Any UK business in the regulated sector that does not take an interest in the ultimate beneficial owners (UBOs) of its clients is in danger of non-compliance with the UK’s anti money laundering (AML) regulations and customer due diligence standards. Companies found to be in non-compliance face still fines and penalties whilst individuals can be punished with fines, professional disqualification, and even custodial sentences.
But what is ultimate beneficial ownership, how do beneficial owners differ from legal owners, and why are they so important?
A beneficial owner is a person or entity who effectively owns an asset, even if their name isn't on the paperwork. Identifying ultimate beneficial ownership within a company is an important part of any UK business' AML customer due diligence processes. .
In this guide we go into more detail about what a beneficial owner is, how a beneficial owner differs from a legal owner, and why the beneficial owner can be different from the legal owner of an asset.
We also explain why it’s so important to know who the beneficial owner of a company is, and how Red Flag Alert's data services can help you get to the bottom of your clients' beneficial ownership.
According to the Financial Action Task Force (FATF), an ultimate beneficial owner (UBO) is the person or legal entity (e.g. an organisation) who directly or indirectly reaps the benefits of ownership of an asset or exercise ultimate effective control over it, even though that asset may be legally owned by a different party.
The beneficial owner of an asset can also be the person or group of people who, either directly or indirectly, has the power to vote on or influence transaction decisions involving the asset. For example, if a company’s board of directors have to decide together on whether or not to sell shares in the company, the board of directors is its beneficial owner or has beneficial ownership.
Where personal beneficial ownership of a company is concerned, the beneficial owner of a company is the person who controls over 25% of its shares and has the right to exercise significant control over the company, or the right to remove the majority of its board of directors.
A beneficial owner can also be called an ultimate beneficial owner (or UBO). This refers to who ultimately has beneficial ownership of an asset. For example, if your client company is owned by another company and that company is owned by an individual, the individual at the top of that chain is your client company's ultimate beneficial owner because they ultimately hold beneficial ownership of the client.
Legal ownership refers to who owns an asset according to its paperwork. For example, the legal owner of a property is the person or entity named on its title deed.
In most cases the legal and ultimate beneficial owners (UBOs) of an asset are one and the same, although in some cases—as we are discussing in this guide—an asset's legal and beneficial ownership are different.
Ultimate beneficial owners (UBOs) can differ in their level of risk. Low risk beneficial owners may only require a visual check using ID documents while high risk UBOs may require enhanced due diligence including additional searches, assessment of their PEP status, their wealth and funds and more.
There are a number of reasons why ultimate beneficial owners (UBOs) and beneficial owners can be different from its legal owner. Some of these reasons are legitimate, while others constitute financial crime.
The reasons for differences between legal and beneficial ownership include:
Often a person who owns securities will trade these securities under their broker’s name, for the sake of safety and convenience. This is legal and common within financial institutions.
Sometimes a person will choose to have certain assets registered in a different legal owner’s name so that they can maintain anonymity about who ultimately owns these assets, for the sake of safety and privacy.
For example, high-profile people like celebrities and politicians may choose to have a property registered under a different name so that their home address cannot be found on public records. This is legal but if a client is seeking undue anonymity and is reluctant to divulge information pertinent to your business dealings then you should consider this a red flag.
Some people have assets registered under a different name so that they can conceal these assets to protect them from being forfeited as damages in a lawsuit or even a divorce. This use of beneficial ownership is a form of financial fraud and is therefore illegal.
Some people or companies choose to have assets registered under different names in order to avoid paying tax on these assets. This use of beneficial ownership is a form of tax evasion and is illegal.
Money laundering is a complex financial crime which we’ve written about in depth before. It basically involves obscuring the ownership of assets and the true origin of funds in order to conceal the fact that the money has been earned from crime.
Assets earned via criminal activity and used in the process of money laundering are often registered under a different legal owner (for example a shell corporation) to obscure their links to the ultimate beneficial owner or hide the ultimate beneficial owner’s involvement in this process. Money laundering can also be used for terrorist financing.
Money laundering is a financial crime and there are sever legal penalties both for those who commit it and those who enable it by not adhering to anti-money laundering regulations in their companies.
As we’ve discussed, an asset having different beneficial and legal owners is not illegal, as long as the ultimate beneficial owners are in compliance with the relevant financial and tax laws.
However, having different ultimate beneficial owners (UBOs) from the legal owners on record is frequently a means for committing financial crimes such as concealment of assets, tax evasion, and money laundering.
Differing beneficial and legal owners are so commonly associated with financial crime that UK companies are required to know who owns or controls their clients in order to remain compliant with anti-money laundering and customer due diligence regulations.
In order to know your customer and be in compliance with AML and KYC regulations, you have to know who the ultimate beneficial owners (UBOs) of your client companies are, verify the identities of these beneficial owners, and vet them for signs of financial crime.
Vetting beneficial owners for signs of financial crime involves:
You also need to know who will effectively benefit from each client’s transactions with your company. To better understand this, you should examine data about:
If your company does not take an interest in the beneficial owners of its clients, it could face penalties for non-compliance with the UK’s AML regulations.
Failure to comply with these regulations is a criminal offence and can carry a prison sentence of up to 14 years, or a hefty financial penalty. One company was issued a £7.8 million fine by HMRC in 2020.
Unfortunately, establishing who a company's ultimate beneficial owner is can be a difficult pursuit. Money launderers are adept at layering shell companies within shell companies and crafting complex chains of assets to make determining beneficial ownership and control a tricky task—and essentially an impossible mission to accomplish without robust data and digital tools.
Ultimate Beneficial Ownership in the EU
There have been various AML directives within the EU in the last 30 years. We are now on the 6th AML Directive in the EU, which broadens the scope of anti-money laundering offences and introduces new predicate offences for companies that operate in this market. AML directives have clear regulatory requirements around UBO directives. For example, in the 5th AML Directive, it clearly stated that EU states must maintain national UBO registries, which governing bodies and professional sector organisations must showcase legitimate interest to gain access to these national registers. Fast forward to 6AMLD, there is new guidance surrounding finding UBOs including promoting the use of innovative solutions and digitalisation.
Your company needs extensive financial data and powerful analytics to protect it from becoming involved in financial crime.
Our data and AML compliance services help businesses across the UK to reliably vet their clients and make more effective decisions in their business relationships.
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