Understanding Group Structure & Ultimate Beneficial Ownership (UBO)

Going beyond the basic understanding of UBOs and group structures begins to shed light on an otherwise confusing and convoluted aspect of business.  

On the face of it, the two seem identical, yet they are distinctly different which can lead to non-compliance violations and subsequential fines. Comprehending this intricate web of company structures and UBOs is essential, and Red Flag Alert has broken down the key information businesses need to know. 

Take a look to discover the significance of both, the insights they offer businesses, along with the challenges companies can face when using traditional platforms to distinguish the two.

What is a Group Structure?

Group structure refers to the hierarchical arrangement of companies under a common parent company or controlling entity. This includes UBOs, but they hold a separate significance, which we will break down later on.

This organisational setup is common in conglomerates, holding companies, and multinational corporations. Having a clear insight into a business’ group structure is incredibly valuable, as it reveals the relationships between subsidiaries, affiliates, and the parent company, shedding light on various aspects of the business.

 

Relationships between Subsidiaries, Affiliates, and Parent Companies - Explained

Subsidiaries 

These are companies that are owned or controlled by another company, known as the parent company. Subsidiaries operate independently but are ultimately controlled by the parent company, which usually holds a majority stake in their ownership.

Affiliates

Affiliated companies are those in which the parent company holds a significant but not majority stake. They may have strategic partnerships or minority ownership ties with the parent company. 

Parent Company

This is the central controlling entity that owns or controls one or more subsidiary companies. It exercises authority over strategic decisions, financial matters, and overall governance.

Importance of Understanding Group Structure in AML

Understanding group structure opens up insights into the risk profile of the organisation being assessed. 

By understanding the diverse range of subsidiaries, affiliates, and their operations across different jurisdictions and sectors, AML professionals can assess the inherent risks associated with the business activities.

For instance, subsidiaries operating in high-risk jurisdictions or industries may pose elevated money laundering or terrorist financing risks.

Enhanced due diligence is a key process that is impacted by a business’s understanding of the group structure. Maintaining compliance is the only way to avoid violations and their accompanying hefty fines, and group structure information is essential to this process.

AML professionals need reliable information to conduct enhanced due diligence checks, particularly on high-risk clients or counterparties associated with the organisation. Without it, they aren’t able to analyse the potential risks posed by the group’s business partners, customers, or suppliers. 

This extends to general compliance with regulator requirements such as Know Your Customer (KYC) procedures.

Many AML regulations and guidelines mandate the identification and understanding of the corporate structure within KYC procedures, leaving businesses with a lack of information vulnerable to regulatory penalties and reputational damage.

What is Ultimate Beneficial Ownership (UBO)?

Ultimate Beneficial Owner (UBO) is the term used to describe the individual(s) who own or control a legal entity such as a business, trust, or partnership. 

Traditionally, they are described as the natural person on whose behalf a transaction or activity is being conducted.

This simple definition incorporates a range of details, as UBOs are those with the ultimate authority over decision-making and financial transactions, regardless of the layers of ownership and control structures in place. 

It’s this level of authority and control that explains why regulatory authorities require disclosure of UBOs to ensure transparency and prevent misuse of corporate structures for money laundering and other illegal activities. 

Cons:

• Must start with at least £50,000 of nominal share capital, with £12,500 minimum paid and committed to the business: initial costs significantly higher than a private limited company.
• Additional and stricter legal and regulatory requirements e.g., a trading certificate from Company’s House before they can trade, follow the rules of the London Stock Exchange.
• More vulnerable to a hostile takeover if most shareholders agree to bid. A potential bidder can build up a shareholding in advance of launching a bid attempt.

An additional con to consider is short-termism. People wanting a return on investment in shares means directors may focus on short-term results to increase profits rather than the long term. Aside from this, although being transparent increases brand recognition, it leaves the company exposed to more scrutiny by analysts and media commentary.

Importance of Identifying UBOs in AML

Having reliable and up-to-date information is essential to UBO checks and subsequently AML compliance. This is due to the myriad of ways criminals can utilise UBO structures to disguise their activities. 

For instance, businesses onboarding a new client must know the UBO to confirm they are aware of the origins of funds and there are no suspicious activities that could indicate fraud or money laundering.

If a business cannot confirm the UBO of their new client, it cannot be legally dealt with. As such, compliance officers must identify UBOs to facilitate AML efforts and uncover the true source of funds to prevent fraud and money laundering schemes.

The Devil is in the Details 

It’s clear that UBO information is vital to compliance officers’ efforts, and when correctly analysed, aligns a business with regulatory requirements. 

However, the power behind this data can be utilised beyond AML requirements. In-depth, reliable data reveals the degree of ownership concentration within a company. Companies are required to declare any and all UBOs that fall under the following categories.

• People who have at least a 25% stake in the capital of the legal entity.
• People who have at least 25% voting rights in the general assembly.
• People who are beneficiaries of at least 25% of the capital of the legal entity.

