KYC for AML through UBO Identification

Looking into the the activities and trends of the year 2022 as per KYC for AMl in the context of UBO Identification the hindrance has been faced by the KYC and AML regulators. Uncertainty was seen in further developments and the methods available to compliance teams. In this article we shall discuss the future effectiveness of KYC for the Anti-Money Laundering and the use of UBO identification in it. Primarily we shall focus on the EU and then expand our thought to the global financial sector.

What is UBO Identification?

An ultimate beneficial owner (UBO) is the individual who ultimately controls and profits from a legal entity or transaction. It may be difficult to determine the UBO because they may be hidden within complex ownership structures involving multiple companies and legal entities. Knowing the UBO is important because it allows organizations to understand who they are truly doing business with. Identifying and verifying the UBO is now a standard requirement for Know Your Customer (KYC) and Customer Due Diligence (CDD) processes.

Swift defines a UBO as an individual who holds a minimum of 10-25% (dependent on jurisdiction) of capital or voting rights in the underlying entity.

UBO Identification in banks

It is a standard step-wise procedure followed by most of the international and national banks worldwide with few minor changes.

Obtain the company's credentials:

In order to verify the legitimacy and accuracy of the organization, companies must provide current information including their registration number, name, address, official status, and the names of top management employees. This may vary depending on the jurisdiction and anti-money laundering/counter-terrorism financing regulations. The Swift KYC Registry can provide a basic level of Know Your Customer information to streamline the process and avoid duplicate data.

Investigate the ownership chain:

Determine the individuals or legal entities that hold shares or interests in the company, and whether this ownership is direct or indirect.

Identify and verify the Ultimate Beneficial Owner(s):

Determine the percentage of shares, management control, and ownership stake of each individual, and identify any who qualify as UBOs.

Conduct an AML and/or KYC check:

All UBOs must go through the necessary AML/KYC checks in a consistent and efficient manner, with consistent reporting.

Importance of UBO

Global regulations now emphasize more on corporate transparency. The key AML regulations in Europe and US passed the Corporate Transparency Act in 2021. The Act defines boundaries for the UK Bribery Act and other international sanctions. Violating these regulations may cause the company or individual to be charged against illegal financing and other criminal activity.

AML directives in Europe

In 2017, the 4th and 5th Anti-Money Laundering Directives in Europe introduced new regulations related to UBOs. The 4th Directive established the definition of a UBO as an individual who holds more than 25% control of shares and voting rights in a legal entity, has power over the management board, or is the ultimate beneficiary of a transaction. It also mandated that European countries maintain a central registry of ownership information. The 5th Directive, which took effect in January 2020, reinforced these regulations and set a deadline for the creation of UBO registries.

As of October 2022, 26 out of the 27 member states had fulfilled their obligation to create a UBO register. Italy was the only exception. Most countries established a separate register specifically for UBOs, while others such as Bulgaria and Slovakia added UBO information to existing company registers.

The link between UBO and KYC

The use of covered or secret offshore accounts and balance maintenance is a shelter to illegal activities including some serious crimes. Panama Papers were a massive blow in exposing many VIPs and influential people and their highlighted ability to secretly maintain billions of dollars in offshore accounts. Therefore, the improved transparency & identification of UBOs is necessary while maintaining records. KYC is one of the key approaches to identify the UBOs and expose their links with Money Laundering activities if any.

UBO Registries for the KYC

Various challenges have been identified by the UBO register requirement. Mostly, the government lacks in the resources, incentives & other aspects where companies require these points to be fulfilled for filing their UBO information. For example, in Germany, even after the deadline for filing UBO information had passed, only a small minority of German companies had done so. To enforce the regulation, German authorities implemented a series of escalating fines for noncompliance. As a result, individuals or regulated institutions, such as banks, that are required to verify UBO information may need to use traditional national registries to obtain a reliable list of shareholders as the starting point for their investigation. This would involve manually mapping each level of ownership and requesting documentary evidence from clients if the investigation leads to a more secretive or inaccessible jurisdiction.

Also Read: The use of Blockchain technology in Automobile industry

European Union Case

In the European Union, national company registries in all 27 member states provide information that can be used to uncover corporate structures, including details on controlling entities and individuals and lists of shareholders, partners, and beneficial owners for various entity types. Outside of the EU, an increasing number of countries, in accordance with recommendations from the Financial Action Task Force (FATF), are also providing this type of information through their local registries. For instance, of the 126 registries available through the Know Your Customer platform, 84% provide official and reliable information on controlling entities and individuals for companies registered in their jurisdiction, and 65% also provide information on shareholders, partners, and beneficial owners.

Overall, these registries will ultimately be for the Know Yous Customer (KYC) and Anti-Money Laundering (AML) check purposes. UBOs can easily be identified and monitored once the UBO information is collected & shared to the regulatory authorities through UBO registries.

RegTech Innovation for Improved Transparency

Due to the overlooked gray area in the company’s complex corporate structures the self-reported data on the UBOs is not deeply studied. Mostly, the cost of AML processes touches the sky if the process is manual. RegTech innovation enables the businesses to comply and regulate their activities easily & swiftly through Software as a Service (SaaS).

Conclusion

Conclusively, it is said that the European Union and other countries are becoming actively serious in curbing Money Laundering. Practicing improved KYC for the AML can become more handy through AI based UBOs. Moreover, transparency from company’s and individual’s end shall be provided by complying with international regulations.

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