In this guide, we will provide a brief overview of new AML regulations in the U.S. and Europe, as well as investigate best practices for identifying and verifying UBOs (Ultimate Beneficial Owners).
EU UBO requirements
If you’re an EU obliged entity doing business with commercial clients, a UBO check is mandatory. Beneficial ownership information is a requirement dating back to the 4th AML Directive (4AMLD) in Europe, and different member states have passed enabling laws to enforce reporting requirements. For example, Sweden has legislation that requires notifying the Swedish Companies Registration Office of beneficial owners.
The Swedish example illustrates some of the specific requirements:
- Covers Swedish companies, companies operating in Sweden and individuals who administer trusts and other similar legal structures
- A beneficial owner is anyone who controls the company directly or through agreements, or has over a 25% ownership stake, or has the power to control at least half of the board
- Any change of beneficial ownership must be reported as soon as the entity becomes aware of the change (within a few days)
While each European member state has specific legislation, the laws have to conform to the 4AMLD, so will share much in common with these examples.
The 5th AML Directive (5AMLD) added requirements for member states to set up publicly available registers for companies, trusts and other legal arrangements. While these registers should have been in place by January 10, 2020, according to global anti-corruption organization Global Witness, “progress has been at best patchy with only five having fully and properly done so.”
CDD Final Rule (U.S.)
In the U.S., similar beneficial ownership disclosures are a part of the FinCEN Customer Due Diligence Final Rule, which took effect May 11, 2018. According to FinCEN Guidance FIN-2016-G003,
“the CDD Rule outlines explicit customer due diligence requirements and imposes a new requirement for these financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.”
Financial institutions, in this case, refers to banks, broker-dealers, mutual funds, futures commission merchants and commodity brokers. Legal entity customers covers corporations, limited liability companies, limited or general partnerships, business trusts and similar entities.
Beneficial owners are defined as a person who has significant ownership (Ownership Prong) or management control (Control Prong) over the legal entity. Specifically, the Ownership Prong refers to all persons who, directly or indirectly, own 25% or more of the legal entity. The Control Prong is at least one person who has “significant responsibility to control, manage, or direct the legal entity.” For example, a C-level executive, president, general partner, or a person who performs those duties, is a potential designate for the Control Prong.
International UBO standards
While the 5AMLD and the CDD Final Rule are on the books, other countries have agreed to international agreements that call for beneficial ownership disclosures. As far back as 2003, the Financial Action Task Force (FATF) set standards for beneficial ownership and in 2012, 198 jurisdictions agreed to a strengthened set of FATF standards.
At the G20 Brisbane Summit (November 2014), there was a policy declaration, G20 High-Level Principles on Beneficial Ownership Transparency:
“Countries should ensure that competent authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities and financial intelligence units) have timely access to adequate, accurate and current information regarding the beneficial ownership of legal persons. Countries could implement this, for example, through central registries of beneficial ownership of legal persons or other appropriate mechanisms.”
However, in October 2016 a FATF report to examine progress — Report to the G20: Beneficial Ownership — found that only two of the G20 had a “substantial level of effectiveness in relation to beneficial ownership requirements.”
The FATF report, regulatory changes in Europe and the U.S., and major corruption scandals such as the Panama Papers are all putting pressure on other G20 countries to put an effective beneficial ownership disclosure system in place. However, the FATF does recognize the complexity of creating and implementing effective beneficial ownership transparency rules. To that end, better technologies and procedures that can speed the process and improve accuracy offer a path forward.
While progress might not be as swift as the FATF wants, progress seems inevitable; legitimate governments do not want to be seen as soft on corruption. Whether it’s to collect more tax revenue, prevent terrorist financing, improve transparency, or stop the flow of illegal funds, there’s a noticeable trend to require beneficial ownership due diligence.
Four steps for UBO
What specific policies and procedures should your organization follow in regard to UBO? Of course, you need to adhere to specific compliance requirements for each country your organization operates in. However, taking a big-picture view, many standard procedures are possible as there are significant similarities in the information requirements across the globe.
There are four main steps you need to implement to create an effective UBO program:
- Receive company vitals
Identify and verify an accurate company record such as information regarding register number, company name, address, status, and key management personnel. While the specific information that you gather depends on the jurisdiction and your fraud prevention standards, you’ll need to systematically gather the information and input it into your workflows.
