The Complete Guide to the Ultimate Beneficial Owner Verification

Ultimate Beneficial Owner (UBO) Verification

As per the KYC onboarding and remediation process, customers must be verified for Ultimate Beneficial Ownership. It is necessary to comply with AML/ CTF sanctions and regulations and meet the tax compliance legislation and standards. UBO is defined as an individual who benefits the most and has ultimate effective control over an arrangement– a legal entity or a natural person, irrespective of the chain of control is UBO – Ultimate Beneficial Owner. UBO check is necessary for different entities such as banks, brokers or dealers in securities, commodities, hedge funds, futures commission agents, blockchains, currency exchange officers casinos, digital lenders, FX, and binary options brokers.
CDD – Customer Due Diligence has come into the spotlight with the several scandals unearthed in recent times, such as the headlines grabbing Panama Papers and others. More emphasis is being laid on CDD now. Increased regulatory compliance helps in improving ownership disclosure and transparency. It is critical to follow the new compliance regulations, as it can put a business on the verge of getting a bad reputation and increase the risk of financial loss.
The legal arrangements are complex, and detangling them is also cumbersome. Several factors hinder UBO verification, such as lack of clarity on multiple beneficial ownership outlines, non-co-operation, and other factors that make it difficult to carry out the process quickly and prevent compliance with the KYC process.

What is UBO (Ultimate Beneficial Owner)?

The UBO is the Ultimate Beneficial Owner of a legal person.
A natural person can only be a UBO. The Ultimate Beneficial Owner owns or controls the legal entity or a natural person who conducts the transaction with the firm. The UBO may or may not be known as the owner of the business.
Reporting entities in the UAE are required to perform UBO checks to identify the real person behind the transactions. The Ultimate Beneficial Owner checks are important to prevent the business from money laundering and terrorist financing risks.
As per the UAE regulations, any person owning more than 25% of shares, controlling more than 25% of the voting rights, or the person exercising control over the company is termed as UBO.
The Complete Guide to the Ultimate Beneficial Owner Verification

UAE Cabinet Decision No. (58) of 2020 Regulating the Beneficial Owner Procedures

The UAE Ministry of Cabinet Affairs (‘Cabinet’) published Cabinet Resolution No. 58 of 2020 on the regulation of the Procedures of the Beneficial Owner ‘ (‘Resolution 58’) as part of the UAE’s shift toward greater openness and to be in line with global norms.
Resolution 58 mandated that entities in the UAE (with few exclusions) gather and retain relevant, accurate, and up-to-date information on their genuine beneficiaries (‘Beneficial Owner ‘), as well as inform the authorities. This law establishes a beneficial ownership framework for UAE “mainland” and free zone entities, as well as requiring the maintenance of necessary registers. As per Article 5, UBO is anyone who owns or controls, whether directly or indirectly, through shares or bearer shares:
  • 25% or more of the legal person’s share capital;
  • or 25% or more of the legal person’s voting rights.
This could be accomplished through a control chain or by having the power to appoint or remove the majority of the company’s management.
If no natural person meets the foregoing conditions, or if there are any uncertainties about who does, the UBO is the natural person who has power over the legal person by any other methods. If a natural person cannot be identified, the UBO is the senior manager of the legal entity.
The main reason for UBO verification is to arrest financial manipulation, money laundering that goes into funding terrorism, and financial crimes hidden behind the garb of legal entities.

Final CDD Rule

The CDD final rule amends the Bank Secrecy Act regulations, which improves financial transparency; It will help prevent money laundering and misuse of legal entities to hide the illegal activities of funding criminal and terrorist activities. The CDD rule works on four elements which require financial institutions to maintain written policies and processes to perform the following functions-
  1. Identification and verification of the customers’ identity.
  2. Identification and verification of the UBO of the companies opening accounts.
  3. Create a Customer Risk profile by understanding customer relationships.
  4. Regular monitoring of transactions to detect and report suspicious transactions. Update the customer information regularly.
Any individual who owns 25 % or more of a legal entity and the individual who controls the legal entity must be subjected to verification of beneficial ownership information.

UBO International Standards

The FATF: Financial Action Task Force is an organisation that keeps a tab on global money laundering and terrorist financing activities. It lays down the international standards that aim to prevent illegal financial transactions. Two hundred countries agreed to the rules established by the Financial Task Force for beneficial ownership in 2003 and 2012. The 4th AMLD and CDD rules are applicable, but several countries adhere to the terms laid down in the international treaties that require beneficial ownership declarations. The organisation regularly keeps a vigilant eye on the money laundering and terrorism financing methods and improves its standards to combat the challenges of evolving money laundering techniques.
As a result of the FATF study, there has been massive awareness, and legitimate governments are targeting corruption. The emphasis on obtaining information on beneficial ownership due diligence has increased more than ever before, serving many purposes such as increased financial transparency, preventing money laundering, and stopping funding of terrorism and unlawful activities.

Ultimate Beneficial Owner Step-by-Step Process

You need to follow the unique compliance standards for each country in which the business is operating. But there are a few standard procedures that must be followed to develop an effective UBO program strategically.

1. Obtain the firm's credentials

Complete records of the companies have to be provided, such as company’s names, address, official status, top management employees and verify the records’ accuracy.

2. Identify Ownership Structure and Percentages

It’s crucial to know about the entities who have a stake in the company, directly or indirectly via another party.

3. Identify Beneficial Owners

Identify UBO by determining the entity or natural person’s ownership interest or management control – total percentage of shares, ownership stake, management control, and verify if any of it falls under the ambit of UBO UAE.

4. Perform AML/KYC checks on all persons identified as UBOs

Companies can adopt this vigilant approach and prevent the misuse of the internet to launder money and fund criminal and terrorist activities. Financial institutions can use AI and ML to avoid criminals with AML software. Modern technologies such as Blockchain can prove to be effective in preventing money laundering and ensuring AML compliance.

Ultimate Beneficial Ownership and AML Compliance

Automated solutions are the futuristic way of compliance with the AML/ CFT requirements as they make the detection and validation of UBOs a seamless and quick process.

About the Author

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Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.