Identifying the Ultimate Beneficial Owner (UBO) is an essential and critical component for any financial institution’s anti-money laundering (AML) and customer due diligence program. It is the backbone to uncovering the ultimate beneficial owners or the controlling persons behind the banking relationship of the entity. The 2012 update to the Financial Action Task Force (FATF) recommendation 10 lists the Customer Due Diligence (CDD) measures required to identify and to verify the identity of the beneficial owner.
Time and again, corporate vehicles have been misused for illicit purposes. Following are the few examples through which the UBO information can be hidden through; shell companies, complex ownership and multi layered controlling structures, bearer shares and bearer share warrants, unrestricted use of legal persons as directors, formal nominee shareholders and directors, informal nominee shareholders and directors, trusts and other legal arrangements, use of intermediaries in forming legal persons.
FATF and other regulators across the globe are working together to curb the misuse of corporate vehicles and other means to disguise ownership. However, recent events like the ‘Panama Papers’ and ‘Paradise Papers’ disclosures for instance, have shown how complex the ownership structures can get and how the parties can hide their ownership behind established entities.
The most critical compliance challenge in ensuring UBO compliance norms comes from the fact that the corporate entities are normally from multiple geographies. This poses major challenges as the rules that govern the corporate structures vary across geographies, allowing criminals to use the legal loopholes by having their base in one country while conducting business or transactions from another.
The differences in laws of the lands across jurisdictions complicate the issue further, as understanding every jurisdiction’s laws and regulations and about the corporate legal structures are quite cumbersome. More importantly, the fact that there is no single standard followed for percentage of ownership thresholds and requirements across the jurisdictions makes the entire process ineffective and prone to non-compliance.
The second most critical challenge comes from the fact that financial institutions are also required to conduct ongoing monitoring of customer transactional behavior to identify anomalies, develop risk profiles, and update customer information. The process of conducting ongoing review is mostly manual, costly, and may fail to detect appropriate linkages.
Given these challenges, financial institutions need a robust due diligence program to comply with the UBO norms.
As regards the challenge related to multi-geography operations, financial institutions should adopt a uniform approach in setting the threshold of shares to consider as UBO across the different jurisdictions they operate in. The norm implemented should be the most stringent so that different regulatory requirements are covered within the uniform approach being adopted. Following uniform standards across jurisdictions, and facilitating seamless sharing of information would definitely improve the compliance standards, improve the program efficiency, and also ensure effort reduction and effort duplication.
To tackle the evolving UBO compliance requirements, financial institutions should first decide – based on their client risk profile classification and with a risk management perspective – the periodicity at which UBO details will be reviewed. This will clearly bring in a structured approach to an otherwise cumbersome process. Normally, UBO review is done by financial institutions once every quarter to allow the changes in the UBO status of an account to be brought under review. Secondly, cleaning up of old and dormant accounts (within the regulatory guidelines) can reduce the ongoing UBO review burden on an institution. Thirdly, cognitive and machine learning solutions can be deployed to bring in more efficiency in the ongoing UBO review process through its advanced data search capability, link analysis and predictive analysis methods and such a mechanism can identify UBO linkages which will not be possible through manual intervention or simple automation.
What do you think is the best approach in this regard? What should financial institutions do to ensure foolproof compliance with UBO norms?