The identification of ultimate beneficial ownership is critical for governments, businesses and individuals as knowing this information ensures compliance, transparency and adherence to AML/CFT regulations.
In this guide, you can learn more about why UBO is important, how to find it, various regulations around the world and the specific UBO identification responsibilities for businesses.
What is the Meaning of UBO?
A UBO (Ultimate Beneficial Owner) refers to the individual who controls or owns an asset or business, even if it is legally owned by a separate entity or person. Legal ownership is tied to formal documentation, which can include property deeds and shareholder registers. Whereas beneficial ownership refers to the individual who ultimately gains financial benefits from the asset. A UBO tends to have significant influence over the business or asset and this is commonly defined as owning 25% or more of the shares, voting rights or capital.
It is vital to note the distinction between legal and beneficial ownership. A legal owner holds the official title of an asset, whereas a beneficial owner benefits from the advantages of ownership, such as income or control. For example, in a corporate context, shareholders with a significant voting stake might be UBOs even if their names are not directly tied to day-to-day operations.
UBO structures vary across different types of businesses. In a trust, the trustee may hold legal ownership while the trust’s beneficiary is the UBO. In corporate structures, shareholders with over 25% of shares often qualify as UBOs, giving them control over strategic decisions, such as appointing or removing directors.
Why is UBO Important?
Identifying UBOs is critical to promoting corporate transparency and accountability, especially in the fight against money laundering. Ultimate beneficial ownership identification ensures that financial institutions can trace the actual individuals who control or benefit from an entity. This reduces the risk of anonymous ownership structures being used to facilitate illicit financial activities, such as money laundering and terrorist financing.
Knowing the ultimate beneficial owner allows institutions to perform thorough customer due diligence (CDD) which is vital for compliance with AML requirements. This ensures that they do not engage in business with individuals involved in illegal activities. UBO checks also play a vital role in combatting tax evasion by preventing individuals from concealing assets behind shell companies or trusts.
Identifying ultimate beneficial owners is also crucial for reducing corruption and illicit financial flows by revealing complex ownership structures that may mask fraudulent activities. During mergers and acquisitions, identifying UBOs helps assess risks associated with potential partners or targets, ensuring regulatory compliance and safeguarding reputational integrity.
As a fundamental aspect of risk management, ultimate business ownership identification protects businesses from financial and legal repercussions and mitigates the risks of enforcement action from regulatory authorities, which can include fines and even imprisonment.
How to Find the UBO of a Business
Determining the UBO of a business typically involves identifying individuals who own or control a significant portion of the company. Common thresholds used to define a UBO include those who own at least 25% of the company’s shares, hold more than 25% of the voting rights, or otherwise exert control over the business through other means such as decision-making power.
The process for verifying beneficial ownership tends to start with gathering and verifying documentation. This includes corporate ownership records, such as shareholder registers, articles of incorporation and relevant legal documents. The next step involves conducting due diligence to verify the identity of the ultimate business owner. This typically requires official identification, proof of address and declarations of ownership. KYC360’s award-winning KYC onboarding software helps businesses to collect this documentation and verify it at scale against top data sources. Through a fully customisable web portal, KYC360 customers can reduce the number of touchpoints and benefit from a flexible risk scoring model that adapts to risk appetite.
UBO identification becomes more challenging when complex corporate structures, such as multi-layered subsidiaries or offshore entities, obscure ownership. Read more about the specific challenges of complex client structures and learn how the use of technology can help resolve them.
Nominees and trustees can also be used to disguise the real owner and these intermediaries may hold legal ownership on behalf of the actual UBO, making it difficult to trace the individual benefiting from the business. Therefore, businesses must apply enhanced due diligence in these high-risk situations to ensure they identify the UBO, particularly when dealing with corporate entities that show signs of complexity or lack transparency. RegTech solutions such as those offered by KYC360 can automate enhanced due diligence for higher risk profiles. When a customer is identified as higher risk, they undergo adverse media screening to check against negative news sources. Alongside this, outreach for further documentation is automated.
