In a recent post by Fenergo, the firm took a deeper look into the rules and requirements surrounding the area of beneficial ownership.
Defining beneficial ownership plays a pivotal role in international compliance, especially in mitigating financial crimes. Transparency in beneficial ownership is a critical tool in ensuring financial flows are above board.
The Financial Action Task Force (FATF) characterises an Ultimate Beneficial Owner (UBO) as the “natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.” This definition encompasses those individuals exerting maximum effective control over legal entities or arrangements. Financial institutions, whenever they initiate or maintain accounts, are mandated to discern the identity of significant stakeholders or controllers.
Concurrently, UBOs are subjected to a Know Your Customer (KYC) examination. It’s essential to remember that pinpointing beneficial owners transcends mere regulatory demands – it’s also an indispensable risk management protocol.
Beneficial ownership covers various spheres. For businesses, the UBOs are typically those owning the lion’s share of the company stocks, subsequently profiting from its financial gains. In the context of trusts, the trustor hands over the asset rights to a trustee, who manages it for a beneficiary.
For properties, the actual beneficiary usually aligns with the legal ownership, but some choose to keep it undisclosed through trusts. When it comes to securities, while the shares are registered under financial institutions, the real beneficiaries or UBOs are those holding them since they are privy to any resulting capital gains.
The Panama Papers Leak revelation cast a spotlight on the convoluted and concealed ownership models adopted by multinational behemoths. This opacity enabled illicit money laundering via overseas accounts. The United States is gearing up to introduce the Beneficial Ownership Information Reporting Rule in January 2024.
Administered by the Financial Crime Enforcement Network (FinCEN), it mandates several U.S. firms to divulge details about their beneficial owners. This initiative is designed to shield the American financial infrastructure from illicit activities and simultaneously curb financial wrongdoings, including money laundering and tax evasion.
Opaque beneficial ownership can pave the way for fraudulent activities, eroding trust and hampering investments. Transparent access to verifiable company ownership data empowers businesses and governments to know their partners better. This clarity enhances Anti-Money Laundering (AML) and KYC protocols within the financial domain, offering deeper insights into business partners and affiliated risks.
FATF has deduced that anyone possessing a 25% or more stake in a corporate customer falls under the “acceptable” benchmark to identify beneficial owners. Also, individuals exercising managerial sway, like executive directors, fall into the beneficial owner category, requiring financial entities to disclose their identities.
A major hurdle in identifying UBOs stems from the disparity in laws and documentation standards across different jurisdictions. This lack of uniformity, paired with the dynamic nature of UBO regulations, underlines the importance of financial institutions staying alert and adapting swiftly.
Several questions often arise around beneficial ownership, ranging from distinguishing it from legal ownership to understanding the risks of anonymous beneficial ownership. Effective identification techniques and the sectors most vulnerable to misuse are also areas of interest.
Robust due diligence, with a focus on beneficial ownership, can significantly reduce the chances of financial malpractice. Fenergo’s KYC solution assures financial entities of rigorous due diligence applied to clients and related entities.
Read the full post here.
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