Financial crime outlook: Assessing information on Ultimate Beneficial Owners

Introduction

The transparency of beneficial ownership is facing increasing scrutiny and this trend is set to continue in 2019. The requirement for discovering the Ultimate Beneficial Owners (UBOs) of customers of financial institutions (FIs), business partners, suppliers and other business relationships continues to grow. Additional legal regulations, such as the 4th Anti-Money Laundering Directive in Europe (2017) and the US Financial Crime Enforcement Network (FINCEN) Customer Due Diligence (CDD) Requirements Final Rule (2018), both of which cover beneficial ownership requirements, have shown there is a need to increase transparency around identifying the UBO of a FI’s customer.

Who are UBOs and why is their assessment important?

A UBO is an individual with direct or indirect ownership or control of an entity. Assessing UBO information is important to ensure FIs are able to screen individuals against Politically Exposed Persons (PEPs), sanctions and negative news or adverse media. UBO assessment is equally important to ensure FIs do not engage in business with sanctioned customers.

How should FIs be assessing UBOs?

We have set out below what we feel are the must dos for FIs when assessing information on UBOs.

Customer self-certification may not be sufficient

FIs should not place sole reliance on a customer’s self-certification of its UBO(s) without taking all reasonable measures to verify and investigate, especially when onboarding customers with a higher level of risk. FIs must be in a position to identify the real customer they are dealing with and appropriately apply controls on the risks.

Consider different sources of beneficial ownership information

When onboarding a customer, a FI or an entity may use both documentary and non-documentary sources of information to carry out customer due diligence to identify and verify the UBO of an entity. Where applicable, in particular in high risk cases, enhanced due diligence measures may be required. Sources of information include

• Articles of incorporation (with share ownership)
• Shareholder agreement
• Verification from an attorney or accountant
• Ownership details from a government database
• Share owner registry
• Organizational chart specifying percentage of ownership

Apply the “25 per cent rule” or a lower threshold

In jurisdictions such as the US, UK and Canada, the 25 per cent rule requires a FI to identify and apply reasonable measures to verify each natural person with a 25 per cent ownership in a legal entity. However, there may be instances where a lower threshold may be required e.g. 10 per cent. This may be based on the entity’s own assessment of its risk relating to the customer, for instance where a customer is classified by the entity as carrying a higher level of risk.

Identifying the beneficial ownership of a trust

In order to identify UBOs of a trust, FIs should ask customers to provide them with records of the beneficial owners of the trust. Beneficial ownership for trustees encompasses the settlor, the trustees, the beneficiaries or, where some or all of the individuals benefitting from the trust have not been determined, the class of persons in whose main interest the trust is set up, or operates, and any individual who has control over the trust, such as protectors of the trust. When assessing the risks that trusts such as shell companies and offshore structures pose, customer due diligence should by way of best practice include

• Comprehensive UBO disclosures (taking into account the new legislation in Europe and US)
• Monitored transactional activity
• Investigations of shell companies and offshore structures

The administration of estates of deceased persons is also within the ambit of trust requirements because executors and administrators are regarded as beneficial owners of their estates as well.

Consider the “OFAC 50 per cent rule”

Any entity in the aggregate that is owned, directly or indirectly, 50 per cent or more by one or more sanctioned persons is itself considered to be a sanctioned person. This rule creates the risk of unintentional violations where ownership information is difficult or impossible to obtain under certain circumstances. OFAC would expect that FIs will apply reasonable due diligence measures to all business partners to reduce the risk of OFAC sanctions. For companies to accurately calculate the aggregated beneficial ownership, a 10 per cent or 25 per cent threshold may not be enough. Determining ownership as low as 1 per cent to calculate the total ownership percentages across various owners may therefore be required for compliance officers to be confident that their FIs are not breaking the 50 per cent OFAC rule.

This is the second article in our financial crime outlook series. If you would like to receive further updates, please register.