Identifying and Verifying Ultimate Beneficial Owners

Getting the Full Picture, Fast

Comprehensively identifying and verifying corporate hierarchies and ultimate beneficial owners (UBOs) has become increasingly important since the implementation of 4MLD and MLR2017. However, achieving this view is time-consuming, and most organisations struggle to uncover the full picture. In this article, Paul Charmatz, Managing Director at encompass corporation, explores some of the big questions around beneficial ownership.

The increasing burden of identifying and verifying ultimate beneficial owners (UBO) is a common thread in the conversations we have with regulated firms. Gathering and analysing the information needed to understand corporate ownership structure and discover UBOs takes anything from several hours to days. As a highly manual process, it’s also prone to human error, leaving firms exposed to unknown risks and criminal activity such as money laundering, corruption and bribery.

What Are Ultimate Beneficial Owners?

An ultimate beneficial owner is an individual who owns or controls more than 25 percent of the shares or voting rights in a legal entity, holds the right to appoint or remove the majority of the board of directors or has the right to exercise significant influence or control over the company. Under the Fourth Money Laundering Directive (4MLD), senior managing officials can also be treated as beneficial owners where the above criteria cannot be determined.

Global regulations – such as the Money Laundering Regulations 2017 (MLR2017) in the U.K. and the upcoming FinCEN final rule on Customer Due Diligence (CDD) Requirements for Financial Institutions in the U.S. – dictate that these individuals must be identified and reasonable measures taken to verify their identities.

Why is it so Important?

Criminals have long used complex corporate structures to hide their real identities and conceal where their funds have come from – or what they are being used for. In recent years, the fight against money laundering has stepped up, with stricter regulations (such as 4MLD and MLR2017) put in place around financial transparency.

Regulated firms have to carry out exhaustive checks when onboarding new customers to ascertain whether they present a compliance risk to anti-money laundering (AML) and anti-bribery and corruption (ABC) regulations. The inability to identify the UBO of a company could lead to an unintended breach of these rules, resulting in heavy fines and severe reputational damage, so it’s a crucial issue that firms have to have a real grip on.

Why is it so Difficult?

Unfortunately, ownership won’t necessarily be neat, within a single jurisdiction or entity type, and it could be many layers deep depending on the structure of the customer. In addition, different countries have different levels of transparency and disclosure requirements regarding company registrations. As a result, we’ve seen many firms struggle with the discovery of UBOs due to the difficulties of mapping out the full picture of an organisation’s ownership structure.

The sheer number of sources needed to comprehensively understand ownership structure, identify UBOs and screen all relevant individuals and entities for regulatory and reputational risk presents a tremendous challenge. Data sources range from publicly available sources (e.g., many corporate registries) to premium providers of company data, regulatory data and adverse media, so companies have to access multiple websites and subscribe to multiple vendors, as well as find a way to integrate these into existing KYC or onboarding platforms.

The challenge doesn’t end once the initial identification and verification is complete; you then have to keep up the ongoing monitoring of your identified UBOs, and, as regulations are updated, your processes have to be refined in order to ensure ongoing compliance.

Where Do I Find the Information?

Data aggregators are typically used to extract UBO data from public sources to create full company hierarchy structures or to hold traceability references back to the original source. This data is relied upon as a “secondary source,” which still requires confirmation with a “primary source” (an approved registry or regulatory source, such as Companies House, Infogreffe or the U.S. Securities & Exchange Commission) or with the client – which is a very manually intensive process.

Federating the search using robotic process automation, such as that built within the encompass platform, can play a key role here, driving the retrieval of relevant information from trusted sources and the analysis of that data, in line with a firm’s KYC policies, in real time. This saves companies significant time and cost while at the same time eradicating the potential risks of human error.

How Can I Balance Customer Experience with Regulatory Compliance?

There are a couple of key developments underway in the industry that are leading the way for a more automated, and therefore faster, process.

• Digitalisation: The development of algorithms to iterate through an ownership structure between data available from aggregators and to, in turn, confirm this against a primary
• Beneficial Ownership Registers: 4MLD requires that all EU member states develop and maintain public beneficial ownership registers, and 20 countries across the EU are also part of the Extractive Industries Transparency Initiative (EITI). The aim is to increase transparency over who owns and controls companies, help inform investors when they are considering investing in a company and support law enforcement in money-laundering investigations. The U.K. was the first country to create a Central Public Registry, launching the “People with Significant Control” (PSC) register in 2017 – a publicly available database of U.K. limited companies that are now expected to maintain details of their UBOs and supply this information to Companies

The challenges around identifying and verifying UBOs may be substantial, but the risks that come with noncompliance are even greater. encompass automates information and news discovery from the widest range of free and premium sources globally, in line with your firm’s policies, to enhance the way you perform KYC at onboarding, as well as event-driven refresh and remediation. By integrating encompass with your existing KYC and onboarding solutions, you can significantly reduce the time, cost and risk involved in customer due diligence activities while also enhancing the customer experience and demonstrating robust compliance to regulators.