UBO Guide: Ultimate Beneficial Ownership Screening for Anti-Money Laundering Compliance

Discover our comprehensive guide on Ultimate Beneficial Ownership (UBO) screening to enhance anti-money laundering compliance, navigate complex legal entities and ownership structures, and ensure a low-risk approach to compliance.

Ultimate Beneficial Ownership (UBO) Guide

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What is UBO screening for?

The hidden beneficiaries of almost 800,000 offshore companies, many used to launder the proceeds of financial crime, evade taxes or disguise the true ownership of property and assets have been revealed via a string of document leaks by the International Consortium of Investigative Journalists (ICIJ) in recent years.

Such leaks highlight the global and industrial scale at which legal entities known as shell companies, registered in offshore havens or in countries with limited controls, are exploited by criminals to make financial transactions that are hidden from the gaze of the international banking network.

It’s therefore vital that financial institutions, large and small, carry out the necessary cross-checking of beneficial ownership information to understand the ultimate ownership of the legal entities they’re entering into business relationships with and the full potential risk exposure and legality of doing so.

The Financial Action Task Force (FATF) recently updated its guidance on beneficial ownership – covered in Recommendation 24 – placing an even greater onus on regulated financial institutions and professional services firms to hold accurate and up-to-date information on the true owners of companies.

Identifying beneficial owners or persons of significant control can be a huge challenge for compliance teams, particularly if they lack expert research-curated data sources. Adopting a true risk-based approach is essential to success if firms wish to avoid the significant fines that can come from non-compliance with AML regulations.

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What does a UBO mean?

A UBO – or Ultimate Beneficial Owner – has come to be defined as the natural person or persons who directly or indirectly owns or controls the corporate entity and benefits from its activities.

AML compliance should focus on those shareholders whose control is significant and who ultimately can influence and benefit from the activities of the enterprise. Frequently, control is exercised remotely, without any involvement in the day-to-day activity of the business.

US, EU and the UK regulators go further, defining an ultimate beneficial owner as someone who owns 25% or more of the share capital with voting rights, although trusts and partnerships work slightly differently. However, beneficial ownership thresholds may differ in other jurisdictions and the cross-checking of ownership information should always be appropriate to the AML regulations of the country in question.

What UBO verification checks are required?

Since 2012, the Financial Action Task Force (FATF) stipulates that firms should hold “adequate, accurate and timely beneficial ownership information.” However, in practice this is difficult and firms need a multi-pronged approach, drawing on various sources of information:

  • A Registry Approach – requiring company registries to hold information on beneficial ownership.

  • The Existing Information approach – drawing on a wide variety of possible sources of UBO data in various, disparate records.

  • The Company Approach – placing the onus on the company itself to maintain up-to-date information on its shareholders or members and provide the data when required.

This requires regulated banks, other financial institutions and professional services organisations to take a risk-based approach and conduct a thorough risk assessment of the customer, ensuring the firm has a detailed understanding of the business, its activities, its funding, and what money laundering and terrorist financing risk might exist. The Fifth Anti-Money Laundering Directive (AMLD) which came into force in the UK in 2020, requires that checks be made using a third-party ‘trusted and independent source’.

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What type of organisations require UBO checks?

Ownership Registers

Transparency of ownership has become a global theme and many countries now provide official registers of beneficial owners, compiled from official company formation data, made available to law enforcement agencies, regulated financial institutions and others.

Public

Public companies are typically low-risk since their ownership structures by nature entail mass ownership and the involvement of regulated entities themselves.

Trusts

Trusts were recently brought into scope and require a slightly different approach due to the legal separation of the parties involved. Checks should establish who could ultimately benefit from misuse of the trust and any potential for financial crime activity. In the UK the Trust Registration Service requires that most Trusts are registered with HMRC and this means that KYC checks are even more important, as firms who deal with Trusts have a greater obligation to fully understand them and identify trustees.

What data sources should I use for UBO screening?

Ownership Registers

Transparency of ownership has become a global theme and many countries now provide official registers of beneficial owners, compiled from official company formation data, made available to law enforcement agencies, regulated financial institutions and others.
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PEPs & Sanctions Watchlists

Sanctions lists are compilations of sanctions applied to individuals, countries and groups by governments or international bodies such as the European Union. They are an important element of Ultimate Beneficial Ownership screening, as firms can face heavy fines if they do business with an organisation ultimately owned by a sanctioned individual.

Politically exposed persons (PEPs) who control State Owned Entities should also be identified in UBO verification screening as ownership structures are analysed.

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Curated UBO Data

A standard search engine will not give you the depth of insight you need to analyse and map the complex company structures synonymous with off-shore and shell companies.

Extensively investigated, high-quality global business data delivered through an integrated RegTech platform is essential to minimise risk. Some RegTech platforms and solutions even allow you to visually map ownership structures.

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Adverse Media & Enhanced Due Diligence

If cross-checking beneficial ownership information reveals potential high risk exposure, further enhanced due diligence checks are required using an adverse media database.

In extreme cases, an in-depth enhanced due diligence report compiled by expert team of global researchers may be the most time and cost-effective solution.

