In the fight against financial crime, many governments have come together to create policies that would enforce transparency between business relationships and transactions. A crucial step to achieving transparency is clear visibility regarding beneficial ownership. Knowing the person(s) with the most influence over a business's direction is an important indicator of whether that company operates legally.
For example, if these individuals are associated with criminal groups or have a criminal past, they will likely use the company as a tool to conduct more illegal activities. Financial institutions need to know this information so they can minimise the risk of partnering with businesses that intend to use their accounts to facilitate money laundering or other crimes.
For beneficial ownership to be genuinely transparent, it requires having all the correct, verified, and usable data. The Beneficial Ownership Rule ensures that companies follow proper procedures when collecting the information they need for the prevention of financial crimes.
Below we discuss the best practices you need to know to correctly follow the guidelines set out by the Ultimate Beneficial Ownership regulations.
What is the Beneficial Ownership Rule?
Also known as Ultimate Beneficial Ownership (UBO), this rule was created by the Financial Crimes Enforcement Network (FinCEN) to help authorities prevent crimes like tax evasion and money laundering.
The UBO rule makes it compulsory for all financial entities (mainly banks) to create and implement policies regarding the identification of an organisation's beneficial owner(s). Specifically, it makes it mandatory for all firms to collect specific information on the beneficial owners of a company each time that the company opens a new bank account.
When is Beneficial Ownership information required?
Generally, UBO data is necessary:
1. Each time a business opens an account.
2. After making changes to an organisation's beneficial ownership.
3. When your bank requests it.
How is a Beneficial Owner Defined?
According to FinCEN if an individual holds 25% or more equity interest in the legal entity (directly or indirectly), then they’re considered to be a UBO. However, each institution has the power to have a stricter or tighter equity threshold to define a UBO. For example, some banks may choose to characterise a UBO as someone who has as little as 10% equity interest in a company.
The challenges of obtaining beneficial ownership information
According to an evaluation conducted by the Financial Action Task Force (FATF), there are six common challenges that organisations face when collecting beneficial ownership information:
1. Risk assessment
There is not a standardised definition of risk, which makes risk assessment very difficult. Risk assessment becomes difficult because of the following discrepancies between businesses:
- Not all organisations include every type of ownership in their assessments;
- Business leaders do not always understand the potential risks;
- Evaluations sometimes focus only on domestic threats and vulnerabilities.
UBO data is not always accurate and up-to-date because all jurisdictions use different methods of collection, monitoring, storage, and verification. Following UBO protocols becomes even more challenging due to intricate ownership structures and restricted information when foreign ownership was involved.
3. Access by competent authorities
Due to inadequate procedures, competent authorities cannot always promptly access beneficial ownership information. The slow access is due to multiple obstacles like: data protection and privacy laws; no information sharing between regulators; absence of a registration/licensing mechanism; and limited resources.
4. Bearer shares and nominee shareholder arrangements
Often, accurate ownership data cannot be accessed when it is hidden behind nominee shareholders.
5. Fines and sanctions
Beneficial ownership reporting failures continue to be a recurring occurrence because of the number and amount of fines which are not enough to discourage them.
6. International co-operation
Due to inadequate processes for monitoring the quality of assistance received from other countries, multiple agencies being involved, languages and methods used, international coordination becomes difficult.
As a result of its investigation, the FATF has proposed a multi-pronged approach that would allow entities to follow UBO procedures more effectively.
Its recommendations are as follows:
· Risk assessment: each country should assign a dedicated agent that will be responsible for analysing all risks. Their responsibilities would include monitoring for trending patterns regarding money laundering and terrorism financing (ML/TF) among criminal organisations, revising applicable court cases, assessing the experience of the authorities, and reviewing suspicious transactions.
· Accuracy and timeliness of beneficial ownership information:
- Select a gatekeeper to verify and keep the accuracy of the information.
- Verify accuracy by cross-referencing data against other platforms/databases.
- Make it compulsory for legal persons to update beneficial ownership data to the reporting entities or company registry.
- Implementing advanced procedures for companies that have foreign ownership/directorship.
- Creating a specialised task force that has all the necessary resources.
- Utilising technology in data verification.
- Implementing a global policy that ensures that competent authorities have direct access to UBO data.
- Banning the use of bearer shares and nominee arrangements.
- Revising sanctions for incompliance, so they are more effective, proportionate, and dissuasive.
Cedar Rose Makes Beneficial Ownership Effortless
Cedar Rose is a business intelligence expert with over 20 years’ experience. Our meticulous investigative team can help protect your company from associating with criminals linked to terrorism or money laundering. We offer multiple due diligence investigation services to Know Your Customer (KYC) and Know Your Business (KYB) which have global coverage and are verified and compliant with international financial regulations.
Below we describe just three of the services we provide that are crucial to Ultimate Beneficial Ownership protocols.
Directorships & Shareholdings Investigation on an Individual
This investigation identifies business connections, traces assets and analyses your business associate's networks, providing you with the results through a Directorship & Shareholding Report. This report is the ideal way to find all individuals associated with a company through a director/registered officer, owner, or shareholder position.
Criminal Records Check on an Individual
Through this investigation, you can confirm that your potential client's beneficial owners do not have a criminal record or known associations with criminal groups. We conduct this investigation using the local language to ensure that we identify the correct individuals.
Furthermore, searches are carried out in all of the applicable jurisdictions with strict adherence to compliance guidelines to remove any chances of bribery or corruption. In this way, our clients can remain confident that in contracting Cedar Rose for their due diligence investigations, they will be compliant too.
Customer Due Diligence Report on an Individual
This report is a thorough investigative survey of a person's business relationship and operating networks. Through this investigation, our clients receive insights into an individual's connections, uncovering whether they are legal, credible or unsavoury entities that their customer may even be unaware of their existence.
Customer Due Diligence includes retrieval of official corporate information, in-depth compliance screening by our skilled multilingual analysts, potential visits to official registries and courthouses in multiple jurisdictions and scanning of official gazettes and media publications and extensive research.
For more information on our KYC Due Diligence services, click here or for KYB here. Or speak with one of our team members at (+357) 25 346630.