Understanding Ultimate Beneficial Owner (UBO) Checks for AML Compliance

Ignorance of the law is no excuse when it comes to money laundering, therefore, the responsibility lies on organisations to conduct proper due diligence before establishing a business relationship with another entity. Generally, this involves carrying out Know Your Business (KYB) or business verification processes on the entity including verifying the business’s name, address, stakeholders, etc. However, arguably the most important aspect of KYB is Ultimate Beneficial Owner (UBO) checks. 

Verifying UBOs is essential to assessing and managing the risks of a business and complying with anti-money laundering (AML) regulations.

Who are Ultimate Beneficial Owners (UBOs)?

An ultimate beneficial owner is an individual who owns or ultimately controls a business or legal entity. Such an individual or group of individuals has a greater deal of control in key decisions and profits the most from the business operations. Generally, an individual is considered a UBO when he or she owns more than 25% shares or voting rights in the company. However, businesses may also screen individuals with up to 20% in ownership or voting rights.

Organisations are mandated to identify and verify UBOs of companies they transact with to prevent money laundering, terrorist financing and other financial crimes. UBOs being hidden gives opportunities for such individuals to launder money and commit other financial crimes through the company. For example, the UBO of a shell company might be a notorious criminal that simply needs a legal entity as a front for illegal operations. Without verification, such UBO can get away with financial crimes using the company as a front. 

Who Qualifies as an Ultimate Beneficial Owner (UBO)?

Generally, UBOs have to satisfy the following criteria:

• Individuals with at least a 25% stake in the capital of the business
• Individuals with at least 25% voting rights in the business
• Individuals who are beneficiaries of at least 25% of the capital of the business entity  

Individuals who fit the above criteria are to be treated as UBOs according to general recommendations by the FATF. Local laws in various jurisdictions have been adapted to reflect these too. 

Is Ultimate Beneficial Owner Check Mandatory for Organisations?

Yes, UBO checks are mandatory for companies operating in regulated industries. This is due to AML compliance laws as it helps identify entities owned by fraudulent individuals, therefore, putting a stop to financial crimes. The screening determines if the company’s shareholders pose a significant threat of financial crimes. Depending on the result, the organisation may choose to onboard the business entity in question or not. 

Running UBO checks also helps protect organisations from the negative reputation that comes with being associated with a fraudulent entity. This could impact public opinion and customer trust, causing financial losses for the business. Businesses run the risk of attracting compliance penalties should they decide not to run UBO checks. 

What are the Risks of Non-UBO Verification?

Some of the risks associated with not running UBO checks include: 

1. Regulatory Non-Compliance:

Regulations like the Anti-Money Laundering (AML) laws, the EU's Fifth Anti-Money Laundering Directive (5AMLD), the U.S. Financial Crimes Enforcement Network (FinCEN), and the CBN Directive mandate UBO verification. Non-compliance can result in hefty fines, sanctions, and legal penalties. For instance, banks and financial institutions can face multi-million dollar fines for failing to identify and verify UBOs.

2. Increased Risk of Money Laundering and Terrorist Financing:

Without proper UBO verification, companies can unknowingly facilitate money laundering and terrorist financing. Criminals often use complex corporate structures to obscure the true owners of assets and launder illicit funds. Effective UBO verification helps identify and mitigate these risks by revealing the actual individuals behind corporate entities.

3. Reputational Damage:

Engaging in business with entities that have hidden or undisclosed UBOs can severely damage a company's reputation. Public exposure of associations with criminal activities, money laundering, or terrorist financing can lead to loss of customer trust, negative media coverage, and a decline in business opportunities. Maintaining transparency through UBO verification helps protect a company's reputation.

4. Financial Losses:

Inadequate UBO verification can lead to financial losses from fraud, embezzlement, and other illicit activities. When the true owners of a business are hidden, it becomes difficult to assess the risk profile and integrity of the entity. This can result in fraudulent transactions, misappropriation of funds, and increased vulnerability to financial crimes.

