An Ultimate Beneficial Owner (UBO) is the natural person that ultimately owns or controls a legal entity, such as a company, partnership, or trust. In the context of beneficial ownership, a natural person is a living human being.
The identification of UBOs is crucial if financial services businesses are to comply with anti-money laundering (AML) regulations. By identifying UBOs, businesses uncover the true owners of entities transacting via their business’s platforms and services, thereby gaining greater insight into the risk of fraud, corruption, and illicit activity.
The Importance of UBO Identification for AML Compliance
UBO identification helps money services businesses uncover complex ownership structures and trace the flow of funds back to their source. Once they understand who owns what, they can identify potential conflicts of interest, corruption, or other risks associated with specific customers or transactions, all of which play a role in complying with AML regulations.
UBO Identification Requirements Under U.S. Regulations
In the United States, UBO identification is mandated by the Bank Secrecy Act (BSA) and related regulations issued by the Financial Crimes Enforcement Network (FinCEN), specifically the Customer Due Diligence Final Rule, also known as the CDD Rule.
These regulations impose obligations on financial institutions to establish robust procedures to identify and verify the beneficial owners of their customers. Under the BSA and FinCEN regulations, financial institutions must:
- Collect information on their customers’ ownership and control structure, including the names, addresses, and identification numbers of UBOs.
- Verify the identity of UBOs using reliable and independent sources, such as government-issued identification documents or public registers.
- Conduct ongoing monitoring of customers and their UBOs to identify changes in their circumstances or behavior that may indicate potential risks or illicit activities.
- Report any suspicious activities or transactions involving customers and their UBOs to the appropriate authorities as required by law.
Learn more about FinCEN’s Beneficial Ownership Requirements.
Challenges in UBO Screening
Despite the importance of UBO identification for AML compliance, financial services businesses face several challenges in implementing compliant and cost-effective UBO identification processes, including:
- Complex ownership structures: Legal entities can have multiple layers of ownership, making it difficult to trace the ultimate beneficial owner. Shell companies, nominee shareholders, and bearer shares can further obscure the ownership structure.
- Absence of standardized and reliable data sources: No single, comprehensive source of UBO information exists in the United States. Companies must rely on multiple, sometimes inconsistent, sources to verify UBO information.
- Dynamic nature of UBO information: Legal entities’ ownership and control structure may change frequently because of mergers, acquisitions, or other events. Financial institutions must continuously update their UBO information to ensure accuracy and relevance.
Overcoming UBO Compliance Challenges
To overcome these challenges, financial institutions should adopt a risk-based approach to their AML processes, tailoring them to the level of risk each customer or transaction represents. The following strategies can help financial institutions enhance the efficiency and effectiveness of UBO identification processes:
- Customer and activity risk scoring: Financial services companies should analyze the risk posed by each customer based on their activity patterns and other factors, tailoring Know Your Customer identification and verification procedures accordingly.
- Enhanced due diligence measures: Additional measures should be implemented for high-risk customers to verify their identity and assess their risk. This may include obtaining more detailed information on the ownership and control structure, conducting background checks, or consulting external databases and watchlists.
- Regular monitoring and updating: Companies should monitor their customers and their UBOs to identify any changes in their circumstances or behavior that may indicate potential risks or illicit activities. This includes updating UBO information as needed and reassessing customers’ risk levels and any change in beneficial ownership.
For additional information on UBO best practices, view our webinar Beneficial Ownership: Complying To CDD Final Rule (Part 1) and our whitepaper overviewing compliance with the FinCEN Beneficial Ownership Rule.
As with all AML compliance requirements, identifying the beneficial owner of your customers imposes substantial workloads, costs, and complexity. It is, however, necessary if your business is to avoid the risk of non-compliance.
Alessa can help. Our comprehensive AML compliance software solution offers a range of tools that reduce the cost and complexity of compliance, such as:
- Our Risk Scoring tool allows our clients to assess customer risk quickly and effectively.
- Our Identity Verification tool provides a seamless solution for KYC, CDD, and enhanced due diligence when required.
- Our state-of-the-art transaction monitoring solution empowers our clients to identify suspicious activity in real time.
To see how Alessa’s integrated AML compliance software can help your business to lower compliance costs, workloads, and technical complexity, schedule a demonstration today.