Ultimate beneficial ownership refers to an entity or an individual who benefits directly from a company, although the entity is not the formal company owner. The UBO can exercise ultimate control of the Company and influence some of the business decisions.

However, the ultimate control is exercised through a chain of the Company’s ownership.

In other words, the UBO does not have direct control of the business entity but only provides a means of control.

Conversely, the ultimate beneficial owner of a company can be described as a person who has control of more than 25% of the shares of a company. This definition means that the UBO has voting rights in a registered company.

The definition also applies to beneficial ownership. A beneficial owner is an individual who enjoys specific ownership privileges of a company even though the Company is registered under the name of a different entity. A person who owns shares in a company is typically a beneficial owner.

Beneficial Owner and Ultimate Beneficial Owner. What’s the Difference?

There is no significant difference between a beneficial owner and an ultimate beneficial owner. Both entities have a stake in a company, although they don’t have direct control of the business.

They both enjoy the specific rights of a company in equity. However, a beneficial owner with more than 25% of the Company gains ultimate control of the Company.

Both the BO and UBO are eligible for the gains, profits, and privileges accruing to a company’s shares, but the UBO has a higher return. The ultimate beneficial owner can also exercise significant over the Company.

Moreover, a UBO may also appoint or remove a member of a company’s board of directors.

Ways to Identify the Ultimate Beneficial Owner

Identifying the beneficial owner of a company can be quite a hassle, especially if there is a long chain of control.

Global regulations and legislations under the Money Laundering Directive (opens in a new tab) (MLD) require financial institutions to identify and verify the identities of UBOs. Companies that conduct business transactions with more than one financial institution, organization, business organizations, and trusts, or individuals, are subjected to a compulsory UBO check.

Identifying the UBOs of a company or trust involves checking all parties that are with the Company.

These parties include but are not limited to:

Company trustees
Protectors
Nominees
Beneficiaries, both direct and indirect
All entities exercising effective control of the Company

All these parties are identified as beneficial owners even though they don’t exercise any control rights of the Company. Contrarily, identifying a company’s BOs can be quite tricky, given the complex and almost endless chain of hierarchy.

Having an understanding of ownership principles will help determine the beneficial owners of a company.

Here are some of the ownership principles.

Direct and Indirect Ownership
Beneficial and Perceived Ownership
Ultimate ownership
Shareholding
Company Tree Diagrams
Corporate Group

Steps of Identifying a UBO

Gathering Company Data

Acquire the firms’ credentials to know more about their legitimacy. The Company should have a registry that houses information regarding the company information.

This information includes

Name of the Company
Registry number
Company address
Top management officials

The information provided will depend on the level of jurisdiction and fraud regulation.

Ownership Structure Research

This step involves researching more about the ownership chain of the Company in question. In this case, the natural or legal entities that have shares in the Company are identified. Checking of direct or indirect ownership then follows. After the company ownership structure is established, the ultimate beneficiary is singled out.

It takes intense follow-up, especially if the Company’s tree diagram is sophisticated. The ultimate beneficiary is arrived at through checking of the total shares and management control of every entity interested in the Company.

Performing a Know Your Customer (KYC) Check

Know Your Customer is the process of validating the identity of entities for risk assessment and maintaining a business relationship.

Checking the BO through Know Your Customer (opens in a new tab) (KYC) will determine the registered ultimate beneficiary. All beneficial owners have to be processed, and their identities established along with other personal information.

KYC process helps to identify all individuals that are associated or who have an interest in a particular company. Conversely, most financial institutions have to know their customers’ policies, which enables them to collect personal data of their clients and partners. Companies that have exercised this process make it easy to identify their BOs.

Estimating Risks

Various beneficial owners fall into different risk categories. These risk categories will range from low to high and have different approaches.

These risk categories are:

Low Risk: It is easier to obtain low-risk UBO information by asking the UBO to confirm the identity and signing a credible document with all information.

High Risk: High-risk UBO may be involved in financial crimes such as money laundering. This risk level will require a more sophisticated approach and further investigations done.

