The quest to identify the ‘real’ owners, or Ultimate Beneficial Owners (UBOs), is critical in the maze of corporate structures. This blog post, inspired by our previous blog on the UBO Guide, aims to shed light on the process of UBO verification and its significance in the fight against financial crimes.
UBO (Ultimate Beneficial Owners) is the individual who ultimately holds control or ownership of a company, account, or transaction and is thus the beneficiary. Financial intermediaries often grapple with the challenge of pinpointing the UBO of a legal entity.
Ultimate Beneficial Ownership verification, or UBO verification, is a critical step in identifying the individuals who hold a legal entity’s reins. This procedure is instrumental in thwarting activities like money laundering and terrorist financing, which often lurk behind the anonymity of corporate structures.
The Financial Action Task Force (FATF), a global organization committed to formulating and promoting the execution of legal, regulatory, and operational measures to combat money laundering, terrorist financing, and other threats that could compromise the international financial system, has underscored the importance of transparency in identifying the beneficial ownership of legal entities and trusts.
As per the guidelines of FATF, a legal entity is defined as any non-individual entity that engages in a business relationship with a financial institution or holds assets. This wide-ranging definition encompasses various entities with legal standing, such as foundations and associations.
National Central Registries (NCRs) play a pivotal role in UBO verification. They are databases that store information about the beneficial owners of legal entities. These registries are designed to make corporate ownership transparent, making it harder for illicit activities to hide behind the veil of corporate anonymity.
The effectiveness of NCRs, however, is contingent on several factors. These include the accuracy of the information they contain, the ease of access to this information, and the reliability of the data.
Beneficial ownership registers are databases that collate information about companies ‘real owners. These ‘real’ or beneficial owners ultimately own or control a company, even if their name isn’t on the legal paperwork. These registers are designed to increase transparency in corporate ownership, making it harder for illicit activities to hide behind the veil of corporate anonymity.
Beneficial ownership registers serve several crucial functions. They assist domestic law enforcement and other competent authorities in investigating criminal activities, enhancing public accountability. They also deter crime by making it more challenging for corrupt individuals and criminals to hide their operations behind anonymous companies.
Moreover, these registers facilitate international cooperation and information sharing, aiding in investigating cross-border cases and tracking illicit financial flows. They also contribute to a more open investment regime, ensuring value for money in public procurement and fostering open competition.
Over the past decade, beneficial ownership transparency has gained significant support on the international policy level. However, the policy area is still nascent, and much evidence will be needed before a robust evaluation of their effects can be undertaken.
While the implementation of beneficial ownership registers is still limited, since existing registers have recently been implemented, substantial progress has been made in promoting beneficial ownership transparency in various international policy fora since the early 2010s.
However, challenges remain. Non-compliance with beneficial ownership regulations can lead to sanctions, including fines and prosecution. Courts may even dissolve legal entities and seize their assets in some jurisdictions.
The regulatory environment for identifying and verifying the Ultimate Beneficial Owner (UBO) is influenced by various authorities’ laws, UBO rules, and guidelines. These include the Financial Action Task Force (FATF), the European Banking Authority (EBA), the Ministry of Finance, and the Dutch National Bank (DNB).
Here’s a straightforward breakdown of the current regulatory structure related to UBO identification and verification:
Wwft’s Article 3(2)b and its Explanatory Note stress the need for institutions to continually verify a UBO’s identity, adjusting the intensity based on risk.
Article 13(1)b of the Revised 4AMLD reemphasizes the need to identify the beneficial owner and take reasonable measures to verify their identity.
EBA’s Risk Factor Guidelines suggest that firms ask the client who their beneficial owners are, document the obtained information, and take all necessary and reasonable measures to verify the information. The guidelines also discuss the acceptance of data from the client when verifying the beneficial owner’s identity and the need to increase the quantity and quality of information obtained for CDD purposes.
In conclusion, the regulatory framework highlights the importance of identifying and verifying the UBO’s identity, taking reasonable measures based on risk, and maintaining adequate and up-to-date information.
While NCRs are a significant step towards transparency, they have their challenges. One of the primary concerns is the accuracy of the information contained in the NCRs. Without an automated system for verifying the information, the registries may resemble a simple mailbox collecting information irrespective of accuracy. This could lead to the inclusion of inaccurate or unverified data, undermining the NCRs’ effectiveness in combating financial crimes.
Access to information is another challenge. Retrieving data from NCRs can be complex, especially for individuals outside the country needing the necessary data. Moreover, some countries may impose fees for access to information, which can be a deterrent for many. This could limit the effectiveness of NCRs as a tool for promoting transparency and combating financial crimes.
The reliability of NCRs is also a concern. Based on the FATF Recommendations and the 4th Anti-Money Laundering (AML) Directive, Obliged entities must not rely solely on NCRs to exercise general due diligence. In this case, a risk-based approach must be applied. This means obliged entities must consider legal entities’ types, forms, and structures and the risk of money laundering and terrorist financing.
The expenses related to establishing and maintaining beneficial ownership registers can differ greatly. These costs are influenced by factors such as the jurisdiction’s size, the number of companies it accommodates, the services it intends to provide, and the method it uses to share data. For instance, the Register of Public Sector Partners in Slovakia, a beneficial ownership register that includes government contractors and recipients of public funds, reportedly had a setup cost of around EUR 330,000 and incurs an annual operating expense of approximately EUR 33,000. On the other hand, the Netherlands allocated EUR 9 million for initial setup costs and anticipated yearly operating costs of about EUR 600,000.
Despite the challenges, the importance of UBO verification in the fight against financial crimes cannot be overstated. The success of NCRs depends on meeting the EU legislation’s deadlines, which imposes the obligation to integrate the NCR with the European Central Platform (ECP) via technical systems.
It is crucial to establish an effective system for checking and verifying the data kept in the NCR and specify a sanctions list for non-compliance. The authority managing the NCR is primarily responsible for the timeliness of the data. This would ensure that the information in the NCR is up-to-date and accurate, enhancing its effectiveness as a tool for combating financial crimes.
Moreover, it is crucial to address the issue of access to information. While it is necessary to protect sensitive information, it is equally essential to ensure that retrieving data from NCRs is not overly complex or burdensome. This could involve simplifying the data retrieval process and ensuring that the fees for access to information are not prohibitive.
Introducing a central registry of bank accounts is another critical development in the fight against financial crimes. While a basic framework for the operation of this registry has been established at the European level, a consensus among the relevant actors at the national level has yet to be reached. The successful implementation of this registry would further enhance the effectiveness of UBO verification.
In conclusion, UBO verification is a critical tool in the fight against financial crimes. While challenges exist, the journey toward greater transparency and accountability in corporate structures continues. As we refine and improve our systems, we move closer to a world where illicit activities can no longer hide behind the veil of corporate anonymity.
The journey of UBO verification is a testament to the ongoing efforts to promote transparency and accountability in corporate structures. It is a journey marked by progress and challenges but one that holds the promise of a more transparent and accountable corporate world. As we continue this journey, we remain committed to unmasking the hidden and shining a light on corporate entities’ real owners.
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