Who is considered a beneficial owner?
The definition of beneficial owner changes according to the geographies. But by and large, it refers to the person who ultimately owns or controls something, like a company, property, or financial account. Ultimate Beneficial Owner might not be the one you see on paper, but they’re the real boss behind the scenes. For example, if you buy a house for your friend to live in, you’re the beneficial owner even though your friend’s name is on the paperwork. Being the beneficial owner means you have the power to make decisions and benefit from whatever it is you own or control.
Knowing the beneficial owner is crucial in Know Your Customer (KYC) processes because it helps financial institutions understand the true ownership and control structure of their customers. This information is important for preventing money laundering, terrorist financing, and other illicit activities. By identifying the ultimate beneficial owners (UBO) who benefit from or control an account or asset, institutions can assess the risks associated with a customer and ensure they comply with regulatory requirements. This helps maintain the integrity of the financial system and protects against financial crimes.
What is the concept of UBO ?
A UBO is an individual who effectively controls the organization and has more influence or control over the company’s work. The statutory directors of the company, as well as individuals who possess more than 25% voting rights or the majority of the shares of the corporation or other legal body, can be considered as the UBO of the company.
The UBO Registry
Companies and other legal entities must register their UBO with the authorities. This registry helps prevent using a company as a cover for financial wrongdoing by making it clear who benefits most from each transaction. The UBO registry aids in preventing financial crimes like corruption, tax fraud, and money laundering.
Registering UBOs can benefit companies looking to do business with them. It helps identify potential risks related to the UBOs during due diligence checks, supports the fight against corruption and money laundering by raising awareness about these risks, and instills confidence in customers due to increased transparency and assurance that client companies are risk-free. These registries are also helpful in noting the change in beneficial owner.
UBO registration in the European Union
Maintaining a central registry, called the Register of Beneficial Ownership (RBO), which includes information on beneficial owners, was made compulsory by the fourth EU Anti-Money Laundering Directive in 2015. The EU’s Anti-Money Laundering (AML Compliance): Beneficial Ownership of Corporate Entities Regulations 2019 regulation took effect in March 2019. Along with the aforementioned, the Fifth Anti-Money Laundering Directive (AMLD) amends the ‘trusted and independent source’ criteria that require the verification of customer data by adding electronic identifiers, if available, to make the process faster and more reliable. Furthermore, the Sixth EU Money Laundering Directive, which took effect in December 2020, mandates that all EU member states make their beneficial ownership records available to the public.
UBO registration in the USA
In an attempt to comply with global requirements to increase the transparency of their business operations, the USA has recently made reporting and recording the UBOs of relevant companies mandatory.
In the end, reporting businesses will have to submit UBO reports to FinCEN. The National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted by the US Senate and House of Representatives in December 2020 and came into effect on January 1, 2021. This Act incorporates both the Corporate Transparency Act and the Anti-Money Laundering Act (AML) (CTA), which require corporations, limited liability companies, and other similar organizations to provide specific information about their beneficial owners.
Although the timing and format of the reporting have not yet been decided, it is anticipated that it will need to be done once a year for existing businesses or when new entities are incorporated if they are being set up in the US. Businesses will thus need to start identifying which of their current companies fall under the purview of reporting and then analyze the structure of these organizations to see if there may be any potential problems about reporting ownership.
Difficulties in compliance due to regional variations in UBO registration
Though the definition and principle of Ultimate Beneficial Owner and its registration remain more or less the same worldwide, the legal definitions involved, implementation processes, and the severity of non-compliance penalties vary from region to region, which can be challenging for companies lie, multinational corporations (MNCs), or other businesses that are looking to branch out into overseas markets.
For example, though the European Union has included the importance of registering UBOs in its Anti-Money Laundering Directives (AMLD) and offers guidelines on how to penalize non-complying entities, the penalty still varies greatly from country to country, with the difference being extremely large in some. Hence, it would be helpful if more uniform regulations or guidelines were followed globally, making it easier for businesses to operate overseas and making adapting to comply with local rules and regulations a much smoother process.
Which organizations are required to register their UBO?
Companies having the following structures must make it a point to register their Ultimate Beneficial Owners-
- All types of partnership firms, including general partnerships, limited partnerships, and professional partnerships.
- All private and public limited companies that are not listed on the stock market.
- Co-operative societies and foundations
- Shipping and trading companies
- Mutual insurance societies
- Associations operating with full legal capacity or associations working with limited legal capacity but showing business activity.
- Religious entities that generate revenues (like churches and temples) may also be required to register their UBO.
How can banks and other financial entities recognize a company’s UBO?
If the company is yet to register its Ultimate Beneficial Owner, then there are a few ways that financial entities and authorities may be able to identify the UBO in question-
1. Banks may obtain this information by obtaining the incorporation and other documents showing the shareholders of the company. Companies must provide complete and up-to-date information that includes the firm’s registration number, name, address, official status, and the names of top management employees for verification of legitimacy and accuracy, though the exact requirements vary depending on the jurisdiction and AML/CTF regulation standards.
2. Financial entities and authorities may also be able to determine the UBO by checking the percentage of shares held by each stakeholder, ownership stake, and management duties and control to determine who gets the most benefit- essentially making them the UBO.
3. Performing basic KYC and AML checks can help bring up information on the owners of the companies. Their previous affiliations can also help to determine their importance in the company and if they may be the UBO or not.
Conclusion
In order to further comply with AML/KYC checks and due diligence measures, certain companies are required to register their Ultimate Beneficial Owner (UBO) with authorities. This helps to determine which individuals of the companies have the most to gain and can hence help track down financial criminals in the case of suspicious activities. Keeping a record of such individuals can also discourage companies from conducting activities like money laundering or other shady activities, as they are aware that it can now be traced back to them.
The EU and the USA, along with many other countries in the world, have already put such measures into place or are planning to, in order to increase the transparency of a reputed company’s business dealings and help prevent fraud, which ultimately benefits the country’s economy as a whole.