- Analyze ownership structure and percentages
Determine the entities or natural persons who have an ownership stake, either through direct ownership or through another party.
- Identify beneficial owners
Calculate the total ownership stake, or management control, of any natural person and determine if it crosses the threshold for UBO reporting.
- Perform AML/KYC checks on individuals
For all individuals that are determined to be UBOs, perform AML/KYC checks.
While, in theory, four steps does not seem too onerous, in practical terms, without a proper system in place UBO checks will add substantial costs, delays and headaches to both compliance teams and legal entity customers.
While technically possible, a manual system that has employees perform individual searches on multiple registrars, import data, track records, and perform complex reviews is rife with potential issues. It slows down the onboarding or monitoring process, making clients wait to do business. It’s prone to errors, as every keystroke is a possible mistake that will need re-entry. It’s expensive, as staff time is drawn upon for every step and their expertise is wasted on data entry, not high-level compliance considerations.
Just as Trulioo has demonstrated the advantages of automating AML/KYC checks for individuals (Step 4), the other steps likewise can benefit from workflow automation. Every step should be automated as much as possible.
With the increasing demands of AML/CFT compliance, solutions that automate the entire workflow for identifying and verifying UBOs are the future.
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This post was originally published October 5, 2017, updated on August 11, 2020 to reflect the latest industry news, trends and insights.
Global transparency trends and beneficial ownership disclosure rules in 29 jurisdictions.
A new compliance requirement is now imposed on companies doing business in Egypt, entailing disclosing the ultimate beneficial ownership of any entity.
The most meaningful change for banks could be a new national registry of beneficial owners of legal entities.
AUSTRAC has prepared a summary of beneficial owner identification obligations, to help businesses protect themselves from being exploited for criminal gain.
In an attempt to address the global issue of money laundering, bribery and corruption, insider dealings, tax fraud, terrorist financing and other illegal activities, the Ministry of Corporate Affairs (MCA), has notified the provisions of Disclosure of Significant Beneficial Ownership of Companies with effect from 13 June 2018.
To effectively fight money laundering, corruption and tax evasion, authorities need to be able to trace money. This means having timely access to sufficient, accurate and up-to-date information about companies and the people who ultimately own and benefit from them.
As the required implementation date of May 11, 2018, for the Financial Crimes Enforcement Network’s customer due diligence/beneficial ownership rule creeps ever closer, the process and procedural challenges that financial institutions may face are crystallizing.
In April 2018, the European Parliament is expected to adopt the EU's 5th Anti-Money Laundering Directive (5AMLD), as agreed by EU Member States on 13th December 2017.
In the near future, however, all legal entities will be required to identify and disclose their controlling shareholders and ultimate beneficial owners (UBOs).On 15 December 2017, the European Council and Parliament reached an agreement on a proposal to introduce enhanced corporate transparency rules (the fifth Anti-Money Laundering Directive).
In the last 11 weeks before the US Financial Crimes Enforcement Network’s new rules on tracking beneficial ownership of customers take effect, financial firms need to decide how deeply they intend to dig into their customer’s shareholder base.
FinCEN Final Rule: New Customer Due Diligence Requirements
The Final Rule refers to new FinCEN rules coming into effect on May 11, 2018 regarding customer due diligence (CDD) requirements. Under the Final CDD Rule, collecting, maintaining and reporting of beneficial ownership information is now a requirement for financial institutions.
Beneficial Ownership Transparency
To help put an end to corruption and financial crime, governments can ensure that effective beneficial ownership transparency rules and procedures are in place. As global anti-corruption organization Transparency International stated, “transparency over beneficial ownership is critical to preventing and exposing corruption and illicit finance.”
Big Fines for Bad Data – 4AMLD & UBO Filing Non-Compliance Penalties
With the threat of fines and other negative consequences, compliance and fraud prevention teams should be working together to ensure accurate filing of UBO information in order to safeguard the company’s reputation and balance sheet.
KYB Due Diligence: From Weeks to Minutes
The error-riddled, time-consuming, manual due diligence ways of the past have now given way to solutions that not only automate workflows and ensure compliance requirements are met, but also aid in seamless onboarding, thanks to increased pressure from regulators and an increasingly digital landscape.
US Beneficial Ownership Rules — FinCEN CDD Final Rule
The Customer Due Diligence Requirements for Financial Institutions (CDD Rule) came into effect on May 11, 2016 with full FinCEN compliance to be implemented two years later on May 11, 2018.
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