Importance of accurate data

Carrying out Ultimate Beneficial Ownership checks can be time consuming and costly. Working with accurate and up-to-date beneficial ownership information, ideally sourced from corporate registries, is therefore best practice and reduces possible errors. However, when corporate registry sources aren’t available then firms need to look to RegTech solutions that can source and automate data on their behalf.
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What’s the process for UBO verification?

1. Obtain key information on the target company or legal entity

Typically, the firm’s registration number, name, address, official status and the names of senior employees for verification purposes. Establish its share ownership structure including individuals and other legal entities.

2. Research the ownership chain

Use the information obtained to start building out the corporate structure, based on the percentage of ownership (in shares or other interests) of the entities named in Step 1. Establish whether their ownership is direct or indirect.

3. Identify and verify the Ultimate Beneficial Owner(s)

Following on from step 2, establish each individual’s total shareholding, management control and ownership stake to determine who, if anyone, fits the UK (FCA) US (FINCEN) and EU (AMLA) definition of a UBO – i.e. holds a 25% or higher stake in the business (shareholding thresholds may vary across other jurisdictions).

4. Perform KYC checks on the identified UBO(s) at an appropriate level

Once any UBOs are identified, further KYC and AML checks will be required, in accordance with your firm’s money laundering risk assessment policy.

5. Record Keeping and ongoing monitoring

The entire process should be recorded and made available for audit purposes. Determine the appropriate frequency of review for ongoing monitoring purposes to pursue a low-risk compliance approach.

What are the main challenges in identifying beneficial owners?

Bad actors are experts at disguising their presence and influence over an organisation being used to obscure criminal activities.
Some of the subversion tactics to look out for include:

Complex corporate structures

Red flags include extensive use of offshore and shell companies, nominee shareholders and across multiple jurisdictions, at odds with the stated activity.

Offshore and Shell companies

Many jurisdictions simply do not publish records of directors and shareholders, so uncovering a UBO is far more difficult. Knowledge of what data is available in that jurisdiction is key to unearthing useful data from other sources.

Nominees

Overuse of nominee shareholders or directors could indicate that the real owners of the company are trying to disguise their true identity and related criminal activities.

Bearer shares

Although banned in some jurisdictions, Bearer shares are simply shares assigned to another person by the registered owner, so effectively handed over in trust. This tactic can be used to disguise the real holder of significant control, who could be a financial criminal. Checks must establish the link between the holder and the original owner.

Benefits of using curated UBO data

Better Due Diligence

Know Your Customer (KYC), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) and Vendor Due Diligence checks will be easier, quicker and more accurate. Having beneficial ownership data in a single location will reduce the legwork for internal investigators.

Enhanced Experience

Applicants need only provide their business name, address, phone number and email – these data points can then quickly be used to verify their beneficiary status, meaning fewer delays and happier clients.

On-going Monitoring

If ongoing monitoring of UBO data is required, an alert service that automatically notifies any changes to shareholders/directors or other entities in the ownership structure of the customer account will be beneficial. What’s more, firms must ensure they understand the provenance and accuracy of the sources of this data. Some UBO RegTech database solutions can be configured to automatically rescreen customers using existing details, in accordance with regulatory requirements.

Frequently Asked Questions

Official anti-money laundering guidance states a UBO is anyone with a shareholding of 25% or more, however many organisations will apply a more risk-based approach and choose a lower threshold, such as 10% for higher risk scenarios.

Beneficial ownership calculations often include direct and indirect shareholdings of business entities and can be quite complex. Visually mapping the entire corporate structure and inserting the shareholdings of all relevant entities is a good way to calculate shareholdings and identify the beneficial owners (those with a 25%+ stake).

Trust and partnership structures make it tricky to determine individual shareholding values. However, if a trust forms part of the ownership structure of a business, then it should be treated like any other individual shareholder and each of the trustees and beneficiaries identified and risk assessed accordingly applying the 10-25% thresholds as appropriate. In the case of property trusts, legal ownership and beneficial ownership may be separate people. Applying the RBA means understanding the purpose of the trust, when and where it was formed and identifying grantor, trustees, beneficiaries and other parties.

Other entity ownership structures that require consideration in the UBO calculation including government entities with a financial stake in the business, foundations, funds and partnerships. All require special attention to understand where the ultimate control lies.

If a shareholder is also a politically exposed person (PEP) then a risk-based approach is strongly advised. In these higher-risk situations, a shareholding of 5% or more is often applied for classification as a beneficial owner. Additional information and enhanced due diligence is essential.

Many jurisdictions do not publish records of directors and shareholders so finding the UBO is much more difficult. In such cases, knowledge of what related data is available in that jurisdiction is needed as key information may be researched from other public records.

  • Difficulty identifying the beneficial owner or no beneficial ownership information
  • Multiple data corrections in filings (names/DOBs etc)
  • Extensive use of nominee directors and bearer shares
  • Low profile of the company e.g. no website
  • Irregular payment transactions to registered companies at the same address
  • Frequent director changes

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