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Ultimate Beneficial Ownership (UBO) Verification

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Risk management has become a crucial aspect of doing business regardless of industry. For some companies, like those in financial services, verifying customers, vendors, and employees is a legal requirement. When conducting background checks on companies, finding out who benefits the most can go a long way towards assessing risk and avoiding threats. Ultimate beneficial ownership verification is part of anti-money laundering (AML) and Know Your Customer (KYC) compliance practices. UBO verification is one of the steps when conducting due diligence for money laundering prevention.

What is Ultimate Beneficial Ownership?

An ultimate beneficial owner (UBO) is the owner or owners who ultimately own the company and benefit the most from it. They may be individuals veiled by the company's legal structure and may not be shareholders or directors. Ultimate beneficial ownership verification is the process of uncovering these actual owners and learning more about them as part of your financial crime compliance and risk mitigation before taking on a customer.

In some cases, owners are buried beneath chained enterprises. For example, a company that owns another company and another. At the end of the line, a valid owner benefits from the company's activities or assets.

Why UBO Verification Matters

UBO (Ultimate Beneficial Owner) verification matters because it helps prevent the misuse of corporate structures for illegal activities like money laundering and terrorist financing. By identifying the true owners and controllers, businesses can better understand their clients' risk profiles and prevent being secondarily involved in illicit activities. Some of the reasons that UBO verification matters so much are:

  • Combating Financial Crimes: Identifying UBOs helps prevent money laundering, terrorist financing, and other financial crimes by ensuring transparency and accountability. Sometimes owners hide behind shell companies and layers of business structure to remain undetected.
  • Regulatory Compliance: Many jurisdictions require businesses to identify and verify UBOs to comply with anti-money laundering (AML) regulations. Financial companies, banks, and investment firms must comply with AML regulations.
  • Enhancing Risk Management: UBO verification helps companies assess and mitigate risks associated with fraud, insider threats, and corrupt practices.
  • Protecting Reputation: Verifying UBOs helps protect a company's reputation by ensuring they are not unknowingly associated with individuals or entities engaged in illegal activities.
  • Improving Transparency: UBO verification contributes to a more transparent financial system by making it easier to track the owners of businesses and assets.

What Regulates UBO?

Ultimate beneficial ownership (UBO) is primarily regulated by the Financial Crimes Enforcement Network (FinCEN). The Corporate Transparency Act (CTA) requires certain companies to disclose information about their beneficial owners to FinCEN as part of their regulatory compliance obligations. FINCEN implements and enforces the CTA and maintains a secure Beneficial Ownership Information (BOI) database.

Reporting companies must identify individuals who have substantial control over or own at least 25% of the company. The purpose of these regulations is to combat financial crimes like money laundering and tax evasion.

Regulatory Frameworks and Requirements - FATF Guidelines

FinCEN's regulatory frameworks primarily revolve around the Bank Secrecy Act (BSA), which mandates financial institutions to implement anti-money laundering/countering of financing of terrorism (AML/CFT) programs, which include customer due diligence (CDD) and reporting any suspicious activities.

The Financial Action Task Force (FATF) is an intergovernmental body established in 1989 to combat money laundering and terrorist financing. It sets international standards and promotes policies to prevent these crimes, thereby protecting the global financial system. FATF's work extends into many areas, including asset recovery, beneficial ownership, corruption, and proliferation financing.

These requirements prevent the misuse of the financial system for illicit activities like money laundering and terrorist financing. Some of the guidelines are:

  • Financial institutions must establish and maintain AML/CFT programs that are reasonably designed to detect and report suspicious activities.
  • Customer due diligence requires financial institutions to identify and verify the identity of customers, including beneficial owners of legal entities, understand the nature and purpose of customer relationships, and conduct ongoing monitoring.
  • Financial institutions are required to report suspicious activities to FinCEN.
  • Specific reporting requirements include reporting cash transactions exceeding $10,000, reporting certain purchases of negotiable instruments, and reporting transactions involving virtual currencies.
  • FinCEN requires reporting of BOI for certain companies and entities, which can include information on individuals who own or control a company.
  • FinCEN identifies and publishes government-wide AML/CFT priorities to focus efforts on areas of most significant risk.
  • For certain high-risk customers, financial institutions may need to conduct further investigations.

