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In the realm of financial regulations, the importance of Know Your Customer (KYC) procedures cannot be overstated. However, there was a critical aspect that went unnoticed for quite some time – the lack of beneficial ownership transparency. This loophole allowed criminals to exploit anonymous shell companies, enabling them to engage in suspicious transactions without detection. In response, policymakers introduced Know Your Business (KYB) regulations, with a crucial focus on establishing the ultimate beneficial owner (UBO). In this article, we delve into the significance of ultimate beneficial ownership, its criteria, and the global push for increased transparency. We also introduce Faceki, a regtech solution that simplifies the process and ensures compliance. 

The Importance of Ultimate Beneficial Ownership: 

An ultimate beneficial owner (UBO) refers to the natural person(s) who owns or controls a legal entity and reaps its profits. KYB regulations mandate companies to disclose the identities of their UBOs to relevant registries. This information is crucial for organizations to verify the UBO before entering any business relationship with a customer entity. Failure to comply with KYB regulations opens the door for financial fraud and illicit activities, as anonymous or complex company structures can hide the true identities of beneficial owners. Consequently, legal entities pose a higher risk in terms of anti-money laundering (AML) and are subject to stricter scrutiny. 

Distinguishing UBO from BO: 

While the terms “ultimate beneficial owner” and “beneficial owner” are often used interchangeably, there are subtle differences. Both UBO and beneficial owner (BO) refer to natural persons with ownership privileges and shares in a company. However, the UBO holds greater control and receives higher returns from the company. This distinction lies in the extent of influence and control exercised over the entity. 

Criteria for Recognizing the Ultimate Beneficial Owner: 

The Financial Action Task Force (FATF), a global watchdog against money laundering and terrorist financing, has established specific criteria to identify beneficial owners: 

  1. Individuals who own at least 25% of the capital or share capital. 
  1. Individuals with at least 25% of the entity’s voting rights. 
  1. Persons with power of attorney. 
  1. Legal guardians of minors. 
  1. Corporate directors specifically appointed to conceal true ownership. 
  1. Holders of anonymous shares, including bearer shares. 

Entities that do not Meet UBO Criteria: 

In some cases, a person may hold shares in a company without receiving any benefits from them. Such individuals, regardless of the number of shares they hold, are not considered beneficial owners. Shareholder benefits include rights to dividends, voting rights, and the ability to benefit from the value of shares when sold or transferred. A person holding shares for someone else, such as a parent holding shares for a minor child or a trustee holding shares for trust beneficiaries, is considered a non-beneficial owner. This arrangement allows for anonymous shareholding through structures like trusts.  

The Importance of Ultimate Beneficial Ownership: 

Establishing the identity of the ultimate beneficial owner is paramount for regulated entities. By validating the true identities of natural and legal persons, organizations can ensure compliance, prevent financial loss, and protect their reputation. The UN Office on Drugs and Crimes reports global illicit proceeds surpassing $2 trillion annually. Exposing beneficial owners helps deter illegal activities such as tax evasion, money laundering, corruption, embezzlement, terrorism financing, and more. Transparency in beneficial ownership enhances the security and integrity of the financial system. 

UBO Screening Regulations Around the World: 

The Panama Papers scandal of 2016 shed light on the lack of transparency in the financial sphere, prompting global law enforcement to take action. Legislators worldwide addressed this issue, with the European Commission leading the way by including beneficial ownership transparency requirements in the 4th EU Anti-Money Laundering Directive (AML 4). Other countries followed suit, implementing public registries for beneficial ownership information. Notably, the United States is in the process of finalizing its Corporate Transparency Act (CTA) to enhance beneficial ownership regulations and combat fraud. However, there is still progress to be made, particularly in low-income economies where UBO regulations are less prevalent.  

Establishing an Ultimate Beneficial Owner: 

To efficiently conduct UBO checks, regulated organizations should adopt a comprehensive KYB strategy as part of their AML compliance. This strategy includes due diligence, politically exposed person (PEP) screening, sanctions screening, adverse media screening, and ongoing monitoring. These procedures ensure that the organization has up-to-date information on the ultimate beneficial ownership and mitigates risks throughout the customer lifecycle.  

In a world where financial crimes continue to pose significant threats, establishing ultimate beneficial ownership is crucial. KYB regulations and the disclosure of UBO information play a pivotal role in promoting transparency, preventing money laundering, and combating financial crimes.

Although the process can be complex and resource-intensive, regtech solutions like Faceki offer streamlined solutions for identity verification, background checks, age verification, gender verification, nationality verification, liveness checks, and even CCTV facial recognition. By embracing these technologies and fostering global cooperation, we can enhance the safety and integrity of our financial systems, protecting innocent individuals from harm. 

To learn more about how Faceki’s identity verification solutions, click here.