Ultimate Beneficial Ownership (UBO)

The rise in financial crime through organizations has forced regulatory authorities to come up with stringent regulations regarding business ownerships. This will allow better transparency between watchdogs and corporate entities enabling smooth and efficient communication to combat money laundering and related activities.  

Who is the Ultimate Beneficial Owner? 

UBO or Ultimate Beneficial Ownership is used to define an individual or entity who is a direct or third-party beneficiary of a business. According to the Financial Action Task Force, UBOs are natural persons that have direct control over the business’ clientele or those on whose behalf the company conducts transactions. Thus, the UBO is either a legal owner of a business entity with whom another partner entity is associated or a group of individuals that are responsible for the company’s governance. 

What are the Criteria for UBO? 

The criteria for ultimate beneficial ownership can be broken down into two sections: 

(i) Those with the ultimate ownership 
Based on the FATF guidelines on transparency and beneficial ownership, the UBO of a legal entity is one who:

• Contributes 25% or more shares in the company’s capital
• Has 25% or greater voting rights in business decisions
• Is a beneficiary of 25% or more of the corporation’s total assets 

(ii) Those who have the effective control 
This category of UBO’s may include: 

• The nominee director, who is designated by a business entity or beneficial owner to act as a company representative to hide the identity of the actual owner
• A corporate director, appointed by the business as head of the corporation’s board of directors who supervises the legal entity’s activities and develops a business strategy on behalf of the stakeholders
• Bearer shares, according to FATF, are ‘negotiable instruments’ that confirm the ownership of a legal person who owns a bearer share certificate. 

Why are UBO Checks Necessary?
Before corporate entities initiate B2B relationships with other business entities, it is important they ensure their partners are legitimate and trustworthy. In this regard, Know Your Business (KYB) or business verification plays a crucial role in achieving UBO compliance across the corporation. Understanding the partner entity’s ownership status,  financial standing and other ties can reveal a lot about the company infrastructure.       
UBO checks are essential in saving a business from unwanted ties with offshore havens, imposter platforms, shell corporations, false trust firms, and financial institutions set up to evade tax payments. Business verification performed using beneficial ownership information prevents legal entities from creating ties with dishonest and illegitimate firms.  

UBO Compliance – Whom Does it Apply to? 

Ultimate Beneficial Ownership compliance applies to the following entities: 

• Banks (Both commercial & investment) 
• Insurance and brokerage firms 
• Credit unions and money exchange platforms
• Payment service providers and online marketplaces
• Companies operating in the real estate where large transactions are frequent
• Certain jurisdictions in which Know Your Customer and AML/CFT compliance is mandatory for conducting business

Participating entities are subjected to the retrieval, maintenance and disclosure of UBO information based on rules defined by regulatory authorities. Obligations defined in the EU’s 4MLD  state comprehensive rules for UBO compliance including screening of owners and individuals who control the organization. Non-compliance may lead to hefty fines and a toll on the business’ reputation in the market. 
Suggested Reads:

Business Verification: A new line of Defense against Fraudsters

4 Reasons why KYB is Inevitable for your Business