The United Kingdom relies on the Economic Crime and Corporate Transparency Act (ECCTA) and beneficial ownership registers to track company ownership in England. To keep ownership tightly controlled, the law allows Companies House to request updated information and electronic verification if it finds anything suspicious or inaccurate about the supplied data.

The 6th Anti-Money Laundering Directive (6MLD) standardizes ultimate beneficial ownership definitions across Europe. It applies to both business ownership and control. In some areas, the minimum ownership standard is lowered to 15%, and then the individual or entity becomes the ultimate beneficial owner.

Parts of Asia and Australia use a national UBO registry to track ownership of companies across the globe.

The UBO Verification Process

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Ultimate beneficial ownership verification is a process used to identify and verify the individual(s) who own a company. It's an essential part of Know Your Business (KYB) and Know Your Customer, which are used to prevent financial crimes. The UBO verification process is as follows:

1. Data Collection and Review

Gather information about the company, including its legal name, address, registration status, and other relevant details.

Review the ownership structure, including direct and indirect shareholders, nominees, and any intermediate entities involved in the business.

Based on how the company is structured, identify individuals who appear to meet the U.S. legal definition of UBO (those with 25% or more ownership or control over the business).

2. Identify the UBO

Take time to trace ownership chains back to the ultimate owners. Pay particular attention to shareholders.

Dig deeper and look for individuals who control the company, such as managers or directors.

Exercise caution and use relevant legal definitions and regulatory guidelines to ensure you follow the rules correctly, using the right thresholds.

Verification and Due Diligence

Cross-reference the UBO's information with public records, global corporate registries, and other databases to ensure accuracy.

Perform Know Your Customer (KYC) and Anti-Money Laundering (AML) checks on the identified UBOs, including checking against sanction lists and politically exposed persons (PEPs).

Additional due diligence measures may be necessary in some cases, especially for high-risk customers or complex ownership structures.

Ongoing Monitoring

UBO verification is not a one-off practice. You must also continuously monitor the company and its UBOs to stay informed about any changes in ownership, potential risks, or regulatory requirements.

Challenges and Risks of UBO Verification

UBO compliance presents some significant challenges and risks due to complex corporate structures, data limitations, and regulatory inconsistencies across jurisdictions. These challenges can lead to risks such as increased opportunities for financial crime, regulatory non-compliance, and reputational damage.

The challenges of UBO verification include:

  • Complex Corporate Structures: Companies may conceal ownership through shell companies, designated shareholders, and offshore entities, making it difficult to trace the true UBO.
  • Incomplete and Inconsistent Data: Public registers may be incomplete, inaccurate, or outdated, and there's a lack of standardized data sets across jurisdictions, making it difficult to gather reliable information. Governments are working hard to resolve this.
  • Regulatory Differences: Various countries have different interpretations and implementations of AML regulations, leading to inconsistencies in UBO identification and verification when sharing information.
  • Data Accessibility: UBO data may be restricted, held by third parties, or not readily available, hindering your ability to gather necessary information.
  • Lack of Consistency: Different countries have different definitions of UBOs and other thresholds for what constitutes a UBO, making it challenging to compare ownership across borders.

The risks of UBO verification include:

  • Financial Crime: Vague ownership structures can be used to conceal the proceeds of crime, facilitate money laundering, and evade taxes.
  • Regulatory Non-Compliance: Failure to accurately identify and verify UBOs can lead to fines, penalties, and legal repercussions.
  • Reputational Damage: Being associated with entities with unclear ownership can harm a company's reputation and lead to a loss of investor or public confidence.
  • Increased Risk of Sanctions Violations: UBOs may be on sanction lists, and failing to identify them can lead to sanctions violations.
  • Reduced Confidence in the Financial System: If UBOs are not identified and verified, the public may lose trust in the financial system.

How Can Small Businesses Stay Compliant?

Large and small businesses must comply with UBO identification and verification. Following the steps below will allow you to vet your customers and their companies fully while keeping your business safe.

