over the last few years, several pieces of counter-money laundering legislation have been passed, adding new layers of complexity to financial compliance.
Some of the new provisions that came about as a result of these regulations are “ultimate beneficial ownership” laws, or UBOs. What exactly are UBOs? More importantly, how do they impact chief financial officers?
In this helpful guide to ultimate beneficial ownership, we examine ultimate beneficial ownership laws, how they can be identified, and what challenges they may present.
What Is an Ultimate Beneficial Owner?
Ultimate beneficial ownership is a broad term used to identify an organization's ultimate interested party or beneficial owner — in other words, the person who’s calling the shots or has the most influence. This person may or may not be the company’s owner in title.
While having an incognito owner or set of owners isn’t explicitly illegal, such structures are often used for fraud, money laundering, and other illicit activities.
Generally speaking, the UBO is a beneficiary that controls more than 25% of a company’s voting rights or owns more than one-fourth of the entity’s shares. An individual who can exercise significant control over an organization may also be considered the UBO, even if they don’t meet either of the other criteria.
How Financial Institutions Identify UBOs
Chief financial officers are required to identify ultimate beneficial owners. To do so, they can apply the same strategies financial institutions use to identify who a UBO is in an individual transaction.
To determine who a UBO is, a bank will typically take the following steps.
Before conducting a transaction, organizations are typically required to provide the names of top management employees, along with other identifying information. Depending on the jurisdiction in which the transaction is taking place, the company may also be expected to provide a registration number and other data.
Research the Ownership Chain
Next, the financial institution will research the ownership chain using the information provided by the entity. They’ll identify the legal persons that have percentage shares in the business. They’ll also determine whether these parties have indirect or direct ownership rights.
Identify and Verify UBOs
At this point, the financial institution will identify the total percentage of shares, ownership stake, or voting control each individual possesses. If any individual holds more than 25% stake or ownership control in the company, they’ll be classified as an ultimate beneficial owner. More than one party can be designated as a UBO.
Perform a KYC/AML Check
Finally, the financial institution will perform an anti-money laundering (AML) or know-your-customer (KYC) check. The checks are performed in a standardized, repeatable way to ensure consistency and accuracy.
Why Determining a UBO Can Be Difficult
Financial institutions and corporations are required to identify any ultimate beneficial owners involved in a transaction. However, this is often easier said than done due to several distinct challenges.
Here are some of the hurdles you may encounter when attempting to identify a UBO.
There Isn’t a Uniform Global Definition
As evidenced by the definition above, the criteria for identifying an ultimate beneficial owner aren’t entirely concrete. At best, they comprise a loose set of attributes and conditions that serve only generally to indicate who ultimately controls a business.
To make things even more confusing, no universal definition exists. Instead, each federal government is responsible for setting its own criteria for a UBO, which means an individual may be considered an ultimate beneficial owner in one country but not another.
If your organization manages multiple entities across a number of jurisdictions, your CFO must keep track of these varying requirements. Some regulatory bodies are still reworking their definitions of a UBO, which makes keeping track of each set of regulations incredibly tedious.
Ownership Can Change
Ownership can change hands at virtually any time. Even if a stakeholder doesn’t relinquish ownership, they may sell off enough shares to impact whether they meet the definition of an ultimate beneficial owner.
For instance, imagine that a stakeholder in one of the entities you do business with currently owns 24% of the shares in the organization. During your last transaction, he wasn’t classified as a UBO. Since that time, however, he’s purchased an additional 2% stake in the company, making him an ultimate beneficial owner.
Since ownership can change without notice, you must perform due diligence before every single transaction, no matter how many times you’ve done business with an entity in the past.
Neglecting to identify a UBO on even one occasion or assuming that the ownership structure is unchanged could expose your business to significant risks, including fines or other forms of civil liability.
In the grand scheme of anti-money laundering regulations, ultimate beneficial owner laws are still in their infancy. These laws will undoubtedly evolve in the coming years and will likely include stringent penalty schedules for violators.
To keep pace with evolving regulations and disparate sets of laws across jurisdictions, you need a means of tracking the UBOs and stakeholders for each entity you do business with.
Tracking UBOs and stakeholders manually is inefficient and leaves the door open for potentially catastrophic errors. As such, you need a modern entity management solution that will support compliance with UBO regulations and other relevant laws.
Monitor UBOs with Athennian
Your organization is required to perform due diligence to identify ultimate beneficial owners. Failing to do so can expose you to liability and endanger the reputation you’ve worked so hard to cultivate. Once you identify UBOs, you need a way of monitoring them to avoid any unpleasant surprises.
As a comprehensive entity management solution, Athennian can help you track UBOs across hundreds of entities and subsidiaries. You can use the insights provided by Athennian to fulfill your legal and ethical obligations.
Want to learn more about Athennian and its diverse array of capabilities? If so, contact our entity management experts to take a product tour or book a demo.