5. Legal Liability:

Companies that fail to verify UBOs can face legal repercussions, including lawsuits from regulators, investors, and other stakeholders. Legal actions can be costly, time-consuming, and damaging to a company's financial health and stability. Ensuring UBO verification helps mitigate the risk of legal liabilities and associated costs.

6. Operational Disruptions:

Regulatory investigations and audits triggered by non-compliance with UBO verification requirements can disrupt business operations. Companies may need to allocate significant resources to address compliance issues, respond to regulatory inquiries, and rectify deficiencies. Proactive UBO verification helps prevent operational disruptions and ensures smooth business continuity.

Recommended: Benefits of UBO Identification for AML Compliance

How to Identify and Verify Ultimate Beneficial Owners (UBOs)

Here’s a detailed step-by-step guide on how to effectively identify and verify UBOs:

Step 1: Understand the Definition of UBO

Definition: A UBO is the individual who ultimately owns or controls a company or asset. Regulatory definitions may vary slightly by jurisdiction, but generally, a UBO is someone who directly or indirectly owns or controls 25% or more of the entity's shares or voting rights or otherwise exercises control over the entity.

Step 2: Gather Initial Information

Collect Basic Data: Start by gathering essential information about the entity in question. This includes:

• Company name
• Registered address
• Legal structure (e.g., corporation, partnership)
• Identification numbers (e.g., registration or tax ID)

Step 3: Obtain Ownership Documentation

Source Documents: Request and review official documents that detail the entity’s ownership structure. These can include:

• Articles of Incorporation
• Shareholder Registers
• Partnership Agreements
• Annual Reports

Step 4: Identify Direct Owners

Direct Ownership: Identify individuals or entities that hold direct ownership stakes in the company. List all shareholders or partners, noting their respective ownership percentages.

Step 5: Trace Indirect Ownership

Indirect Ownership: Determine if any of the direct owners are entities themselves. If so, trace the ownership through these entities to identify the individuals who ultimately control them. Repeat this process until all layers of ownership are unravelled and the true individual owners are identified.

Step 6: Verify UBO Information

Verification: Once potential UBOs are identified, verify their identities using reliable sources and documentation. This can involve:

• Government-issued IDs (e.g., passports, national ID cards)
• Utility bills or bank statements to confirm addresses
• Independent databases or registries

Step 7: Conduct Due Diligence Checks

Enhanced Due Diligence (EDD): Perform comprehensive background checks on identified UBOs, especially if they are classified as high-risk. This can include:

• Checking against sanctions and watch lists
• Reviewing adverse media reports
• Analysing financial history and connections

Step 8: Document the Findings

Record Keeping: Maintain detailed records of the identification and verification process. This includes:

• Copies of documents reviewed
• Notes on ownership structures
• Verification steps taken
• Results of due diligence checks

Step 9: Regularly Update UBO Information

Ongoing Monitoring: UBO information can change over time due to ownership transfers, restructures, or other corporate changes. Establish a process for regular updates and reviews to ensure the information remains current.

Step 10: Report and Escalate

Compliance Reporting: If any discrepancies, red flags, or suspicious activities are detected during the identification and verification process, report them to relevant regulatory authorities as required by law. Escalate concerns internally to the compliance team or legal department.

Automate your UBO Verification Process with Smile ID

Ultimately, verifying the ultimate beneficial owners of a legal entity is compulsory for organisations to protect themselves and achieve AML compliance. However, the process may be time-consuming without the right technology.

Smile ID offers a comprehensive AML Check solution that empowers organisations to verify Africa against a database of 7million+ companies. Our AML solution gives a breakdown of UBOs after which you can screen them against: 

• 1100+ global and African sanctions
• PEP list of approximately 1.5 million individuals across four levels.
• Adverse media from 75,000+ reputable news sources with a minimum of 2 news sources from every country in the world.

This way, organisations can easily spot high-risk businesses through their UBOs and place appropriate money laundering prevention processes in place. 

Book a free demo to see how it works.