  1. Determine if your company is required to report under the Corporate Transparency Act (CTA). Corporations and LLCs are typically considered "reporting companies" unless they have filed for an exemption. Exempt businesses are large operating companies (over 20 full-time employees and over $5 million in gross sales/receipts from U.S. sources), inactive entities, and some nonprofits. If you are unsure, consult a legal professional to find out if you are required to report.
  2. Learn about and understand the definition of a beneficial owner (someone who exercises substantial control or owns 25% or more of the business). Identify individuals who meet this criterion. Check out senior management or board members. Collect all the required information for each beneficial owner, including full legal name, date of birth, residential address, and verifiable photo ID (driver's license, passport, etc.). Do this for older and new companies. Research those who registered the company's business documents.
  3. Develop a process to organize and secure the collected information to ensure accuracy and prevent loss or compromise. Maintain accurate and up-to-date records of UBO information. Review and update records regularly to reflect any changes in ownership or control. Conduct regular audits to ensure information accuracy and integrity.
  4. File a Beneficial Ownership Information Report (BOIR) with the FinCEN. You can fill out an online form or upload a completed PDF. Review the filing dates and file on time based on your company's creation or registration date.
  5. Develop a robust due diligence program by establishing internal protocols for identifying and verifying UBOs. Train staff on UBO compliance requirements and red flags. Consider using technology solutions and third-party partners to automate data collection, analysis, and tracking of company ownership.
  6. Stay updated on legislative changes and adapt your compliance strategies accordingly. Consult with legal and compliance experts for guidance and assistance navigating UBO regulations. For additional information, refer to FinCEN's resources, including the Small Entity Compliance Guide, FAQs, and webinars.

Benefits of UBO Transparency

Verification of legal entity ownership is paramount to risk management. UBO transparency helps fight financial crime and corruption, and improves your own business security and threat mitigation. Some of the major benefits of UBO transparency are:

  • Reduced Illicit Activity: UBO transparency makes it harder for individuals to use layered corporate structures to hide their true ownership, thus hindering activities like money laundering, tax evasion, and terrorist financing.
  • Improved Enforcement: Identifying UBOs helps law enforcement agencies trace the flow of funds and hold individuals accountable for illegal activities.
  • Enhanced Accountability: Transparency makes it easier to hold individuals and businesses responsible for their actions, reducing the incentive for corruption and illicit behavior.
  • Better Risk Management: Businesses can better assess the risks associated with their business relationships, customers, and partners by understanding their counterparts' ownership structures.
  • Improved Compliance: UBO transparency helps businesses meet their obligations under anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.
  • Increased Efficiency: Businesses can streamline their compliance processes and avoid unnecessary delays by knowing who the real owners are.
  • Increased Trust: Transparency builds trust in the financial system and encourages investment and economic growth.
  • Level Playing Field: UBO transparency creates a more level playing field for businesses by reducing the risk of corruption and other illicit activities.
  • Enhanced Public Procurement: Transparency in ownership can improve the fairness and efficiency of public procurement processes.
  • Better Taxation: UBO transparency helps identify and collect taxes that individuals and companies owe.
  • Market Understanding: UBO information can help businesses understand their market better and identify potential risks or opportunities.
  • Operational Efficiency: UBO transparency can improve operational efficiency for businesses by simplifying compliance processes.
  • Early Risk Detection: UBO analysis can identify potential red flags early in the decision-making process, such as links to politically exposed persons (PEPs), entities with a history of non-compliance, or those on sanction lists.
  • Facilitates Due Diligence: UBO information is valuable for conducting customer due diligence and understanding a business's ownership structure.
  • Supports Investigations: UBO information can be used by law enforcement and regulatory agencies to investigate potential criminal activities.

How EntityCheck Helps Your Business with UBO Verification

EntityCheck delivers comprehensive business data that we have compiled from government, public, and private sources. Our reports include multiple sections with dozens of data points. You'll find detailed Secretary of State records, such as Articles of Incorporation, annual filings, ownership changes, and entity classifications. UCC filings that cover equipment, vehicles, inventory, accounts receivable, and real estate. License status and expiration details are included if a business requires professional licensing, such as in law, real estate, dentistry, or skilled trades. Court-related data is also available, including lawsuits, bankruptcies, liens, judgments, and federal cases. You can also see information about trademarks, patents, company officers, employees, and their background information.

EntityCheck reports include data in the following categories:

  • Secretary of State Filings
  • UCC Filings
  • Bankruptcy Filings
  • Judgments & Liens
  • Lawsuits
  • Employees
  • Agents & Officers
  • Business Owners
  • Trademarks
  • Patents
  • Professional Licenses
  • And More

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