The Challenge of Beneficial Ownership

The problem

The complexities of international trade and global financial systems have opened new opportunities for criminals. Far from operating in the shadows, criminals disguise their activities as legitimate businesses to hide illicit funds. Every second of the day there are global transactions that cross borders and hide behind shell companies that are non-public entities, solely formed to protect or hide another company’s assets. These companies exist only on paper, typically have no physical premises, employees, revenue, or significant assets, but may hold bank accounts or investments.

The Panama Papers Leak showed the world the scale of the problem of dirty money flowing through the financial system. This extends beyond banks to company formation agents, governments, and law enforcement agencies — many of whom have campaigned tirelessly for beneficial owner public registers for corporate entities. However, visibility does not equate to transparency, and criminals use a multitude of tools, including shell companies, trusts and other legal arrangements to conceal the true intent of their activities and the Ultimate Beneficial Ownership associated with them.

What is Ultimate Beneficial Ownership?

Ultimate Beneficial owner is the person who ultimately owns a legal entity or legal person during a transaction. An Ultimate Beneficial Owner of a legal entity or person could be:

• Anyone that has direct/indirect control of the account holder
• Power of Attorney
• Guardian for minors
• Shareholders

Key challenges of Ultimate Beneficial Owner (UBO)

The challenge, of course, is that legal entity accounts pose the most difficulty for financial institutions in terms of identifying beneficial owners. There are a number of facets to this challenge:

1. Multiple legal structures and/or corporate vehicles (particularly in the case of offshore entities subject to different laws, regulatory requirements and client documentation – (not to mention secrecy havens) can obscure the ownership of a legal entity. While used by many legitimate legal entities, the combination of different sophisticated legal structures, corporate vehicles and offshore entities, create a playground for money launderers, fraudsters and terrorists to transfer illicit gains under perfectly respectable guises.
2. Legal structures or corporate vehicles with more than one layer of ownership, (and they may have several layers), increases the number of entities to be verified.
3. There is no public office for entity/corporate vehicle registration across the different jurisdictions. This makes it even harder to get independent records to identify and verify beneficial owners (although the UK is spearheading efforts for central registries).
4. A lack of standardised documentation across countries makes the role of supporting compliance obligations and validating ownership increasingly difficult.
5. In jurisdictions where it is easy to transfer ownership, the financial institution may not be aware of such changes, which may impact the client risk profile and risk appetite of the bank to do business with the customer.
6. Financial institutions are not geared up for event-driven changes and lack of flexibility in responding to these changes may leave them at the mercy of regulators.
7. Complicated layers of structures, corporate vehicles and jurisdictional laws, means that financial institutions find it difficult to detect changes in profile or suspicious patterns.

Unravel complex money laundering webs with UBO verification

Failing to understand who you are doing business, or the status of the client counterparty (KYC) or the Ultimate Beneficial Owner (UBO), exerting control over the assets/trading instruments, has proved very difficult for regulated businesses.

A prime example is shown in the collapse of Greensill Capital. Its demise was not caused by the products/funds that were sold by Greensill. Instead, they were not aware that there was an out-sized beneficiary of the funding that was experiencing liquidity issues.

Screening and monitoring of Ultimate Beneficial Owners is critical to ensure your business is protected against the risk of financial crime or reputational damage.

The criminals and professional money launderers often use complex chains of company structures to create laundering webs spanning multiple jurisdictions that turn vast quantities of dirty money seemingly clean. This makes it difficult for the business to unravel the web when using manual processes – not least in time and resource

Join our webinar on Tuesday 15th June at 14:00 with renowned MoneyLand author and Journalist Oliver Bullough, to discuss the challenge of Ultimate Beneficial Ownership, why the UK is still attractive to global crooks and Kleptocrats; what can be achieved with technology and the best approach for identifying and monitoring UBOs to safeguard your business.