Sources of BO Information

It may be quite hard to access information regarding a company’s owners and business partners. However, there are a few sources where members of the public or interested parties may access a company’s ownership information.

These sources are:

Registry

Some directives require companies to provide a registry of their owners. These registries can be made available to the public and can be used to determine ownership. The records require constant updates with relevant information on beneficial ownership.

The benefits of using a registry include:

Providing a single query point for authorized parties.
Ease of access by requesting entities.
High ability to identify particular holdings with a specific individual or entity.

These central registries can be accessed online through the right jurisdiction and authorization.

Company Database

The company database would make a good source of information on beneficial owners. The reason for this is because most companies are under the jurisdiction to collect and maintain information on the beneficial owners. The data is made available on request. There are penalties for companies that fail to provide information about their UBOs. BOs that fail to provide their details or provide false information to the company registry are subject to harsh penalties.

Anti-Money Laundering Mechanisms

Some financial institutions will collect information about their customer and access the risk factor associated with the client. This process is vital in identifying the UBO and more information regarding the beneficial owners.

Public Database

There is information that is accessible by the public regarding a company’s beneficial owners and their stake in the Company.

Tax Authorities’ Database

The tax authority may also collect information about a company and its beneficiary owners. It may happen during the registration of tax compliance or filing of returns. Tax reports may be resourceful for acquiring BO information by the necessary authorities.

Comparison of the Top 5 Offshore jurisdictions

When is Identification of Ultimate Beneficial Owners Needed?

Specific cases will call for the identification and verification of BOs. These cases include:

Money Laundering

It is the process of passing illegally obtained money through a series of commercial transactions to conceal its origin.

There are three stages involved in money laundering.

Placement; This is the movement of money from its origin. The money is then placed into central circulation through banks, casinos, shops, or through other companies.
Layering; This process involves the efforts of concealing the money trace or activity through converting the cash into money instruments such as money orders. It is achievable through purchasing and selling of assets purchased with the illegal money.
Integration; The laundered money is then moved into the economy through the banks as legit money from ordinary business transactions. The proceeds from the sold property make the deal look clean and untraceable.

Terrorism Financing

Terror groups acquire funds through companies that disguised as legit businesses. If a company is in suspicion of funding terrorism, then extensive due diligence is carried out to determine the BOs of the Company.

Sanctioned Trades

A company may be barred from conducting business with sanctioned foreigners. The list of BOs may be demanded if the Company is under suspicion of transacting with an entity that belongs to or controlled by a foreign government.

Tax Evasion

A call to identify the beneficial owners of a company will be implemented in suspicion of tax evasion. Top management officials will be identified and face charges for tax compliance.

Benefits of Identifying UBO

It helps financial institutions to screen all clients against Politically Exposed Persons. This move ensures that entities are not associated with transacting with third parties controlled by foreign powers.
Through mechanisms such as Anti-Money Laundering Mechanisms, it is possible to identify the beneficial owners of entities that are behind funding terrorist groups.
BO compliance has enabled the financial institution to curb money laundering from the proceeds of drug trafficking and other crimes.
Money laundering amounts to about 5% of global GDP, thus posing a threat to economic stability. Identifying the BOs of companies involved in money laundering does justice to the economy.

Challenges of Identifying Ultimate Beneficial Owners

Several challenges make it hard for financial institutions or interested parties to access beneficial owner information.

These challenges include:

Lack of updated and new company ownership information. Registries that hold company details regarding ownership are rarely updated regardless of changes made in company ownership.
The company ownership structure may be too complicated, especially if it involves ownership through natural and legal arrangements.
Some jurisdictions make certain personal information on BOs protected, and it takes special clearance or situations for the information to be made available.
Financial institutions may find it difficult to detect changes in profiles or suspicious activities due to complex structures and jurisdictions.
It may be hard to detect changes in a company where there is a smooth transfer of ownership.
Companies with multiple ownership structures increase the number of entities to be verified.
verification of ownership is difficult due to a lack of standard documentation to back the findings.
Offshore accounts make it almost impossible to collect financial data.
Lack of adequate or qualified staff to carry out an in-depth analysis of a company’s sophisticated ownership structure.
False information on account holders’ details in the ultimate beneficial ownership declaration.

