Uncovering Beneficial Ownership in KYC

Uncovering Beneficial Ownership in KYC

In the compliance industry, we hear a lot about the term beneficial owner. While Anti-Money Laundering (AML) and Know Your Customer (KYC) laws and procedures are well established for individuals, requirements for corporate structures are increasingly being mandated. The recent leak of Panama Papers revealed how individuals were using the corporate veil to hide money and control; these loopholes are now the target of beneficial ownership laws.

In the 2014 KPMG Global AML Survey, respondents stated that “identifying complex beneficial ownership structures is the most challenging area in the implementation of a risk-based approach to KYC process”, particularly where an entity resides in a jurisdiction where AML regulations are not as strict or data privacy requirements particularly solid.

The FATF recommendations provide measures that address the transparency and beneficial ownership of legal persons. These recommendations include:

  1. Assessing the risks associated with legal persons and legal arrangements
  2. Making legal persons and legal arrangements sufficiently transparent, and
  3. Ensuring that accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion.

Source of wealth is one of the crucial information required to ascertain the risk of the client, and this risk factor cannot be identified unless the true owners of the corporate are uncovered.
Here’s a sampling of how beneficial owners are defined and the requirements from regulatory agency or policy:

  • OFAC – 50% rule
  • High risk or Politically Exposed Persons (PEP) – a threshold as low as 5% or 10% is required
  • FinCEN Final Rule – 25% ownership threshold
  • 4th EU AML Directive – 25% shares or voting rights in a corporate entity. If, after having exhausted all possible means and provided no UBO is identified, the natural person(s) holding the position of senior managing officials are, in principle, considered to be the UBO

Source: Understanding Beneficial Ownership Structures by Dun & Bradstreet

These rules do not, of course, represent all the rules around beneficial ownership but are demonstrative of some of the issues. For example, the thresholds range from 0.01% to 50%, so there’s little consistency or commonality.

Verifying ownership of a publicly listed entity can be relatively easy. Public listed companies are subject to stringent regulatory disclosures, therefore it isn’t necessary to seek to identify and verify the identity of any shareholder, and same is the case for financially regulated firms. For private entities with simple structures, FIs can check the company registry or chamber of commerce, or can ask the client to supply a certified copy of the share registry.

However, when there are complex legal structures things get complicated. This is especially true in offshore locations because corporate entities often have limited disclosure requirements. Complex structures are often intentionally used to hide the true owner of assets. There can be multiple ownership layers with different types of corporate entities in different locations, including trusts or private foundations, further hiding the true ownership of the entity.

It doesn't necessarily mean that companies incorporated in offshore locations always have fraudulent transactions. There are wide legitimate reasons why companies prefer to establish themselves in offshore jurisdictions. FIs need to be extremely careful when distinguishing between legitimate and suspicious activities.

Here is where technology can play a crucial role in simplifying the complex game of ownership; it can enable FIs in mapping the organisational diagrams, document the owners and their findings and automatically link the ownership data if there are any changes in the shareholding pattern. However this is again restricted till the ownership is held by a corporate entity, if further ownership includes trusts and foundations; technology would be of little help as the information relating to these would not be available in any public domain and it would again lead to dependency on the information provided by the client.

Technology can help facilitate integrity checks on all parties involved in the ownership structure. This capability would help the FIs as they would be able to double check all names against watch lists or research what publicly available information there is on that entity in real time.

To summarise, Beneficial Ownership is the most important aspect of performing due diligence hence either done manually or using technology all the information should be captured up to date.

Speak to us about how Cenza leverages RegTech solutions to uncover the Beneficial Ownership and help your institution onboard customers faster with improved quality and efficiency.

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