What is a UBO Declaration?
A UBO declaration is a formal document where a business discloses its ultimate beneficial owners. The purpose of the UBO declaration is to ensure transparency and compliance with anti-money laundering (AML) and tax regulations. The document is signed by the ultimate beneficial owner to confirm information about their identity such as name, address and date of birth is accurate.
By identifying the true beneficiaries, companies help authorities prevent financial crimes. UBO declarations are important because they provide authorities with vital information on who is ultimately benefiting from or controlling a company, ensuring accountability and reducing the risks of hidden or illicit ownership structures. In some jurisdictions, signing this declaration and keeping it periodically updated is a legal requirement.
UBO Regulations Around the World
In Europe, the Fourth (4AMLD) and Fifth Anti-Money Laundering Directives (5AMLD) have significantly impacted UBO regulations. Under 4AMLD, companies are required to maintain accurate records of UBOs who own more than 25% of shares or voting rights. This data is stored in centralised registers, which are accessible to authorities and individuals with a legitimate interest. The 5AMLD expanded these regulations by making UBO registers public in some cases and enforcing stricter monitoring. Learn more about EU anti-money laundering law.
Globally, the level of enforcement varies. Global authorities such as the FATF (Financial Action Task Force) and OECD (Organisation for Economic Co-operation and Development) have set guidance and requirements for UBO reporting.
The FATF has published specific guidance that helps countries to mitigate the threat of money laundering and terrorist financing from beneficial ownership structures and it calls for a “multi-pronged approach” for countries to obtain this information. Under the OECD’s common reporting standard, a beneficial owner, defined as a person who has control over a legal entity, must be identified and reported to the relevant tax authority.
The United States has enhanced transparency through the Corporate Transparency Act which mandates UBO reporting for domestic companies and any foreign entitles that register to do business in the U.S.
The implementation of UBO guidance can vary across jurisdictions and some have relatively lax regulations that offer more anonymity for beneficial owners. The threshold for beneficial ownership can also vary across jurisdictions. This inconsistency in enforcement creates challenges in establishing global transparency.
UBO Responsibilities for Businesses
Businesses have significant compliance obligations in identifying and reporting UBOs. These obligations include conducting due diligence, verifying beneficial ownership through official documentation and keeping UBO records up to date. Non-compliance can result in severe enforcement actions, including fines and reputational damage. In certain jurisdictions, employees may even face imprisonment for failing to comply with UBO regulations.
In practice, UBO compliance affects the finance and legal departments of companies, particularly those engaged in mergers, acquisitions or financial transactions. These departments must integrate UBO checks into their risk management processes to prevent any involvement in illicit activities. This can have a significant operational impact, especially if these checks are done through manual processes and when there is a significant volume of accounts.
Ensuring compliance with UBO requirements can impact on staff morale as they may have to dedicate time and resources to manual rekeying of data. KYC360’s suite of CLM (Customer Lifecycle Management) solutions can help to automate this process and ensure that businesses keep on top of UBO requirements.
The Future of UBO
The future of UBO regulations will likely see a tightening of global standards. Governments worldwide are expected to implement stricter UBO disclosure requirements to enhance transparency and combat financial crimes more effectively.
Advancements in technology such as blockchain could revolutionise UBO tracking and reporting, providing more secure and immutable records of ownership.
There are ongoing efforts to create a more unified global approach to UBO regulation with initiatives like FATF’s recommendations driving countries to harmonise their regulations, making it easier to track beneficial ownership across borders and reducing jurisdictional complexity.
Conclusion
Overall, UBO identification is crucial for promoting transparency and reducing financial crime risks. It ensures that the true beneficiaries behind corporate entities are disclosed, helping to combat money laundering, tax evasion, and corruption. As UBO regulations and requirements for reporting continue to evolve, businesses must stay informed and fully comply with these requirements to avoid enforcement actions and prevent reputational damage.
Contact KYC360 today if you need more detailed guidance or assistance with UBO compliance.