AML and UBO: Connecting the Dots in Financial Transparency and Risk Management

Financial criminals go to a lot of effort to hide their connections to dirty money and the schemes used to launder it. They usually operate through seemingly legitimate and trustworthy sources, making it vital to perform robust ultimate beneficial ownership checks.

Money laundering is a global scourge, with up to USD $3 trillion of dirty funds being cleaned through the global economy each year. This figure is on the rise, fuelled by rising crime rates in the West and the huge number of sanctions handed out in the wake of Russia’s invasion of Ukraine.

Generally speaking, money laundering schemes seek to clean their money through and deposit laundered funds into developed Western economies, which are seen to be more stable and where governments have less power and inclination to freeze and seize funds.

The UK is one of the most attractive locations to money launderers due to years of low regulation and our close ties to various tax havens and banking secrecy hotspots, such as the Cayman Islands. In fact, only the USA has more money laundered through its economy each year, and London is the number one city in the world to launder money through.

To combat this, the UK government has introduced strict AML regulations that place stringent compliance requirements on companies in the regulated sector.

These require such companies to perform detailed AML investigations and AML checks on all their clients, including discovering and recording the ultimate beneficial owners of any businesses, entities, or assets that they deal with.

Connecting the dots between businesses and the people who profit from them is a vital part of ensuring that you are not dealing with someone engaging in criminality and protecting both our economy and your business.

How criminals hide UBO

The aim of laundering money is to make it impossible to connect the resultant laundered cash and its owner to the crimes that earnt it. As such, those laundering ill gotten gains do not want to be connected to the funds or the process of cleaning them.

This makes obscuring ultimate beneficial ownership critically important to money launderers.

Whilst there are many ways to do this, the most common way is to use convoluted and complicated corporate structures, mainly involving shell companies, and transfer the dirty cash between companies within a structure and between different phoney structures.

These corporate structures often mean that you would have to go up many levels of ownership before they linked to a human being.

In the age before widely available UBO data, this meant that it was almost impossible to trace the money trail back to an individual without spending a significant amount of time doing so. Whilst UBO data goes a long way to unravelling these structures, this is still an effective method as most companies do not practise UBO due diligence and many of those that do use confusing and unclear tools that often lead to error.

Another method is for criminals to simply own below the 25% reporting threshold for UBO reporting set out by UK AML regulations. This makes them effectively invisible if you are using traditional UBO data sources that do not provide ownership data below 25%.

At Red Flag Alert we do things differently. We provide ownership data from as little as 0.1% and present ownership structures in a simplified and easy to understand manner. So you can make the right decision, faster.

Risks presented by hidden UBOs

For companies in the regulated sector, that are bound by AML regulations, failing to properly record and report the UBOs of your clients exposes you to stiff regulatory fines should you be subject to an AML compliance inspection.

With the government ordering regulators and industry bodies to increase the number of inspections they carry out, it is vital that regulated companies insure that they are meeting all compliance requirements.

Whether you are subject to AML regulations or not, being found to have facilitated money laundering can cause irreparable reputational damage that will do irreparable harm to your business.

And should the client be hiding their UBO to get around international sanctions, being found to have done business with them can also lead to severe criminal punishment.

How transparency is provided on UBOs

Transparency over ultimate beneficial ownership is provided via national registers and UBO data providers.

In the UK all business entities must register those with over 25% ownership or control of a company to the Register of People with Significant Control and any overseas entity that owns property or seeks to must register UBOs to the Register of Overseas entities.

The laws about checking who really owns a business are very complicated. According to the EU's Fourth Anti-Money Laundering Directive, if someone owns more than 25% of the shares or profits, or benefits from at least 25% of the company's gains, they are considered an Ultimate Beneficial Owner (UBO). This means their identity needs to be verified during the KYC process.

Many other countries maintain some sort of UBO register such as USA, France, Spain, Switzerland, Germany, Ireland, Spain and India. Like the UK, these registers set the reporting threshold at 25%, with the exception of India which recently lowered it to 10%.

However, the information required, enforcement of compliance, and punishments for non-compliance varies form nation to nation. Many experts are calling for a standardised approach to be adopted globally to aid cross-border investigations.

Whilst the majority of these registers are public, they do not always provide the complete information you need and manually tracing each of your clients UBOs would be impractical.

UBO data providers are able to draw from all of these registers, as well as additional sources, to provide you with instantaneous ownership trees.

Even then, UBO can be difficult to trace and understand. Which is why we have revolutionised the way UBO data is displayed; so you can quickly and more accurately understand who it is you are really dealing with.

Why is UBO Relevant In AML?

The Fourth AML Directive requires companies to maintain accurate information on beneficial owners. The Fifth Directive emphasises transparency and mandates EU member states to have interconnected, public UBO registries and separate registries for bank accounts accessible only by authorities.

It also introduces penalties for non-compliance with UBO verification. Companies need reliable UBO data and the capability to navigate complex corporate structures. Accurate UBO information is just the first step in financial due diligence; finance professionals must effectively utilise this data to avoid facilitating crime and facing penalties.

Failing to identify Ultimate Beneficial Owners (UBOs) can inadvertently lead to onboarding Politically Exposed Persons (PEPs) or individuals sanctioned for illicit activities like money laundering or tax evasion.

This oversight may cause firms to miss entire networks and connections within complex ownership structures, as seen in many money laundering cases where intricate financial schemes obscured true ownership and facilitated illicit fund movements.

Identifying the ultimate ownership and verifying the identity of non-personal customers are crucial elements of crime risk management and prevention. This process facilitates informed client acceptance decisions, emphasizes ongoing monitoring, and safeguards firms against reputational harm and potential regulatory actions.

Gain a comprehensive understanding of Ultimate Beneficial Owners (UBOs) in AML compliance, including definitions, legislations and identification with Red Flag Alerts ultimate guide to UBO.

To find out more about our cutting edge UBO and AML offering speak to one of our experts today and start doing smarter, safer, and faster business.