For banks and other financial institutions (FIs), the problem of identifying beneficial owners is becoming more acute. As Financial Action Task Force (FATF) President, Dr. Marcus Pleyer, states 2022 will “include a focus on improving beneficial ownership transparency,” noting that current rules are “not working.”
There are multiple reasons for FIs to put more focus on improving beneficial ownership procedures, including:
- The Pandora Papers, a comprehensive exposé of financial secrecy, which revealed the shell accounts of over 100 world leaders, billionaires and celebrities and garnered significant media attention
- New EU criminal liability for AML violations 6AMLD, whereby institutions can now be held liable for non-compliance with the Ultimate Beneficial Ownership (UBO) requirements
- The Corporate Transparency Act (CTA) in the US, which has been called a “gamechanger” for beneficial ownership tracking in the US
- The FATF will release more substantial recommendations for greater transparency around beneficial ownership, and it seems just a matter of time until these become legal requirements in various jurisdictions
Beyond specific requirements, the ethical imperative to prevent financial crimes and nurture a responsible organization requires truly understanding who you are doing business with.
To help better discern the context, challenges and solutions of identifying beneficial ownership, Trulioo has created How can banks vet UBO integrity in a post-Pandora risk landscape? The guide will help financial institutions enhance their Know Your Business (KYB) processes and better prepare compliance organizations to operate in 2022 and beyond.
Uncovering complex legal arrangements
Correctly identifying beneficial ownership structures can be difficult, costly and time-consuming. Some of the positive trends driving digital transformation are helping create more complex, cross-border and opaque organizations.
Now, legal entities are created halfway across the world in minutes. While speeding up business formation has obvious benefits, it also allows those who want to hide their interests to create shell companies and other entities digitally.
Some of the issues include:
- Regulatory fragmentation, as different jurisdictions have varying definition criteria, ownership thresholds, recordkeeping requirements and Anti-Money Laundering (AML) penalties
- Transparency, as layered ownership structures and difficulties in getting company records complicate ascertaining the parties involved
- Front companies, low-intervention jurisdictions, nominee ownership structures — or all of the above — conceal illicit financial activity and the involvement of key conspirators
- Calculating ownership percentages, as connected entities can have vastly different ownership parties and shares
- Ongoing changes in regulatory requirements, technology, new money laundering techniques and customer business structures that all require consideration and adaptation
Compliance failures can lead to fines, sanctions and reputational damage. There were $2.2 billion in AML fines imposed by global regulators in 2020, which increased almost 500% from 2019. In a post-Pandora enforcement landscape, identifying and verifying the UBOs of legal entities will be critical for regulated firms globally.
How do you identify a beneficial owner?
Fortunately, various technologies and methods can help acquire, process and analyze KYB information. Some beneficial ownership best practices include:
- Automating manual processes, such as data acquisition and data entry
- Using AI technologies to improve data intelligence
- Combining data sets from multiple sources to better develop a holistic understanding of business customers and their associated risk
According to the FATF, “the variety and availability of sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources.” This multipronged approach enables collection from different channels to provide more detailed and up-to-date information and cross-checks information for accuracy.
Another powerful technique to determine an entity’s risk profile is to perform Know Your Customer (KYC) checks on the ownership structure; is the person a real person, and are they on any watch lists?
Additional measures encompass:
- Using digital procedures to verify registry information against other accessible digital sources to help ensure that inputted information is correct
- Automatically calculating share information to speed the process and better validate the shareowner
- Cross-referencing new information with existing data to potentially uncover suspicious activities
As stated in an article in Finextra, it takes 3-4 months to onboard a corporate banking customer. The lengthy delays lead to application abandonment and, as a result, “in 2019, it was deduced that the global commercial and business banking market lost $3.3 trillion.” Correctly identifying business ownership is a compliance issue and affects customer acquisition and bottom-line performance.
Taking measures to speed up and improve the accuracy and reliability of KYB processes is a vital initiative for financial institutions in 2022 and beyond.
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