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Identifying and Verifying Ultimate Beneficial Owners: Getting the Full Picture, Fast

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By Paul Charmatz, Managing Director, encompass

The increasing burden of identifying and verifying ultimate beneficial owners (UBOs) of entities is a challenge faced by all regulated firms. However, Know Your Customer (KYC) regulations that enforce corporate transparency by identifying UBOs can reduce the risk of corruption and the cost of compliance. Firms undertaking appropriate due diligence can also safeguard their reputation against damage.

What are ultimate beneficial owners?

A UBO is an individual who owns or controls more than 25% of the shares or voting rights in a legal entity; holds the right to appoint or remove the majority of the board of directors; or has the right to exercise significant influence or control over the company.

Global regulations – such as the Money Laundering Regulations 2017 (MLR2017) in the UK and the upcoming FinCEN final rule on Customer Due Diligence (CDD) Requirements for Financial Institutions in the US – dictate that these individuals must be identified and reasonable measures taken to verify their identities.

Why is it so important?

Because companies drive much of the world’s economic activity, individuals with criminal intent use them as vehicles for money laundering by attempting to make unlawful transactions appear as legitimate business. The criminal and the corrupt seek to hide their ownership of companies so they cannot be identified as the individuals who ultimately profit from prohibited activity. As evidenced by the Panama Papers, leaks of hidden ownership generate broad interest and unleash reputational damage.

In recent years, the fight against money laundering has stepped up, with stricter regulations put in place around financial transparency, such as the Fourth Money Laundering Directive (4MLD) and MLR2017. Regulated firms have to carry out exhaustive checks when onboarding new customers to ascertain whether they present a compliance risk to anti-money laundering (AML) and anti-bribery and corruption (ABC) regulations.

Why is it so difficult?

Teasing apart complex, multi-level, multinational corporate structures can be a time consuming and expensive task, demanding great attention to detail and domain knowledge of corporate structures adopted by those intent on concealment. Many firms rely on processes that are either manual, or a combination of manual and electronic tasks. While this approach can be effective, it is expensive, slow and complicates the work of compliance professionals.

The sheer number of sources needed to comprehensively understand ownership structure and identify UBOs presents a tremendous challenge in itself. Data sources range from publicly available sources to premium providers of company data, regulatory data and adverse media, meaning companies have to subscribe to multiple vendors and integrate these into existing KYC or onboarding platforms.

The challenge doesn’t even end once the initial identification and verification is complete: firms then have to keep up the ongoing monitoring of their identified UBOs, and as regulations are updated, processes must be refined in order to ensure ongoing compliance.

Where do I find the information?

Data aggregators are typically used to extract UBO data from public sources to create full company hierarchy structures or traceability references back to the original source. This data is relied upon as a secondary source, which still requires confirmation with a primary source (an approved registry or regulatory source, such as Companies House) or with the client.

Federating the search using robotic process automation, such as that built into the encompass platform, can play a key role here, driving the retrieval of relevant information from trusted sources and the analysis of that data in line with a firm’s KYC policies in real time. This saves companies significant time and cost, while at the same time eradicating the potential risks of human error.

How can I balance customer experience with regulatory compliance?

There are a couple of key developments underway in the industry that are leading the way for a more automated, and therefore faster, process.

1. Digitalisation: The development of algorithms to iterate through an ownership structure between data available from aggregators and, in turn, confirm this against a primary source

2. Beneficial ownership registers: 4MLD requires all EU member states to develop and maintain public beneficial ownership registers that will serve as building blocks to transparency and good corporate governance. Making firms responsible for providing information about their beneficial owners creates a prime source of information that can be used by firms operating in financial and professional services and obliged by regulators to undertake customer due diligence to protect national economies from financial crime. The UK was the first country to create a central public registry, launching the ‘People with Significant Control’ (PSC) register in 2017.

The challenges around identifying and verifying UBOs may be substantial, but the risks that come with non-compliance are even greater. Using a solution such as encompass enables regulated firms to automate information and news discovery from the widest range of free and premium sources globally, in line with their policies and to enhance the way they perform KYC at onboarding, as well as event-driven refresh and remediation. By integrating this with their existing KYC and onboarding solutions, institutions can significantly reduce the time, cost and risk involved in customer due diligence activities. They can also enhance the customer experience and demonstrate robust compliance to regulators.

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