Almost every major economy in the Gulf Coordination Council (GCC) region suffers from a dire lack of financial transparency. The World Bank believes that the unavailability of public business and corporate data hinders the credible analysis of important economic issues. The lack of verified data on shareholding and ultimate beneficiary owner (UBO) information makes it much harder for financial institutions in the GCC region to ensure compliance with relevant AML laws.
One major reason for the unavailability of credible public data and the subsequent prevalence of financial fraud is the way some of the biggest companies in the Gulf are structured. Convoluted and highly veiled corporate ownership structures in the GCC make it difficult for organizations to identify and verify shareholders and ultimate beneficiary owners. Companies that do business with these entities can often become embroiled in illegal activities without knowing it so it’s vitally important to conduct the due diligence processes required to understand whom they’re dealing with and to comply with the relevant AML/KYC legislation. Let’s take UBOs as an illustrative example.
A UBO is an individual or an organization that ultimately controls the company, directly or indirectly, and is the benefactor of any business transactions made by a company. Although it varies by each country’s legislation, typically, a UBO is someone who fits one or more of these criteria:
• Maintains a minimum interest of 25% capital of the organization.
• Has at least 25% voting rights at the general shareholders’ meeting.
• Receives a minimum of 25% of the company’s capital as beneficiary.
So, if person A owns significant shares of company B, which in turn, owns significant shares of company C, A is considered to be a UBO of C.
It is, however, much harder to identify UBOs given that there are often multiple layers of ownership and complex business structures which often include multiple countries and jurisdictions, with opaque access to information.
This makes it difficult for organizations to properly identify and list UBOs for AML/KYC purposes. Further, a lack of publicly available and verified business data affects their ability to conduct the required due diligence checks quickly and efficiently. This is because the unavailability of data puts the onus on organizations to find new ways to gather and process reliable business information.
Apart from this, there are several reasons why organizations in the GCC region need to update their AML/KYC and other verification processes to combat the unique transparency challenges present in the GCC.
Prevalence of UBO ownership
What makes it so difficult to identify UBOs is the fact that under most jurisdictions in the GCC, there is a lack of publicly available data. Convoluted ownership structures hinder proper AML/KYC proceedings and force organizations to find new ways to collect reliable business information about their clients. Recently introduced AML regulations regarding UBOs in the UAE have made it compulsory for a company to disclose their shareholders and ultimate beneficiary owners, making it more transparent for the relevant authorities.
The veracity of and trust in information
As mentioned, it is often difficult to get publicly available business or corporate data about UBOs, which compels organizations to find new data sources. Apart from finding these alternative sources of data, organizations are also required to successfully assess the veracity of this data. Any data which isn’t provided by a federal or regulatory body is prone to biases, discrepancies, and a general lack of transparency. Using such data to assess clients puts organizations at risk. Not being able to perform the required customer verification processes satisfactorily can lead to a loss of reputation and legal action being taken against the firm.
AML/CTF risks, rules, and regulations
Companies with veiled ownership structures and complex beneficiary agreements are potential AML/CTF risks for financial institutions. Unclear ownership leaves room for nefarious parties to use the ownership structure of these companies for money laundering and terrorist financing. This puts organizations directly at risk of non-compliance with applicable AML/CTF legislation, which could result in penalties, criminal proceedings, and government sanctions. Global money-laundering watchdog Financial Action Task Force (FAFT) recently put UAE on the gray list for money laundering (used to monitor jurisdictions with strategic deficiencies). This has further prompted local authorities to take strict AML/CTF measures and increase the regulatory requirements for businesses to complete AML checks.
Identifying UBOs satisfactorily requires a specialized risk-based approach. While low-risk UBOs can simply be made to sign a statement that their details are accurate, medium-to-high-risk UBOs require further investigation before a partnership decision is made.
Cedar Rose offers two solutions to access UBO information at local, regional, and international levels.
• UBO Lookup: Take advantage of Cedar Rose’s ultimate source database consisting of millions of corporate entities worldwide, accessing the information on corporate hierarchy structure and relationships.
• UBO Discovery: Cedar Rose is a corporate information research and analysis expert. With over 25 years of expertise in the MENA regions, Cedar Rose conducts fresh investigations to identify and verify UBO information and determine corporate hierarchy structure, across multiple layers of ownership.
To find out more call +971 4 374 5758 or visit our website.