Transparency is a critical asset in the fight against money laundering and other financial crimes. Client onboarding and KYC establish exactly who you are doing business with, reducing risk and making it harder for bad actors to conceal wrongdoing. Ultimate Beneficial Ownership (UBO) transparency is an essential tool to help accomplish these goals.
Regulators know that, too. Around the world, they have focused on UBOs in recent years with the objective of closing loopholes and eliminating anonymity that can empower criminals. This can mean more KYC work for financial institutions, but the good news is there are solutions to simplify the process.
Know the ultimate beneficial owner, know your customer
The ultimate beneficial owner is the person who ultimately has power over and reaps profit from a legal entity or a transaction. The UBO may be hidden under complex and multilayer ownership structures of several companies and legal entities. Understanding who is an ultimate beneficial owner, though it can require some investigation, lets organizations know who they are actually doing business with. UBO identification and verification has become a part of standard KYC and CDD requirements.
The anonymity provided by secretive offshore centers makes it easier to hide illegal activity. Major investigations within the last few years, like the Panama Papers, have demonstrated the power of secret offshore structures and shell companies in concealing funds. Establishing better transparency through UBO identification and verification advances anti-money laundering efforts. It can also help combat corruption and tax evasion.
Tightening ultimate beneficial ownership regulations
Regulators have set their sights on UBOs as a tool in preventing financial crime for exactly those reasons.
In January 2021, the United States enacted the Corporate Transparency Act (CTA) as part of the 2021 National Defense Authorization act, in an effort to better crack down on shell companies. These have been a huge challenge for organizations fighting money laundering in the US. The CTA establishes a national registry of ultimate beneficial ownership for corporations. The new law primarily impacts small businesses, but it effectively creates a new resource financial institutions may be able to rely on for customer onboarding and ongoing due diligence.
In Europe, both the 4th and 5th Anti-Money Laundering Directives imposed new regulations on UBOs. 4AMLD established the definition of a UBO as having more than 25% control of shares and voting rights in a legal entity, or having power over management boards, or being the ultimate beneficiary of a transaction. It also required European countries to keep ownership information in a central registry. 5AMLD, which came into effect in January 2020, reinforced those regulations and put a timeline on the creation of UBO registries.
These recent pieces of legislation on both sides of the Atlantic point to a clear trend: mandating up-to-date, accessible information on ultimate beneficial ownership is a priority for regulators in the fight against money laundering. They also hold the possibility of being a new potential resource for financial institutions. Centralized databases of UBOs could end up an important tool to facilitate the compliance obligations of financial institutions.
UBO identification: a uniquely challenging process
UBOs can be concealed by layers of complex structures that are designed to hide who is behind a legal entity. This means doing the work of UBO verification and keeping that information up-to-date to stay compliant can eat up a lot of time. It often requires finding and cross-checking information from multiple sources. But falling short on the task can let criminals slip through the cracks and expose your organization to penalties.
If a company is owned by a single shareholder, it’s easy: that shareholder is the UBO and that’s the end of the story.
It gets tricky when the number of ownership layers, and the number of owners per layer, increases. Essentially, it means financial institutions must determine the ownership of each layer. On top of that, because beneficial ownership can be exercised in different ways, the complex process of determining the UBO must usually be done on a case-by-case basis. It’s a task that can feel really heavy.
Manually investigating the ownership structure of each company to identify its UBOs and repeating the process until there are no new UBOs is a time-consuming and error-prone process.
A best practice approach: How to identify UBOs with graph visualization and analytics
Graph visualization and analytics make the whole process much easier and faster.
What exactly is a graph? The graph technology approach is a model in which data is structured as a network. Information is stored as nodes, which are connected to each other by edges that represent the relationships between them. Graph is actually a very natural way to think about UBO structures. In this use case, nodes are corporate and legal entities, and edges represent ownership structures.
With graph technology, understanding sophisticated beneficial ownership structures can be translated into a single graph query to automate the process, yielding results quickly. See just how quickly in this short demo using the publicly available beneficial ownership data on the OpenOwnership Register:
Compliance analysts can look into the overall ownership graph to identify where a problematic UBO sits, for example. Since the results are visual, they are easy to understand and share.
By visualizing the entire ownership structure, you can see the big picture at a glance, ensuring nothing suspicious goes unnoticed.
Learn more about graph analytics use cases for AML
UBO verification isn’t the only AML process made easier with graph visualization. Download our ebook to learn more about how graph technology is changing the paradigm in money laundering investigation to help stop criminals in their tracks.