In the realm of finance and regulation, grasping the concept of Ultimate Beneficial Ownership (UBO) is crucial. UBO refers to the real individuals who ultimately own or control a customer or transaction and can play a pivotal role in anti-money laundering (AML) efforts and financial crime prevention.

In this article, we take a look at the significance of UBOs, their relevance to businesses as well as the complexities and challenges associated with UBO verification. Lastly, we introduce NorthRow’s UBO Identification tool, simplifying this vital aspect of compliance.

What is an Ultimate Beneficial Owner?

An Ultimate Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

Reference to “ultimately owns or controls” and “ultimate effective control” refers to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.

This definition should also apply to the beneficial owner or a beneficiary under a life or other investment-linked insurance policy.

Who are Ultimate Beneficial Owners?

As more and more complex money laundering schemes started to be identified towards the end of the 20th century, the letters UBO started to become more prominent.

You might be forgiven for thinking they originally stood for “unidentified beneficial owner” because in most cases then, and still in many cases now, trying to find the ultimate owners of many corporations can be like searching for Higgs Boson with a magnifying glass.

However, the law in most countries in the world is quite clear. If you provide financial services to a legal entity, then you must first identify the ownership chain behind that entity, all the way to the human beings who ultimately own it (or at least those who own more than 25% if such is the case).

Company Ultimate Beneficial Owner

If you are dealing with a large multinational company with highly diverse ownership or a state-owned industry, for example, there is little likelihood of a human being (or natural person to give them the correct nomenclature) fitting the bill. But for the majority of small corporate entities, there is likely to be one or more natural persons who do. And they need to be identified.

In most circumstances, this is a straightforward matter. A joint-stock company, for example, is composed of shares (or equivalent). These shares tend to have “voting rights” (i.e., a say in how the company is run), and usually, each share has one vote. Where the legislation calls for firms to identify those who “own or control” more than 25%, that is what they are talking about. The shares give you ownership, and the votes give you control.

Challenges of Ultimate Beneficial Ownership verification

For many organisations, getting into the details of Ultimate Beneficial Ownership is not straightforward. Typically, many compliance technology firms provide complex corporate webs that map out all the companies associated with an individual.

The corporate web diagrams can often be confusing to navigate and can take hours or days to manually unravel and identify attributes (confirming self-certified information such as company name, address, and registration details) and verify those attributes (such as ownership levels and financial reports), and understand where if necessary, to conduct enhanced due diligence.

Ultimate beneficial ownership verification can be further complicated as a result of the different ways a company can be constituted. Let’s look at some specific examples of what I mean by this.

There might be more than one class of shares issued by the company, which carry different voting rights. For example, there might be 100 shares issued in total, 70 “A” shares which carry one vote each and 30 “B” shares which carry 20 votes each. You could easily have a situation where 2 people own all the “A” shares, and 3 people own the “B” shares.

What would this mean in practice?

Each of the “A” shareholders owns 35 shares and, therefore, owns 35% of the company, so they are UBOs by virtue of ownership. Each of the “B” shareholders controls 10 “B” shares and therefore 200 votes each. Given that the total number of votes available is 670 (70 “A” share votes plus 20 x 30 = 600 “B” share votes”), each “B” shareholder is a UBO by virtue of control (200 votes equates to approx. 30% of the voting rights).

Not quite so straightforward.

What if there doesn’t appear to be a direct owner of a company?

To take this a stage further, what happens if there is no direct ownership of the company you are onboarding? Let’s say there are three shareholders, all corporate entities themselves, and they all have a variety of shareholders, some of whom are common to more than one company.

And what if some of those intermediate companies also have different shares with different voting rights? All of those shareholdings need to be worked out (along with voting right calculations if necessary) in order to establish who, if anyone, is a UBO.

Getting all that information is not always easy, which further complicates matters.

At this point, it would be nice to think that we’ve now covered all the requirements relating to legal entities, but there is still more.

One of the things that regulated entities are obliged to do is to consider the rationale for any particularly complex ownership structures. Previous fact sheets emanating from the Financial Action Task Force (FATF) have indicated that more than three layers of ownership should be considered as a possible starting point for complexity.

Compliance questions you need to ask

The question that needs to be answered is this: “Do I understand the commercial rationale for this level of complexity?”

Perhaps the company has been subject to numerous mergers and acquisitions, acquiring multiple layers of ownership along the way, or it may have entered a joint venture that came with some accompanying baggage.

This is all well and good. But suppose there’s no apparent commercial rationale for the nature of the corporate structure. In that case, you must determine whether the complexity was built solely to obscure or obfuscate ownership and control. If so, this should be treated with suspicion.

UBO and trusts

One of the difficulties with trusts (assuming the trust itself is your client) is that they are not as well covered in the legislation and supporting guidance as corporates are.

In essence, everyone can be considered the UBOs of trusts, such as the settlor, trustees, beneficiaries and protectors. And, for good measure, anyone else (if there is someone) who exerts some form of control can also be considered a UBO.

This brings with it its own complications and questions. What if the beneficiaries don’t yet know they are beneficiaries? What if there is only a class of beneficiaries at onboarding? What if the trustees are a professional corporate trustee?

Most of these questions are outside the scope of this article to answer effectively, but there is always one thing to bear in mind. Where is my greatest risk?

Source of wealth and trusts

With trusts, the biggest risk clearly relates to the funds that have been settled into the trust – after all, you don’t need to launder clean money. This means that it’s important to make the source of the funds that were settled into the trust and the overall source of wealth of the settlor very clear.

The importance of establishing this cannot be stressed enough – even where the trust has existed for some time, and even if the settlor has long since shuffled off his mortal coil, it needs to be done.

On the other hand, there is simply no need for a source of wealth information for the rest of the actors, as they do not contribute any funds, and so do not present any risk in this respect.

However, they are still classified as Ultimate Beneficial Owners (UBOs), so identification and verification will be required to some degree at least. It’s in this area that the approach of some firms can cause more hindrance than help.

Now, when requesting the necessary documentation, it is crucial that you do it in a way that informs the customer as to why providing the information for verification checks is important. Of course, criminals will always be aware of this, which is why they go out of their way to find nominees and proxies (call them what you will) to provide a “cover” for their activities. It’s why they tend to open bank accounts in countries different from the registration jurisdiction, it’s why they tend to have diverse geographic ownership and control, and that is why all of those things, added together, should be treated as “red flags”.

Simplify Ultimate Beneficial Ownership verification with NorthRow

NorthRow’s Ultimate Beneficial Owner Identification tool delves into the complex ownership structure of your target organisation and returns a simple table containing the person(s) that you are required to screen. No more unnecessary or complicated corporate webs. Just the information you need to determine the risk and decide whether it is safe to onboard a business client or not.

This can be returned as an add-on to a standard check-in a new tab on the UI or can be returned via our API. In both cases, the UBO service also makes performing additional checks on these individuals a streamlined process by simplifying existing workflow and can also be combined with RemoteVerify. If you would like to learn more about Simplifying Beneficial Ownership with NorthRow, then get in touch to find out more about our powerful UBO identification tool.

Last updated: Thursday 2nd November 2023