Money laundering has always been a very important issue for world institutions. States from all over the Planet have, in fact, been subject to various anti-money laundering directives since the early nineties.

The objective of these directives has always been to establish clear requirements for the level at which countries combat money laundering and its underlying crimes, such as drug trafficking, human trafficking, corruption, bribery, and others.

After 30 years of the First Directive in Europe, we still find ourselves tirelessly fighting against this international problem.

And watch out: although the directives have evolved over time, introducing new requirements and increasing the types of entities that must adhere to them, a key element remains a major weak point for both governments and corporate entities: the discovery of the Final Beneficiary or Ultimate Beneficial Owner.

For this reason, today we want to talk to you about this figure and how you can identify it.

Who is an Ultimate Beneficial Owner (UBO)?

These terms refer to the person or group of people who ultimately own, control, or benefit from a company or organization. This includes those who directly hold a majority stake in the company, as well as those who exercise significant control over the organization’s business or financial decisions.

Identifying the UBO is important for several purposes, including the prevention of financial crimes, compliance with anti-money laundering and terrorist financing laws and regulations, business transparency, and tax fairness. It can also be important for determining a company’s legal liability in certain situations.

This identification can be complicated, especially in cases of companies with complex structures or in situations where the shareholders and managers of the company are not clear. However, it is a crucial part of due diligence for many business transactions, including mergers and acquisitions, foreign investment, and financing.

How can UBOs be verified?

The procedure for verifying UBOs can be divided into two main steps.

1. Verification of the company – KYB

To verify the legitimacy of a company and the accuracy of its records, it is necessary to collect complete and up-to-date information about its registration number, name, address, official status, and senior management employees. The required information may vary depending on the jurisdiction and fraud regulation norms. Generally, the following information should be collected:

  • Registration number
  • Name
  • Address
  • Type
  • List of senior executives

The information provided must be verified using reliable documents or data, or a combination of both.

2. Verification of UBOs – through the KYC process

A company must know not only the total percentage of shares but also the ownership stake or possible indirect control of each individual and calculate if any of them falls under the definition of UBO.

All individuals considered UBOs must undergo a KYC check.

When did the UBO become a requirement for Europe and what is its history?

The creation of the first Anti-Money Laundering Directive marked the recognition that international and cross-border collaboration would be necessary to effectively combat money laundering. In other words: it’s not enough to let nations tackle these problems individually. For this reason, there is more global regulation.

The Fourth Anti-Money Laundering Directive of the European Union (4AMLD) was the first to establish requirements for Member States regarding the type and level of information they must collect about the beneficial owners of entities.

It was established that obligated entities had to obtain and retain “adequate, accurate, and current” information about their beneficial owners, and this information had to be accessible through interconnected central registers.

In July 2018, the Fifth Anti-Money Laundering Directive was introduced. This directive incorporated new requirements for UBO transparency, while reinforcing what was originally outlined in 4AMLD.

Furthermore, in January 2020, the European Commission presented an Action Plan that set out various measures for the following year with the aim of improving compliance, supervision, and coordination of these rules.

In November 2020, the Council adopted conclusions on combating money laundering and terrorist financing and proposed:

  • A single regulatory code that harmonizes EU rules.
  • An EU supervisor with the authority to exercise direct supervision.
  • A coordination and support mechanism for national financial intelligence units.

Equally, there are some issues in this regard. For example, several countries have established registration requirements that restrict access by nationality. Some use payment barriers. In many cases, the way countries have chosen (or not) to create their registers of non-listed companies limits the ability of the public and foreign authorities to search and find information about the true ownership of companies, which directly opposes the spirit of the anti-money laundering directives.

And, as expected, there are also inconsistencies in the type and format in which data is collected, adding additional difficulties for those who need to obtain and understand the ownership information.

In summary, if your entity is required to operate throughout Europe, identifying beneficial owners is a fundamental part of its compliance requirements.

If the information from beneficial owner registers is difficult to find or even impossible to access, critical elements of your compliance work against money laundering are lost. This puts your organization and yourself, if you are a director or officer of such a company, at risk of costly regulatory fines and permanent damage to your reputation.

Why is it important to identify UBOs?

It’s important to identify the Ultimate Beneficial Owners of a company or entity because it allows for understanding who the physical persons are that have effective control over it and benefit from its economic activities.

This information is crucial for preventing and combating money laundering and terrorist financing, as it helps identify the true owners of a company and detect any suspicious activity that might be related to these crimes.

What are the consequences of non-compliance with UBO regulations?

Non-compliance with UBO regulations can result in severe legal and financial consequences for the companies and individuals involved. Among the most common penalties are economic fines, revocation of licenses or authorizations, restrictions on doing business or contracting with the state, and in extreme cases, imprisonment.

Furthermore, non-compliance with the regulations can generate a negative reputation for the company and affect its credibility with customers and the market in general. Therefore, it’s essential for companies to ensure they comply with legal obligations regarding UBO identification to avoid potential adverse consequences.

In other words, these are the most problematic consequences:

  • Economic Sanctions: Companies that do not comply with UBO regulations can face economic sanctions from competent authorities.
  • Loss of Reputation: Non-compliance with UBO obligations can negatively affect the image and reputation of the company, which can have a negative impact on its relationship with its customers, suppliers, and collaborators.
  • Disqualification of Legal Representatives: In some cases, legal representatives of the company who do not comply with UBO obligations can be disqualified from holding similar positions in the future.
  • Legal Actions: Companies that do not comply with UBO regulations may be subject to legal actions by shareholders, investors, or affected third parties.

How can we help you?

If you need to implement a KYB process to comply with regulations, avoid sanctions, and to know and verify your clients, you’re in the right place: at Silt, we offer you a secure and fast automated KYB process.

Want more information? Do not hesitate to contact us.And book our free demo.