Ultimate Beneficial Ownership: A Key Element of the End-to-End KYB Process

Ultimate Beneficial Ownership: A Key Element of the End-to-End KYB Process

The age of heightened regulatory attention is forcing financial institutions, fintechs, and regulated entities to reconsider transparency and compliance. Identification and verification of Ultimate Beneficial Owners (UBOs) is one of the main aspects of this change. UBO identification is an important element of a wider end-to-end KYB process to prevent money laundering, terrorist financing, and other financial crimes.


Organizations need to know about Ultimate Beneficial Ownership to adhere to local and international laws. This article outlines what UBOs are, why UBO verification is essential, and how companies can perform effective UBO checks in order to stay compliant and risk-sensitive.


What Is a UBO?

An Ultimate Beneficial Owner (UBO) is the natural person who is the ultimate owner or controller of a legal person or arrangement. Although a firm can be incorporated in the name of a corporation with multiple shareholders, the UBO is the person who enjoys the greatest benefit of its assets, operations, or profits.


UBO compliance was formulated to reveal the true identities of legal entities. Shell companies, corporate chains of title, and nominees are common methods of concealing illegal activity. Thus, the process of determining the UBO is not only a good practice, but a legal necessity in most jurisdictions.


UBO Verification in KYB

When it comes to Know Your Business (KYB), it is important to know who is behind a company. Whereas the usual KYB procedure entails gathering and confirming firm registration information, the UBO verification tier is more profound. It also makes sure that a business relationship is not indirectly subjecting the organization to high-risk individuals, politically exposed persons (PEPs), or organizations on sanctions lists.


UBO verification is a way to increase transparency and assist companies in fulfilling their regulatory requirements under Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws. An example is that financial institutions must conduct due diligence on the business clients and know the ownership structure before starting or continuing a business relationship.


The UBO Identification Process

UBO identification refers to the process of determining the natural person(s) who is/are the ultimate beneficiary of a business. This normally entails examining the shareholding pattern of the company and any parent companies until the controlling persons are reached.


Generally, an individual holding over a particular percentage of shares of a company - usually 25 percent - is regarded as a UBO. But control may also be established by the right to vote, by contractual power, or by other substantial control.


The entire KYB process is dependent on proper and current UBO identification in order to determine the legitimacy and risk profile of a corporate client. This is usually done by collecting corporate records, organizational charts, shareholder lists and in certain instances, statements by the business itself.


UBO Checks: Risk Mitigation by Transparency

Effective UBO checks will enable businesses to have a complete picture of who they are actually dealing with. These checks are not just superficial data and they assist in discovering the covert ownership structures or people who might be trying to avoid legal attention.


The typical UBO check procedure includes:


Lack of adequate UBO checks will leave businesses at risk of unknowingly becoming linked to criminal networks or being heavily fined due to non-compliance.


UBO Compliance and Overseas Regulations

UBO compliance is not a best practice, but a regulatory requirement in the majority of jurisdictions. The EU Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD), the U.S. Corporate Transparency Act (CTA), and FATF (Financial Action Task Force) recommendations are just some of the laws that compel organizations to gather, store, and disclose beneficial ownership data.


The United States has the BOI Reporting requirement under the CTA that requires corporations and LLCs to report information regarding their UBOs to FinCEN. The purpose of this initiative is to make the ownership of companies more transparent and to avoid the possibility of misuse of anonymous shell companies.


The inability to comply with UBO standards may lead to huge fines, reputation loss, and even criminal prosecution. Therefore, the adoption of an effective beneficial ownership data management system is essential to regulated entities.


UBO as a Part of the End-to-End KYB Process

The entire KYB procedure has several steps: onboarding, verification, risk assessment, and monitoring. Identification and verification of UBO are part and parcel of this journey, as they allow businesses to have a complete picture of the entities they deal with.


The integration of UBO checks at the onboarding phase will make sure that all stakeholders are appropriately vetted. With the changing business relationships, constant monitoring of UBO information assists in identifying changes that may impact the risk profile of the client.


Incorporating UBO procedures into the entire KYB process, businesses will be able to ensure that compliance is not achieved only at the beginning of the client relationship but throughout its lifecycle.


Technology-based Verification of UBO

Verification of UBOs may be a tedious and inaccurate process when done manually. Today, UBO checks are being transformed by automation and data-driven solutions, which companies are using to conduct their checks. The latest KYB platforms provide real-time access to registries, automatic document extraction, and risk scoring based on AI, which can greatly relieve compliance departments.


Automation of UBO identification and monitoring process enables companies to scale their compliance activities and retain accuracy and efficiency. It also assists in making sure that the UBO compliance is not undermined by the shortage of resources or human control.


Conclusion

Ultimate Beneficial Ownership is the main pillar of contemporary compliance plans. In financial services, legal, real estate, and any other regulated industry, it is not an option to identify and verify UBOs. It increases confidence, minimizes the risk of exposure to financial crime, and allows it to be in line with international regulatory standards.


Through a comprehensive UBO check as part of an end-to-end KYB process, and maintaining a current BOI reporting regime, businesses can protect themselves against reputational and regulatory risks. In a transparent world where power is transparency, it is not only smart to know the people behind the business, it is a must.