Why Identifying UBOs is a Bad Idea

Identification and verification of UBO have a more positive approach. However, there is also a chance that beneficial ownership information or access to it may bring about negative impacts. First, BO information may be used for criminal purposes.

Here is why the identification of BOs may not be such a good idea after all.

Corruption of the Overall Register

Making companies to follow directives that make it mandatory to fill information on beneficial ownership can make it hard for the Company to track changes. Changes may happen, especially in companies with complex structures and unknown to some company representatives. In turn, this transfer of ownership and mandatory filing makes it difficult for the identification of owners and unreliable registry information.

Granting Registry Access

The registry may be open to the public or access granted to parties such as

Competent authorities
Compliant with carrying out customer due diligence
Persons with legitimate company interest

However, the directive may be quite unclear on persons with legitimate interests.

Does it mean that anyone with a legit company interest can have access to the BO registry?

Transparency Exemption

Without the right guidelines to determine exemption cases, the registry could be open to abuse. BOs may be at risk of fraud or kidnapping due to exposure. The directives should provide guidelines that limit access to the registry and cement various access protocols.

Addressing Bearer Shares

Imposing an obligation for companies to provide information on BOs would apply to all shareholders, including any holders or bearer shares.

This directive will give the Company registrars a hard time tracking down holders of bearer shares who want to remain anonymous.

How to Improve UBO Identification and Verification

There are jurisdiction lines that have made identification of various ownership entities hard and hinder the efforts to find out those running shady companies.

Multiple approaches can be adapted to improve the identification of the beneficial owners of suspicious business entities. Here are some of the strategies that can be employed to enhance UBO identification and validation.

Robotic Process Automation

Automation accesses various data silos and saves the data in one location. This process results in improved UBO profiling of politically exposed persons and financial misconduct.

The robotic process automation (RPA) will enhance cost efficiency by reducing time wasted on redundant tasks. The central storage will allow easy data analysis and provide information used in making informative decisions. RPA helps companies to take control of their compliance by implementing the right BO identification procedures.

Updating Registries

For accurate BO information, companies need to update the management database frequently. Updating company registries will ensure that the information on the Company’s structure is reliable and precise. In case of any transfer of rights or ownership, the record should be updated for Anti-Money Laundering compliance and up-to-date ownership information.

Frequently Asked Questions

Can an ultimate beneficial owner be a company?

An ultimate beneficial owner is an entity or individual that controls 25% or more of a company’s shares or voting rights. So yes, a company can be a UBO if it meets the 25% threshold.

How Do You Find the Ultimate Beneficial Owner?

Several approaches are taken in identifying the BO of a business entity. This process includes looking for the Company’s information, researching the ownership chain, and singling out the ultimate beneficial owner.

Finding the BO of a company with multilayered management or ownership structure will prove to be a challenge.

Why Is It Essential to Identify the Ultimate Beneficial Owners of a Client?

The key reason for identifying and validating the BOs of a company is to make sure the Company complies with Anti-Money Laundering Directives.
Identifying the BO of a client will ensure that businesses do not transact with sanctioned companies that belong to or associated with the BOs. Identifying the UBO of a client will help in the calculation of the risk factor associated with negotiating with the client in question.
Identifying the BOs of clients will help businesses to stay on the safe side of being involved in money laundering or financing terrorism. It also ensures that clients are not politically exposed persons.

Why is UBO Important?

It helps most companies to stay in the line of Anti-Money Laundering compliance. With UBO, it is possible to determine the identities behind the ownership of companies linked to financial crimes.
Conversely, UBO makes it possible to determine the face behind a company before transacting. Business entities that belong to anonymous UBOs are red flags and should undergo screening for financing terrorism or laundering money.
Beneficial ownership sheds light on the fight against tax evasion. A lot of money gets lost to tax evasion, and thus, identifying UBOs associated with tax-evading companies will help to improve the economic sector.

What is Ultimate Beneficial Owner (UBO)?