A complex and layered ownership structure of a company can make ascertaining the real owner challenging. Knowing the actual owner requires digging through the coats of nominee shareholders and shell entities. This is where the idea of the ultimate beneficial owner (UBO) comes into picture. Understanding and knowing the actual UBO is essential to sustaining transparent business relations. Let's take a closer look at the ultimate beneficiary and why the identification is crucial.
Who is the Ultimate Beneficial Owner?
The ultimate beneficial owner is the centre of the complex web of ownership structure. It is any individual or entity that holds complete control and exercises great influence over a company, either directly or through a chain of nominee shareholders and holding companies.
UBO is frequently confused with the beneficial owner (BO). BO is an individual or a group of individuals who enjoy the benefits of ownership, such as dividends, profits, or influence over the operations. To be a BO, the party must hold atleast 25% stake in the company to have a considerable influence, whereas UBO ultimately holds the complete ownership either directly or indirectly via voting rights.
The following parties can be the ultimate beneficial owners in a company:
- Direct & Indirect Owners: A direct owner holds ownership rights without any intermediary. On the other hand, an indirect owner owns shares in the company through intermediaries such as holding companies or shell entities. Either of them can be the ultimate beneficiary of a firm.
- Economic Beneficiaries: Another type of UBO, the economic beneficiary, benefits from the operations of the company without having any direct control over the transactions.
- Senior Management: In the absence of a BO with a stake of 25% or more, the senior management is considered the ultimate beneficial owner. However, the percentage can vary as per the jurisdiction.
- Trustees and Nominees: In most cases, trustees and nominees are not the ultimate beneficial owners. But, a trustee can be a UBO if they benefit directly from the asset management in the trust.
- Controllers: A controller is a person who oversees and controls the financial management and accounting in the firm. He can be the ultimate beneficiary if he also owns the firm.
Pivotal Ultimate Beneficial Ownership Regulations to Know
Illicit funding and money laundering activities have been on the rise. Here are the critical regulations that help combat these through the ultimate beneficiary:
FATCA & CRS
The Foreign Account Tax Compliance Act (FATCA) helps uncover the ultimate beneficiary of a firm. It requires companies to report structural details and provide information about people who have substantial ownership in firms.
Similarly, common reporting standards (CRS) are an OECD initiative to facilitate the exchange of financial accounting information. This disclosure makes it difficult for firms to conceal the identity of the ultimate beneficial owner.
4th EU AML Directive
The 4th AML directive by the European Union introduced the maintenance of UBO registers, highlighting a company’s structure and those who gain benefits from its operations. Since the implementation of this directive, companies are required to file and update information regarding their ultimate beneficial owner in these registers.
Dodd-Frank
The Dodd-Frank Act of 2010 is a guiding force in financial reformation in the United States. It addresses the concept of transparency and enhances due diligence with an aim to prevent future financial crises.
Major Organizations that Oversee UBO Screening
Here are some of the major organizations that oversee UBO screening:
FATF
The Financial Action Task Force (FATF) is the guiding force behind the implementation of AML regulations. This international watchdog has also laid down rules to regulate the UBO and provide guidelines for effective UBO screening to support transparency.
OFAC
The Office of Foreign Assets Control (OFAC) is another primary agency that lists rules to combat illicit activities. OFAC puts the ownership threshold at 50% and actively delists firms that are operated by blacklisted persons, such as those with links to terrorist funding. Moreover, OFAC also automatically blocks the entity if the ultimate beneficial owner has more than a 50% stake in the firm.
FinCEN
Financial Crime Enforcement Network (FinCEN) requires offshore companies set up in the US to report UBO and BO. It is a key agency in the fight against crime and the implementation of anti-money laundering policies.
Why is UBO Screening Important?
Screening the ultimate beneficial owner is important to:
Money laundering is a widespread problem. Ascertaining the UBO in a company helps identify shell companies involved in fraudulent activities.
Counter Terrorist Financing
Terrorist organizations often exploit shell companies to obtain funding. UBO screening helps identify and disrupt financial institutions that instigate terrorist activities.
Identifying UBO in the company induces transparency in the system. As a business person or an institution, it enables you to know the true nature of the deal.
Long-term growth depends on efficient risk mitigation. UBO screening helps sidestep risks by identifying potential fraud in the system.
Fulfill Regulatory Requirement
Acceptable limits for ultimate beneficial owners differ by organizations, such as OFAC puts the limit at 50% ownership, whereas the EU’s AML directive pegs it at 25%. Thus, UBO screening helps meet these requirements before finalising deals.
How to Conduct UBO Screening?
UBO screening is vital to manage and even sidestep financial mishaps. Here’s a generic screening procedure that firms can undertake:
Step 1: Conduct KYC
The first step to UBO screening is the collection of information. Acquire the entity’s name, address, contact details, place of registration, and the organizational structure. You can also check out information on the registrar’s portal to assess the credibility of the organization.
Step 2: Identification of Ownership
After the information collection, scour through the information to identify the ultimate beneficial owner. The ownership structure is the key to identification. You may have to trace through multiple entities to determine who is actually in possession.
Step 3: Verify UBO identity
Once you have successfully identified the ultimate beneficiary, confirm it through cross-verifying authentic IDs such as a passport.
Step 4: Screening Against Risk Databases
Authorities such as OFAC, UN, and EU publish lists of sanctioned individuals and entities involved in financial crimes. You can cross-check through the list to establish that there is no link to illicit activities.
International watchdogs such as FATF strongly promote the application of AML guidelines, including the identification of the ultimate beneficial owner. Thus, establishing UBO screening mandatory for banks and financial institutions in all jurisdictions, including the offshore locations. This often translates to time-consuming and rigorous scrutiny, especially when applying for offshore company formation and bank account opening. The viable solution is partnering with an offshore consultant, such as Business Setup Worldwide, to quickly set up your firm. Get in touch with us to begin your journey now!
