Who is in charge here? A brief guide to ultimate beneficial owners

Understanding ultimate beneficial ownership (UBO) is a critical aspect of achieving corporate transparency, essential for regulatory compliance, anti-money laundering efforts, and managing supplier risks.

It is crucial to verify and review the UBOs of a business entity from the outset of a third-party relationship to establish trust. Then to continually screen UBOs in a counterparty network for related risks.

According to the Financial Action Task Force (FATF), the global authority on anti-money laundering and combating the financing of terrorism, a UBO is defined as “the natural person(s) who ultimately owns or controls a customer or the natural person on whose behalf a transaction is being conducted. This definition extends to individuals who exercise ultimate effective control over a legal person or arrangement.”

Typically, a UBO is someone who directly or indirectly owns more than 25% of a company's shares or voting rights. However, identifying the UBO(s) of an entity can be challenging, especially when ownership is deliberately obscured through complex holding structures spanning multiple jurisdictions with different disclosure requirements.

Successfully establishing who the ultimate beneficial owner(s) of an entity is takes place through a series of checks - often via a process known as KYB or as part of an onboarding or ongoing Know Your Customer (KYC), Customer Due Diligence (CDD) or third-party due diligence program. A series of identification steps helps ensure correct UBO verification and risk assessment.

Identification and verification of UBOs is key because financial institutions, corporations, and other organizations need to adhere to anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations. Knowing the UBOs of an entity in your counterparty network of clients, suppliers, and business partners helps assess risks to make sure this is in line with a company’s policy and appetite, while helping prevent direct or indirect involvement in illegal activity.

To determine the ultimate beneficial ownership of an entity there are several steps to go through:

1. Identification process
   
   Review corporate documentation: Examine company records, shareholder agreements, and organizational documents to identify individuals with significant ownership stakes or voting rights.
   
   Conduct due diligence: Perform background checks and research on key stakeholders to understand their relationships with the company and potential control over decision-making.
   
   Analyze ownership structures: Trace ownership through complex holding companies and legal entities to uncover the ultimate individual(s) with controlling interests.
   
   
2. Verification process
   
   Verify identities: Confirm the identity of potential UBOs through official identification documents, such as passports or driver's licenses, to ensure accuracy and legitimacy.
   
   
3. Ongoing maintenance process
   
   Monitor changes: Continuously monitor changes on ownership structures and updates to corporate records to stay informed about any shifts in UBO status and maintain compliance with regulatory requirements.

There can be legitimate reasons why a UBO may want to remain behind the scenes. Protecting their privacy and security is one example. In some cases, UBOs may choose to conceal beneficial ownership as public disclosure of ownership information could make them vulnerable to threats, such as kidnapping, extortion, or cyberattacks. Also, competitive advantage may be a reason to conceal beneficial ownership in certain industries or markets. By keeping ownership information confidential, UBOs may prevent competitors from gaining insights into their business strategies, partnerships, or financial resources.

But there are also reasons why a bad actor may want to hide UBO status, including:

1. Tax evasion: One of the primary reasons a UBO might try to hide beneficial ownership is to evade taxes. By concealing their ownership stake in a company, they can avoid paying taxes on profits or assets, leading to significant financial gains.
   
   
2. Money laundering: Hiding beneficial ownership can also be a tactic used to facilitate money laundering. By obscuring the true ownership of assets or funds, individuals can disguise the illicit origins of money and integrate it into the legitimate financial system.
   
   
3. Avoiding regulatory scrutiny: Some UBOs may seek to hide beneficial ownership to evade regulatory scrutiny or oversight. By remaining anonymous, they can avoid compliance with anti-money laundering regulations, sanctions, or other legal requirements that could expose their activities.

Overall, while some reasons for hiding beneficial ownership may be legitimate, such as privacy concerns, others like tax evasion and money laundering are illegal and pose significant risks to the financial system and society as a whole.

Various regions worldwide have implemented regulations to enhance corporate transparency and combat financial crimes through UBO disclosure.

In the United States, the Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020, requires certain companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This act requires that UBO information such as name, birthdate, address, a unique identifying number are provided and an image of the identification document used to obtain the identifying number.

