Money laundering and terrorist financing are increasing in this digital world, and financial organizations are the front runners of these scams. International and national watchdogs set up AML/CFT regulations to safeguard them from these bad actors. Compliance with these obligations protects companies from financial crimes and enhances their reputations. Without verifying UBOs of the business, financial organizations can not beat these scammers. This article is a brief note about what UBO verification is and why it is essential.
Explanation and Importance of UBO Screening in Financial Structure
UBO is a short-term for the ultimate beneficial owner of the company. All the shareholders who own 25% of the company owner’s interest and have the right to make decisions and vote against the strategies are the UBO of that business. This definition is the standard set by the international law enforcement agency Financial Action Task Force (FATF). The FATF also urged all the member states to verify UBOs and monitor their real-time activities. Moreover, report any suspicious activities in national law enforcement action to prevent illicit gain. This will assist financial institutions in collaborating against bad actors and safeguarding the integrity of the global economy.
UBO verification plays a significant role in preventing money laundering and terrorist financing. Understanding the company ownership structure helps them to comply with international regulations. Financial institutes can verify the company’s real owners and make accurate decisions after UBO screening. They in-depth overview of who is in-real getting the benefit from their services and the end source of the funding.
Difference between UBO, Legal Owner and Shareholders
To find out who UBO is, it is essential for the financial institutes to first differ between the terms of business owners. Specifically when they are dealing with the company’s ownership structure. Most illegal businesses did not use transparent corporate structures; they made up complexity to hide their illegal gain. To unveil the complexity, let’s start with the terms;
UBO- The ultimate beneficial owners of the company, as explained before, are all the individuals who own 25% of the company interest. Whether they are the direct owner of the company by purchasing the shares or indirect links to the businesses from their ancestors are the UBOs. The different members of the family can own one company. They all can be UBOs of the family business if they have control over the company’s decisions and voting.
Legal Owners- the legal owner is the company’s hidden personality who benefits from the business revenue. The legal owner can be the UBO, or it might be another person. Sometimes, companies make dummy UBOs of the businesses, and they can hold the assets for the legal owners. To check this, it is a must for financial institutes to check the money trail of all UBOs.
Nominee Shareholders- these are used in the most complex business ownership structure, the LLC, where the UBOs nominate various shareholders who own the assets. It protects the UBO from law enforcement agencies and makes it challenging for financial institutes to unveil real owners. These shareholders use their legal documents to comply with regulations and protect the illegal personality behind the curtains.
Benefits of UBO Screening for Financial Institutes
Identifying the UBOs is essential for financial institutions in the fight against money laundering and terrorist financing. These assist them in raising a bar for financial criminals and prevent them from using their services for illicit gains. There are various advantages for financial organizations to uncover the complexity of the companies’ ownership structure. Due to its nature of unhiding the source of company funding and revealing the owner’s illicit activities. Given are some prominent benefits of UBO screening:
When the financial institutes know with whom they work, it enhances the corporate structure’s transparency. It provides a clear identity of the real owners without any shades between the company and financial organizations. Transparency also protects financial institutions from law enforcement agencies’ penalties. In any case, they can show all the legal transactions that happen through their services.
Mitigate Financial Crimes
As discussed earlier in this article, the UBO screening is the one-way for financial institutes to mitigate financial crimes. Various types of scams can happen because of technological advancement, from deep fakes to other latest innovations. Companies need machine learning and AI technology to protect them from these scams, which advancements in UBO screening can do.
Financial institutes must comply with rigid international and national regulations. That can only be possible by verifying UBO with adequate derivatives. Without UBO identification, financial institutions can not comply with the AML/CFT regulations. Failure to comply with these regulations will damage the company’s reputation and also expose them to law agencies’ penalties.