What are Ultimate Beneficial Owners (UBOs) and why do they matter?
20 Jun 2023
Those with less honourable intentions may look for opportunities to retain control over criminally derived assets by inhibiting the ability of law enforcement to trace the origin and ownership of assets. Companies, trusts or other similar legal arrangements are seen by criminals as potentially useful vehicles to achieve this outcome.
The only way for businesses to prevent these criminals from using complex structures or legal persons to conceal true ownership is by assessing their clients and truly understanding who profits from and operates the business. This is where the concept of identifying UBOs comes into play.
The Financial Action Task Force (FAFT) defines a UBO as the natural person who ultimately owns or controls a customer and/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.
Typically, a UBO is the majority shareholder or a person who holds at least 25% shares in the company but not all entities have a majority shareholding or even shareholders at all. For example, if we look at a listed company that has thousands of shareholders with no clear majority holder, you might look to the CEO, CFO or COO as having ultimate control. For a residential estate management company, club or association you might look to the elected Chairperson. For a Trust, you would first look to the Donor to understand who and where the assets come from, followed by the Trustees to understand who can control the assets and lastly the Beneficiaries to understand who can benefit from the assets.
Although the requirements around establishing beneficial ownership are widely acknowledged, international scandals such as the Panama Papers, Pandora Papers, and more local events such as the Digital Vibes tender corruption scandal, emphasises the need for rigorous customer due diligence (CDD) as well as an accelerated regulatory drive for enhanced ownership disclosure and transparency.
To mitigate your risk of unknowingly becoming engaged with an entity that has something to hide, beneficial ownership identification and verification have become essential components of the Know Your Client (KYC) process. However, navigating complex legal structures that are deliberately designed to conceal UBOs can sometimes prove to be a challenge.
What are the challenges around identifying UBOs?
With thousands of companies being incorporated each year, sometimes with little information required and the increased presence of high-secrecy jurisdictions, shell corporations, offshore legal structures and nominee shareholders, the task of identifying an organisation’s ultimate owner cannot be underestimated.
Whilst the vast majority of clients will be legitimate businesses, over recent times it has become clear that corruption, fraud, drug and human traffickers, as well as terrorists, are leveraging companies to provide a level of legitimacy to their illicit activities, transactions or funds. This, along with recent scandals, is leading regulators and governments to strengthen their controls around corporate transparency and reinforces the need to really understand your client as part of your customer due diligence (CDD) and who you are ultimately working with.
The requirements around establishing a UBO has created an interesting paradox by requiring more granular identification and verification in an environment that has very limited accessible public information around ownership. Around the world, many countries have either begun to create or have plans to create beneficial owner registers to counter the use of legal persons to disguise illicit activities or criminally obtained assets.
In South Africa however, a lack of company ownership information leads to a heavy reliance on client declaration and self-certification, which was a key finding in the 2021 Mutual Evaluation Review of the country carried out by the Financial Action Task Force (FATF).
The report noted that law enforcement faces challenges to readily obtain accurate and updated beneficial ownership information about companies and trusts, to enable effective investigation and that “significant money laundering risks remain largely unaddressed for beneficial owners of legal persons and trusts”.
It is hoped that South Africa will consider these serious concerns and seek to address the challenges sooner rather than later, especially considering recent tender corruption scandals that highlighted the use of entities attempting to disguise the flow and ownership of illicitly gained funds.
Publicly available access to ownership information will not only assist Accountable Institutions in being able to easily and quickly identify who they are ultimately working with but will also enable them to effectively assess the potential risk they possibly present.
To summarise, the challenges around identifying UBOs include the lack of clarity around beneficial ownership definitions and thresholds across global regulations and guidance, inaccurate or non-existent ownership registers, reluctance to disclose potentially confidential information, and even client lethargy around endless disclosures all compound the task of complying.
However, with systems like DocFox, Accountable Institutions can seamlessly identify and verify UBOs and be notified if there are any potential adverse media involving these UBOs in order to accurately assess the potential risk they present.
Please feel free to reach out to our compliance team to see how we can assist your business: [email protected]
See also:
- Recent important FICA amendments you should be aware of
- Publication of draft Companies Act Regulations to enable beneficial ownership of shares to be determined
- Beneficial Ownership regulations are strengthened to address FATF’s grey listing
- Registering beneficial ownership following South Africa’s grey listing
