Ultimate Beneficial Owner (UBO) is a legal term related to anti-money laundering (AML) and know-your-customer (KYC) regulations imposed by countries around the world. It is an important part of an organisation's due diligence and compliance procedures. The UBO of an organisation is the individual or entity who ultimately benefits from business transactions conducted by the firm.
Typically, a UBO is someone who fits one or more of these criteria:
- Maintains a minimum interest of 25% capital of the organisation.
- Has at least 25% voting rights at the general shareholders' meeting.
- Receives a minimum of 25% of the company's capital as beneficiary.
The term UBO exists because banks, financial institutions, and other relevant organisations are expected to know the identity of who they do business with. Any organisation that operates within the scope of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) controls is required to know and provide details of the UBOs relevant to their business transactions. Failure to provide this information can result in large fines for non-compliant businesses.
The Rise of Financial Crimes
The International Monetary Fund (IMF) estimates that around €1,000 billion (EUR) in funds has been used for money laundering and terrorism financing activities, a figure that amounts to between 2.5 and 5 percent of the world’s GDP. This number has increased dramatically over the past decade, giving rise to stricter compliance regulations and due diligence procedures.
A further study from CreditSafe found that 37% of businesses had fallen victim to some form of financial fraud within the last year. These shocking figures have led the international Financial Action Task Force (FATF) to list new recommendations regarding how companies should identify owners when conducting Customer Due Diligence (CDD).
On 10 January, 2020, the 5th AML Directive (5AMLD) came into effect, in part as a response to a rise in terror attacks across EU member states. The new directive extends the scope of obligations that companies are required to comply with regarding virtual currencies and art traders, plus an expansion on the level of transparency on beneficial ownership.
The fallout from the 2008 financial crisis combined with a rise in terrorism has led government regulators to implement stricter rules around business ownership. Entities involved in money-laundering or terrorist financing activities often use fake names and addresses to mask the identity of their owners.
Companies that do business with these entities can often become embroiled in illegal activities without knowing it. For this reason, its vitally important to always know the UBO of any entity you do business with.
How to Identify a UBO
1. Acquire Credentials
Companies are required to supply up-to-date information of all relevant business details, such as the full name, registration number, address, and official status. The names of all top management employees are also required and everything is recorded in the KYC Registry for clarity and to avoid duplication.
2. Research Chain of Ownership
Companies should assess who, whether natural or legal entities, has shares or interests in the company and to what degree. Determine the percentage of interest and whether its direct or indirect.
3. Single out Ultimate Beneficial Owner (UBO)
By identifying the total percentage of shares, control and ownership that each individual has in the company, you can determine precisely who are the ultimate beneficiaries.
4. Conduct Anti-money laundering (AML) and know-your-customer (KYC) checks
The identification of UBOs should be updated on the register at least once every five years with appropriate AML/KYC checks.
How to Mitigate UBO Risks
Once you have accurate information regarding the UBO status of a company, it's important to assess the existence of any risk. Once the risk level has been determined you can plan how to proceed. UBOs fall under three categories, from low to high risk.
Low risk UBOs can verify their identity by signing a statement that confirms their details are accurate. Further checks against identity documents can be conducted for comprehensive verification.
In the event of medium to high risk UBOs, further investigations should be performed before a decision is made regarding the level of involvement. If the ultimate beneficial owner shows signs of involvement in terrorism or money laundering activities, additional information must be collected such as political exposure, negative media coverage and legal enforcement measures.
Investigations into an entity's source of wealth or funding should be performed to assess any discrepancies between income and overall net worth. It's also important to ascertain the nature of the business relationship and its intended purpose.
The collection of such information can be expensive and time consuming for businesses to conduct, leading many to enlist the help of a third-party services with extensive knowledge and large databases of company information. Cedar Rose will perform these checks along with many others and put in requests for any additional information not available in standard databases.
Cedar Rose's Legal Entity Affiliation Hierarchy & UBO
Cedar Rose has recently updated its Company Credit Reports offering to include "Legal Entity Affiliation Hierarchy & UBO". This revolutionary addition will enable you to identify companies that are linked to a subject, listing ownership connections and aiming to identify the UBO depending on the comprehensiveness of the data.
Cedar Rose customers can take advantage of this new addition along with a wealth of other services included in our Credit Report offerings. Speak to a representative now about how your business can benefit from the extensive list of company details we hold in our business databases.
For more information on how we can help you to identify the ultimate beneficial owner, give us a call today on +357 25 346630 or email firstname.lastname@example.org