While dealing with financial institutions, criminals use many techniques to conceal their identities and stay outside the regulatory or enforcement radar. They structure financial transactions in such a way that financial institutions cannot link them to a suspicious case. In order to address the situation, financial regulators mandate that firms should establish Ultimate Beneficial Ownership (UBO) in transactions with their corporate customers.
Definition Of Ultimate Beneficial Ownership
An Ultimate Beneficial Owner is the person or persons that eventually benefits from a particular financial transaction. According to the Financial Action Task Force (FATF), a UBO is “the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.”
Financial institutions often find it difficult to immediately identify UBOs unlike individual customers, who are direct beneficiaries and easily identifiable. This is because their identities are buried deep inside complex corporate structures.
How To Identify Beneficial Owners?
Various countries have different guidelines on the identification of beneficial owners. The following are the generally accepted norms from the FATF on how to identify beneficial owners:
- People that own at least 25% of share capital
- People that exercise at least 25% of voting rights
- Beneficiaries of at least 25% of an entity’s capital
- People with power of attorney
- Guardians of minors
- Corporate directors or nominee directors who are appointed to conceal the true owners of a given firm
- Shareholders, including the holders of bearer shares that may be transferred anonymously
Money Laundering Risk Related To UBO
Creating proxy entities such as shell companies is a common tactic used by criminals when they launder money. By using proxy firms, these criminals conceal their identities and evade AML measures.
In most cases, the real owner/owners of an offshore shell company cannot be located as the registered addresses of the directors are completely different from the address submitted to the registrar. Shell companies are considered as one of the safest means to disguise business ownership from law enforcement or the public. They are also used to store black money or as channels to obscure the origin of such money.
The Latest Developments Related to UBO
FATF adopts a new standard on UBO
On March 4, the FATF amended its Recommendation 24 and its interpretation. The recommendation requires countries to prevent the misuse of legal persons (corporate entities) for money laundering.
The amendments “strengthen the international standards on beneficial ownership of legal persons, to ensure greater transparency about the ultimate ownership and control of legal persons and to mitigate the risks of their misuse,” according to the global AML watchdog.
The revisions to Recommendation 24 include the following:
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- Countries should follow a risk-based approach and consider the risks of legal persons in their countries.
- They must assess and address the risk posed by legal persons, not only by those created in their countries, but also by foreign-created persons which have sufficient links with their country.
- Access to information by competent authorities should be timely, and information should be adequate for identifying the beneficial owner, accurate and up-to-date.
- Countries should ensure that public authorities have access to beneficial ownership information of legal persons in the course of public procurement.
- There should be stronger controls to prevent the misuse of bearer shares and nominee arrangements.
US moves closer to implement rules on reporting of beneficial ownership information (BOI)
In the US, an estimated $70 billion per year is lost through shell company-related money laundering. Keeping that in mind, the US senate passed the Anti-Money Laundering Act in 2020. The act banned anonymous shell companies and introduced requirements for firms to report their beneficial owners to the government.
In January 2021, the country enacted the Corporate Transparency Act (CTA) which sets to establish a new system for the reporting, maintenance and disclosure of beneficial ownership information. The information gathered will be limited to Financial Crimes Enforcement Network (FinCEN) and other government departments to access.
In December 2021, the FinCEN issued a notice of proposed rulemaking requiring the reporting of beneficial ownership information, seeking comments from stakeholders. The proposed rule describes who must file a BOI report, what information must be reported, and when a report is due. Specifically, the proposed rule would require reporting companies to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners of the entity; and (2) individuals who have filed an application with specified governmental or tribal authorities to form the entity or register it to do business.
On February 8, the FinCEN said it received over 230 comments to the proposal.
UK revives plans for beneficial ownership registry of overseas real estate owners
As part of its plans to control Russian oligarchs, who allegedly launder money via UK real estate, the government in the UK looks to introduce a new beneficial ownership register for all overseas entities holding UK real estate. The plan is part of the recently introduced UK's Economic Crime (Transparency and Enforcement) Bill and it is likely to see swift passage through Parliament.
The new rules will apply to any entities that are incorporated outside the UK and having any freehold or leasehold property in the country. The overseas entity owning a UK property would now need to identify its beneficial owners and register the name and address of the beneficial owners.
How Can Financial Institutions Establish Ultimate Beneficial Ownership?
By developing mechanisms to examine and identify ultimate beneficiaries of transactions, financial institutions can prevent criminals from illegally using shell firms to launder money. These processes include:
Customer due diligence: In accordance with the laws of the country of operation, firms should take necessary steps to collect identifying information about their corporate customers, including the names and addresses of company directors, and information about the company incorporation. They also need to periodically ask for updated information to assess and rate customer’s AML risk.
Transaction monitoring: Financial institutions need to continuously monitor their customers’ transactions and be vigilant for any unusual activities (generally matching with those of shell companies), transaction patterns and transactions connected with high-risk countries.
Screening for sanctions, PEPs and Adverse Media: Sanctioned individuals and politically exposed persons (PEPs), such as government officials, politicians and their relatives, might use shell companies to access prohibited or restricted financial services. News articles are also good sources of information to identify illegal shell company connections of a customer. Therefore, having a robust sanctions/PEP/adverse media screening programme is essential.
How Can Technology Help?
Modern technologies such as machine learning and Big Data analytics can be effective tools for financial institutions to help identify shell companies and prevent their illegal activities.
Specifically, modern solutions equipped with network analysis, deep learning, anomaly detection, and natural language processing can assist compliance staff get superior results in their hunt for shell companies.
Tookitaki’s end-to-end AML operating system, the Anti-Money Laundering Suite (AMLS), powered by an AML Ecosystem is intended to identify hard-to-detect money laundering techniques including shell companies. Available as a modular service across the three pillars of AML activity – Transaction Monitoring, AML Screening for names, payments and transactions and Customer Risk Scoring – the AI-powered solution has the following features to aid in the detection of shell companies.
- AI-powered detection of interactions and network relationships between customers or interested parties to flag suspicious activity
- World’s biggest repository of AML typologies providing real-world AML red flags to keep our underlying machine learning detection model updated with the latest money laundering techniques across the globe.
- Advanced data analytics and dynamic segmentation to detect unusual patterns in transactions
- Risk scoring based on matching with watchlist databases or adverse media
- Visibility on customer linkages and related scores to provide a 360-degree network overview
- Constantly updating risk scoring which learns from incremental data changes
Our solution has been proven to be highly accurate in identifying high-risk customers and transactions. For more details of our AMLS solution and its ability to identify shell companies among other money laundering techniques, speak to one of our experts.
