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As governments, banks and other financial institutions (FIs) fight to prevent money laundering, fraud and other financial crimes, one of the most important factors to consider is ultimate beneficiary ownership, or UBO.
What is UBO in banking and finance?
The Financial Action Task Force (FATF) takes the lead globally in the fight against money laundering and terrorist financing by establishing global standards and making recommendations designed to help governments institute anti-financial crime measures. Key to this effort is defining UBO and guiding nations around ways to collect, maintain, update, and share UBO data.
FATF defines a UBO as “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.” That definition may seem clear, but different nations interpret it very differently.
Some nations consider a person or entity to be a UBO when they own or control 50% of an entity, while other nations set the ownership / controlling interest bar as low as 15% in certain situations. Understanding the UBO(s) of a company can become even more confusing when one considers how ownership can shift via share sales, mergers, acquisitions, corporate expansions, etc.
Identifying UBOs in complex or multinational business structures
Often, nefarious actors set up legal businesses or business networks that involve complex structures with the aim of leveraging those structures to mask money laundering and terrorist financing activities. For example, according to the US Department of the Treasury, Russian national Andrey Dmitriyevich Sudakov (Sudakov), an employee of U.S.-designated Russian state-owned gold producer Public Joint Stock Company Polyus (Polyus), and his Hong Kong-based associate Mu Xiaolu (Mu), engaged in a complex, multi-layered laundering scheme whereby payments from the sale of Russian-origin gold were converted into fiat currency and cryptocurrencies through numerous UAE and Hong Kong-based front companies. Hong Kong-based trading companies routed payments related to gold sales through foreign financial institutions and back into the Russian financial system. The scheme also used UAE-based front company Red Coast Metals Trading DMCC to obfuscate payments from the sale of Russian-origin gold.
Frequently, when such sanctions evaders and money laundering networks want to leverage the US financial system, they set up shell companies in jurisdictions like the British Virgin Islands, Cayman Islands and other such “offshore” locations that lack robust UBO disclosure requirements. In such cases, FIs find it difficult to pinpoint ownership because it is hidden in foreign jurisdictions that possess virtually no information regarding layers of ownership. This lack of consistent UBO data throughout the world is an ongoing problem for AML compliance teams at banks and other FIs. Such schemes enable nefarious actors to launder a large portion of the nearly $2 trillion per year in laundered money – with the US alone accounting for $365 billion of the total.
While FATF, the OECD and other international organizations are making significant progress toward creating UBO transparency, that progress is slow. Yet, FIs do not have the luxury of waiting for international order to be established around UBO, because they are required – today – to collect, maintain and update UBO data for every one of their customers. Navigating each nation’s UBO requirements, available data and ways to access it can be challenging and consume considerable resources for compliance teams at FIs.
Even the most advanced regulating nations have problems
The lack of international UBO data consistency means financial institutions often struggle to obtain accurate information, particularly in jurisdictions with limited public registers or weak regulatory oversight. Yet, even in the USA, FIs do not enjoy unfettered access to a one-stop-shop UBO database. In fact, the newly formed UBO database run by FinCen currently lacks comprehensive data and only allows FIs to access that data on a case-by-case basis. Thus, FIs have mainly relied on customer-provided UBO information, which can be riddled with fraudulent data, misrepresentations and nuanced facts.
In the UK, tracking complete UBO data is also difficult, as there are multiple beneficial ownership registers – for companies, land, property, and trusts. Companies House is the UK government agency responsible for requiring businesses to register their information. As part of the UK’s recent strategy to prevent fraud and financial crime, Companies House has gained new, government-mandated intelligence and enforcement capabilities under the March 2024 Economic Crime and Corporate Transparency Act (ECCTA). Companies House will be able to review and challenge company-supplied information that may appear inaccurate, inconsistent or fraudulent.
Despite new UK government rules and regulations, the fact that they are new and evolving while UBO information resides in multiple registries makes it difficult to obtain a clear picture of holistic UBO data for complex businesses and business owners seeking to obfuscate the truth about ownership in the UK and beyond its borders.
Where does this leave FIs?
Clearly, overcoming UBO data problems has both international and US domestic roadblocks. Given the state of UBO data and access in the USA and UK – two of the most aggressive nations in stressing the importance of using UBO data in finance – FIs need to find their own way today and until governmental UBO data programs mature.
Ultimately, UBO data gaps are each FI’s own problem. Knowing your clients’ true ownership and control structure is not only important for controlling risk to the financial system, but it is also a legal requirement for your bank or financial institution.
Compliance teams leverage private data solutions
To gain the most comprehensive UBO data available today, FIs rely on private data providers and technologies that can collect, analyze and take action on UBO data. Companies like Dun & Bradstreet, LexisNexis, Moody’s, and Thomson Reuters offer databases with extensive information on businesses that include detailed corporate structures and UBO-specific data. By adding data from these information sources to your own FI’s internal database(s) of customer information, your compliance team can rapidly gain a fuller picture of your clients and who owns/controls them. As a baseline, data providers supply the following UBO data:
- Beneficial owners and entities (detailing names and the percentage of ownership by each)
- Ownership structure (often via intuitive, interactive visualizations)
- Country of ownership
- Type of ownership (E.g., private, publicly traded, government-owned)
This information makes it much easier for compliance teams to identify where and to whom funds and benefits are being routed within complex business structures.
Continuous monitoring of customer UBO data
Collecting UBO data about your clients is not a ‘one-and-done’ activity. FIs must periodically update customers’ ownership data and monitor for changes that may occur between scheduled updates. Often, changes in UBO data are early identifiers of financial crime risk. Of course, the more time spent collecting UBO data, the more resources are needed by your bank compliance team. This is where AI-driven compliance automation can provide relief. For example, WorkFusion’s AI Digital Workers automate many of the standard, repetitive tasks required to collect, aggregate and report on customers’ UBO data.
Consider WorkFusion’s AI Digital Worker named Darryl. Darryl performs the work of a Customer Due Diligence Program Analyst. As an AI-based, preprogrammed tool, Darryl’s primary mission is to protect the organization from risky client relationships by collecting information and documentation to conduct due diligence on customer relationships. Darryl collects, indexes, validates, extracts, and inputs information regarding the entity being onboarded or refreshed. With the help of Darryl, your compliance team can scale without adding headcount. Moreover, you gain the ongoing capacity and automation needed to perform both periodic and continuous UBO data collection.
To learn more about ways to collect, aggregate and act upon the data your compliance team needs to fight off financial crimes, visit www.workfusion.com today.