Holding the Line on Ultimate Beneficial Ownership

Financial institutions need to ensure that UBO information on customers is complete and accurate, but this is only half the battle, says Refinitiv’s Phillip Malcolm.

The misuse of legal structures for illicit activities has been the subject of intense global scrutiny since the release of the Panama Papers in April 2016 and the Paradise Papers in November 2017. Since then, the requirements around the identification of the UBOs (ultimate beneficial owners) of legal entities have moved up on the regulatory agenda, increasing the need for financial institutions to identify, verify and screen beneficial owners.

Prior to the leaks, the FATF (Financial Action Task Force) Recommendations had already set out obligations for financial institutions to identify beneficial owners, take reasonable steps to verify their identities, and understand the control structures of customers that legal persons (e.g. companies) and legal arrangements (e.g. trusts).

To address the challenges many jurisdictions experience in trying to ensure ownership transparency, last October the FATF released a best practice paper offering guidance on measures countries should consider to facilitate access to beneficial ownership and control information by financial institutions and other entities.

However, there remains a large gap between the best practices put forward by the FATF and market realities, and progress to enhance beneficial ownership transparency has been uneven, given that jurisdictions often have different methods for defining and recording ownership.

Closing the transparency gap

In the US, no state currently requires disclosure of beneficial owners to set up a company. In fact, most states do not even require information about the officers and directors who will be managing the company.

FinCEN’s CDD Rule was issued to address this vulnerability, requiring financial institutions to identify and verify the identities of UBOs of legal entity customers at the time of account opening and defined points thereafter. While the CDD Rule became fully enforceable in May 2018, it is “not a comprehensive solution to the problem”, according to the US Treasury Department.

Last month, the US Treasury issued its 2020 national strategy for combatting terrorist and other illicit financing, calling for legislative action to require the disclosure of beneficial ownership information at the time of company formation. This “gap” was cited as one of the principal reasons for the US’ “failing grade” on beneficial ownership transparency in its 2016 FATF mutual evaluation report.

In Asia, Hong Kong and Singapore require all companies to maintain an up-to-date list of their UBOs in the form of significant controllers. In Malaysia, companies are required to maintain basic ownership information, which is available to the public. Japan requires companies to declare UBOs upon establishment, but changes in beneficial ownership are not covered.

To try and address transparency gaps, and eventually become fully compliant with the FATF Recommendations, a number of Asian jurisdictions have also indicated they are exploring the possible introduction of public registers of beneficial owners – including Australia, New Zealand, Japan, Malaysia and Indonesia.

The introduction of public UBO registers in each member state was the EU’s direct response to the Panama Papers, forming part of the 5th Anti-Money Laundering Directive (5AMLD) which took effect on 10 January 2020. The previous directive – 4AMLD – did include a requirement to collect beneficial ownership information on companies and trusts, but it did not require this information to be made public.

Despite having two years lead time for compliance, the majority of EU member states either still do not have a centralised register of beneficial owners, or they have imposed registration requirements or other restrictions that inhibit full public access. According to campaigning group Global Witness, only six EU states – including the UK – have complied with the requirement so far.

A persistent stumbling block

“Although progress is being made in many jurisdictions, a persistent stumbling block is a lack of independent and reliable UBO data,” says Phillip Malcolm, Regional Performance Director for Asia Pacific at Refinitiv. “Countries that have a beneficial ownership register in place are better able to support enforcement action because of the enhanced access to ownership information.”

“But in many jurisdictions, especially where such registers are not present, authorities largely rely on banks and financial institutions to supply beneficial ownership information. In many cases this information is incomplete and inaccurate, ultimately hindering efforts to crack down on financial crime.”

According to Malcolm, financial institutions are not always taking that extra step of building into their systems a robust mechanism that consistently identifies UBOs during the customer onboarding process and monitors for changes once the customer relationship is established. This is despite a general awareness that financial crime is going unchecked at most institutions.

In a 2019 report, Refinitiv revealed that 72 percent of the 3,000 compliance professionals it surveyed were aware of financial crime in their global operations in the preceding year. Yet, the survey found that only 53 percent of respondents performed KYC checks on their clients. More concerning were findings that only 27 percent of respondents performed UBO checks. Of these, almost half indicated that their UBO checks were ultimately unsuccessful.

“One of the key challenges for financial institutions is that when they do perform UBO checks, they are relying on processes that are largely manual, time-consuming, and ultimately costly,” Malcolm says. “What firms need is the ability to have complete and reliable UBO data delivered directly into in-house systems. This can enable compliance teams to identify beneficial ownership quickly and easily.”

Even where information is maintained in public registers, and accessible, it can be difficult to aggregate and analyse that data without the right tools in place. Data aggregators like Refinitiv can help fill this gap, providing access to and analytics on up-to-date information sourced directly from corporate registries across multiple jurisdictions.

A complete view of risk

“Having access to reliable UBO data is only half the battle,” Malcolm says. “More than that, financial institutions also need to be able to screen the beneficial owners they identify against relevant lists to uncover links to financial crime.”

Good screening tools enable financial institutions to identify PEPs (politically exposed persons) and related persons, individuals or entities subject to sanctions globally, and other money laundering and terrorist financing risks.

In cases where UBO screening identifies potentially heightened risk, firms should perform EDD (enhanced due diligence) – which involves detailed background and reputation checks to form a more complete view of actual risk – before entering into a business relationship.

“Part of the EDD process is determining which data sources and additional research can be applied to mitigate potential risk,” Malcolm says. “An EDD team may first look at corporate registry documents, stock exchange disclosures, or financial reports. It’s worth noting that not all of these checks can be performed online, or even in person. And even when the data is available, it may not always be complete or accurate.”

The EDD process typically involves a team of specialised personnel who will perform activities such as adverse media checks, searches on company directors and associated parties, and checks on the client’s litigation and bankruptcy history, past regulatory breaches, potential conflicts of interest, political and criminal links, and possible reputational analysis.

These checks need to be performed against all the client’s name variations and aliases, including in local language media and internet searches. This requires a hands-on approach by a team of specialised personnel. In Refinitiv’s case, its EDD team comprises over 400 individuals, with people on the ground in all major markets to ensure local nuances and details are captured, even where information may be less reliable.

“Because EDD research is a largely manual process, firms should generally adopt a risk-based approach to determine which clients might require this extra step. But ultimately, you really want a clear and holistic view of potential risk early on in order to safeguard your reputation and comply with regulatory requirements,” Malcolm says.

“Timely access to this type of detailed intelligence can mean the difference between a good decision and a bad one.”

More information on UBO identification with Refinitiv Enhanced Due Diligence reports is available here.

This article was jointly produced by Regulation Asia and Refinitiv.

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