At Red Flag Alert, we highlight UBOs down to 0.1% ownership. This opens up a plethora of opportunities for further analysis and understanding, strengthening a business’ confidence behind decisions, and helping to avoid troublesome partnerships.

For example, when a business onboards a new client, UBO data emphasises how high ownership concentration may indicate significant influence or control exerted by a particular individual or group of individuals. 

This concentration of ownership can impact corporate strategies, investment decisions, and overall business operations. By identifying UBOs, stakeholders can assess the level of ownership concentration and its potential implications for the company's performance and stability. 

Our comprehensive approach also helps users to identify potential conflicts of interest within a company.  

If UBOs have interests in other entities or businesses that engage in similar activities, conflicts of interest may arise. These conflicts could compromise decision-making processes and undermine the interests of other stakeholders.

It is also important to have a complete understanding of every person and organisation you are doing business with as part of your credit risk procedures. For example, a struggling company that is destined to fail but is part of a larger UBO structure may take out what is called a cross company debenture. This is where they take out a secured ‘loan’, which doesn’t truly constitute money changing hands, from a company in their ownership structure that has a nominal percentage ownership. This ultimately places the beneficial owners of the company as secured creditors and eligible to recover the ‘loaned’ funds before the majority of legitimate creditors. 

PEPs and Sanctions are also covered by our industry-leading software, allowing businesses to swiftly rule out any businesses that have UBOs with objectionable associations, or legal sanctions against them. This is extended to adverse media too, so users can save time scouring the internet for unsavoury articles that spell out trouble.

By clearly illustrating this UBO information, Red Flag users can mitigate the risk of conflicts of interest and ensure that decisions are made in the best interest of the company and its stakeholders. 

Challenges and Limitations of Traditional Platforms

Obtaining accurate and up-to-date group structure and UBO information from traditional platforms severely stalls onboarding processes, and is littered with pitfalls compliance officers must militantly avoid.

Firstly, relying solely on public records can be limited, as they may not always provide comprehensive or timely data. 

Additionally, data from public records may be fragmented across different jurisdictions, making it difficult to gather a complete picture of the ownership structure. Manual research processes further exacerbate these challenges, as they are time-consuming and prone to errors.

These issues are amplified by the complex structure businesses often have, shrouding their UBOs. At Red Flag Alert, we are committed to providing companies with the tools they need to unravel these webs. With our user-friendly data visualisation tools, anyone can decode these convoluted structures at a glance, ensuring a simple and to-the-point approach to what was once an overwhelming, and error-prone task.

Traditional platforms also lack integration with various data sources, resulting in incomplete or outdated information.  

This can lead to misinformed decision-making and regulatory non-compliance, as organisations may not have a clear understanding of the individuals or entities with significant control over a company. 

Compliance officers should never rely on outdated UBO information, as it immediately exposes the business to significant risks, such as inadvertently engaging with sanctioned entities or being involved in illicit financial activities.

These drawbacks don’t just negatively impact the business, but there is a knock-on effect felt across any organisation being onboarded.

Long, convoluted onboarding processes can quickly lead to a drop in interest and a sustained decrease in future clients, customers, and supply chain networks. Red Flag Alert values a smooth onboarding experience just as seriously as compliance efforts, and for good reason…

How Red Flag Alert Has Revolutionised Company Structure Analysis

 At Red Flag Alert, we have led the charge in facilitating businesses' compliance efforts to ensure they are getting the most out of their data. Now, our innovative platform has revolutionised the way businesses understand group structures and UBOs.  

By leveraging cutting-edge algorithms and data analytics, our data consolidates and analyses vast amounts of information swiftly and efficiently. 

This approach enables users to onboard new clients in a matter of minutes, unravelling complex corporate structures, identify UBOs seamlessly and ensure compliance with regulatory requirements. 

 Red Flag Alert’s UBO and Group Structure Features

• Offers real-time updates for access to the most current information

• Incorporates intuitive visualisation tools for simplifying understanding of corporate structures
• Empowers informed decision-making by offering comprehensive insights into group structures and UBOs
• Facilitates compliance with regulatory requirements, especially anti-money laundering (AML) regulations
• Streamlines risk management processes by speeding up compliance and risk assessment procedures

Unlock Efficiency and Compliance: Transform Your Onboarding Processes with Red Flag Alert 

Don't let traditional platforms hinder your compliance efforts or deter clients due to lengthy onboarding processes. Instead, embrace the transformative solution offered by Red Flag Alert for unparalleled benefits in navigating complex company structures effectively and efficiently. 

With advanced algorithms, real-time updates, intuitive visualisation tools, and customisable reporting features, we work to provide informed decision-making, bolster risk mitigation efforts, ensure compliance, and smoother onboarding. 

Have peace of mind across the board and streamline your risk management processes today with your free trial of our award-winning services.