In the European Union, member states were required to set up public UBO registers by January 2020. These registers contain details such as the UBO's name, birth date, nationality and nature of their beneficial interest. However, in November 2022 the European Court of Justice ruled that public access to these registers was a breach of privacy. Consequently, access is now restricted to competent authorities and entities with a legitimate interest.

The recently adopted EU's AMLD Package strengthens the requirements for beneficial ownership registers and makes sure people with a legitimate interest – such as journalists, civil society organizations, authorities and supervisory bodies, have immediate and free access to beneficial ownership information.

The recently published regulation provides additional guidance on the identification of ownership including both direct and indirect interest and control by other means as key factors to determine the ultimate beneficial owner of a legal entity.

Whilst the general threshold for identification and verification of ownership remains at 25% of voting and or interest rights, member estates can request a lower threshold for higher risk categories such as higher risk sectors. In this situation the threshold should be set at no more than 15% of the ownership interest. As the regulation states ^*:

“In the case of indirect shareholding, the beneficial owners should be identified by multiplying the shares in the ownership chain. To that end, all shares directly or indirectly owned by the same natural person should be added together. That requires the shareholding on every level of ownership to be taken into account”

In the UK, the Economic Crime (Transparency and Enforcement) Act 2022 is now in place. UK companies and limited liability partnerships must create and maintain a register of people with significant control (PSCs). The Register of Overseas Entities requires overseas entities owning property in the UK to disclose their beneficial owners. 

In the APAC region, regulations vary significantly. Singapore requires companies to maintain a Register of Registrable Controllers (RORC), which is accessible to the Accounting and Corporate Regulatory Authority (ACRA) upon request. Australia, on the other hand, currently does not require companies to maintain UBO information unless they fall under existing AML obligations. There are plans to implement what’s known as Tranche 2, which will align the country with the Financial Action Task Force’s (FATF) recommendations on international AML standards. Malaysia, which will be going through a FATF mutual evaluation slated for 2025, issued updated guidelines on beneficial ownership reporting requirements. The Companies Commission of Malaysia effected policy changes to strengthen its beneficial ownership reporting framework, which includes removing exemptions on reporting obligations and introducing a new definition of a “beneficial owner”.

The United Arab Emirates (UAE) implemented UBO regulations in 2020, requiring existing entities to submit UBO data by mid-2021. Corporate entities are obliged to disclose UBO information on any entity which owns, directly or indirectly, 25% or more of a company.

Despite global efforts to improve UBO transparency, challenges persist due to varying regulations across jurisdictions and privacy concerns. There are also barriers put in the way by bad actors using legal structures - like shell companies - to hide their ownership and control status. Technology and data analytics play a crucial role in addressing these challenges by tracing complex ownership structures and facilitating real-time monitoring of UBO data across jurisdictions.

Moody's compliance and third-party risk management solutions offer organizations comprehensive data and resources to facilitate Ultimate Beneficial Ownership (UBO) discovery as part of an integrated approach. By leveraging Moody's advanced technology and data analytics capabilities, organizations can efficiently identify and verify UBOs, ensuring compliance with regulation and mitigating risks associated with opaque ownership structures.

We provide in-depth insights into complex ownership relationships, enabling organizations to trace beneficial ownership across multiple jurisdictions and layers of ownership. This level of transparency helps uncover potential risks, such as money laundering, tax evasion, and terrorist financing, associated with undisclosed UBOs.

Our solutions also offer continuous monitoring of UBO data, allowing organizations to stay informed about changes in ownership structures or UBO information. This proactive approach enhances risk management and strengthens compliance efforts, safeguarding organizations from regulatory penalties and reputational damage

Contact the Moody's team to discuss your UBO discovery processes and learn how our compliance and third-party risk management solutions can help your organization efficiently identify and verify UBOs.

Stay ahead of evolving global regulations and mitigate risks associated with opaque ownership structures by leveraging our advanced technology and data analytics capabilities. Foster trust and transparency in your counterparty relationships by prioritizing UBO verification and compliance efforts.

Get in touch with the Moody’s team if you have any questions, we would love to hear from you.

_{* (108) - Directive (EU) 2024/1624 of the European Parliament and of the Council of 31 May 2024 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing}