Identifying the Ultimate Beneficial Owners

In the face of terrorist financing, drug trafficking and other criminal activities, money laundering is becoming a growing concern for the financial institutions across the world. These activities are compelling the banks and financial institutions (FIs) to take the Ultimate Beneficial Ownership (UBO) compliance seriously.

Financial Action Task Force defines Ultimate Beneficial owner as the natural person(s) who ultimately owns or controls a customer 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.

Ultimate Beneficial Owner refers to any person with even indirect ownership or control of an entity. In order to hide the origin of the criminal proceeds, complex structure of legal entities is created. UBO Compliance in many countries require the financial institutions to understand who runs this chain and who exercise the control over the entities.

Obtaining accurate beneficial ownership information is crucial for the financial institution to:

  • Ensure that the Financial Institutions perform screening and provide risk rating for all the required parties against Politically Exposed Persons (PEPs). These parameters may also include factoring negative information in public domain associated with the Ultimate Beneficial Owners.
  • Ensure Banks do not do business with sanctioned customers associated with the Ultimate Beneficial Owners.
  • Understand the potential risk that a Ultimate Beneficial Owners pose to a bank through its relationship with multiple customer and vendors.

Not only is knowing your business clients an important risk mitigation strategy, it also is increasingly becoming a legal requirement such as the 4AMLD requirements in Europe, or the Financial Crimes Enforcement Network (FinCEN) Final Rule in the US.

Latest in the bandwagon to control the UBO misuse is India. In 2018, Ministry of Company Affairs notified the Significant Beneficial Ownership Rules in 2018. To determine the natural persons who hold ‘ultimate’ control over companies, the SBO Rules have prescribed piercing through the veil of non-individual shareholders. The term ‘beneficial interest’ has now been defined under Section 89 of the Act.

Indian companies will now be required to identify, verify and report the Significant Beneficial Owners to the Registrar of Companies in the specially designed form called BEN-II. This will increase the responsibility of the financial institutions to carry out the customer due diligence to trace the natural person who owns the business, however multiple layers of ownership will definitely increase the cost of compliance with the Anti Money Laundering (AML) rules.