Your Guide to Ultimate Beneficial Owners (UBO) Regulations

Last year, many financial institutions were most concerned about beneficial ownership regulations. That's unlikely to change this year, given that the regulatory burden has only increased.

To help you stay on top of the regulations, we have analyzed the latest changes. If you're a compliance veteran — the kind whose office jokes include punch lines with FATF in them  — then "section 1" is just for you, with all the latest updates on ultimate beneficial ownership (UBO).

But if you're clueless about this stuff and mistake FATF for a swear word, then we have you covered too! Just scroll down to "section 2" below and learn all the basics of ultimate beneficial ownership.

Section 1 — What's New in Beneficial Ownership Regulations?

What can you expect in 2023? We'll first look into a couple of key factors driving the regulatory changes this year before diving into the changes.

Factors That Will Impact Your Compliance

We present a few key factors that have led to new rulemaking or new situations that may affect your compliance and risk management:

• The Russia-Ukraine conflict: The conflict is expected to continue in 2023. After attempts to evade sanctions, regulators in the U.S. and Europe tightened the reins. If you have customers or vendors in Russia, update your due diligence and risk strategies.
• Manufacturing supply chains: Political upheavals have led to manufacturing supply chains moving to other countries, sometimes through local partnerships. Include such foreign legal person partnerships in your beneficial ownership due diligence.
• Cryptocurrencies: To close some tax evasion loopholes, the OECD brought crypto-assets under the common reporting standard that includes beneficial ownership reporting.

So watch out if you, or your customer, is in any of these industries tied to the above factors:

• Oil, gas, and petroleum products
• Agribusiness involving wheat
• Any manufacturing that uses iron, aluminum, or copper
• Electronics and consumer devices
• Financial institutions like banks
• Financial services like insurance companies or investment advisers
• Cryptocurrency services

What's New in FATF Beneficial Ownership Guidance?

Here are the developments in the Financial Action Task Force's (FATF) recommendations related to beneficial ownership (BO).

In its March 2022 amendments to Recommendation 24 on BO, FATF wants the following from companies:

• Report accurate and up-to-date BO information to your country's nationwide registry, regulated financial institutions, and stock exchanges.
• Be ready for independent verification of your BO information by your regulators.
• Follow a risk-based approach for all legal persons.
• If you participate in public procurement, you must provide BO.
• If you issue bearer shares or have nominee arrangements, expect more scrutiny.

Plus, FATF's October 2022 "grey list" of countries under increased monitoring now includes the Cayman Islands, Philippines, Türkiye, and the United Arab Emirates — all with considerable U.S. business interests. FATF wants them to improve their beneficial ownership reporting. Do you have customers, partners, or branches in these countries? Then bump up their risk levels in your customer due diligence (CDD) and third-party risk management (TPRM).

What's New in U.S. Beneficial Ownership Regulations?

2022 saw the following regulatory changes, some of them sparked by the factors we've already seen, like FATF updates and the Russian situation.

1. FinCEN's Final Rule

The biggest development is the final rule implementing the Corporate Transparency Act's (CTA) beneficial ownership information (BOI) reporting requirements.

It aims to "prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States." It comes into force on January 1, 2024, giving you a year to prepare and one more to file your initial report with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN).

Is your company exempt? The final rule's large set of 23 exemptions makes for an interesting list. You're probably exempt if you're already filing similar information under other acts.

But if you aren't exempt, here are some beneficial ownership requirements you must know:

• Report if you're a domestic U.S. company: Unless exempted, you must file your ownership information even if you're a small business. You’re a domestic reporting company if you're a corporation, a limited liability company (LLC), or any entity created by filing a document with a secretary of state or any similar office in a U.S. state or tribal jurisdiction.
• Report if you're a foreign-registered company: A foreign reporting company is a corporation, LLC, or any entity formed under the law of a foreign country and is registered for business in any U.S. state or tribal jurisdiction.
• Report your ultimate beneficial owners: You must identify your ultimate beneficial owners. That's anyone who has substantial control or owns or controls at least 25% of your ownership interests. For each UBO, report their name, date of birth, address, and taxpayer identification number (if available). Also provide an acceptable identification document with its photo, unique identifying number, and issuing jurisdiction.
• Report your company applicants: These are the persons who register your company and the persons who direct or control them. Report the same four pieces of identifying information for them as above, but only if your company's registered after January 1, 2024.

FinCEN will hold all this information in a non-public registry called the beneficial ownership secure system.

2. CDD Final Rule

Another major regulation covering beneficial ownership is the customer due diligence final rule for the Bank Secrecy Act. 

This applies to you if you're a covered financial institution like a U.S. mutual fund, bank, securities broker-dealer, futures merchant, or commodities broker. 

If you are, you must verify the identities of the natural persons who are beneficial owners of your legal entity customers. Make sure to read the August 2020 guidance.

What's New in European Union Beneficial Ownership Regulations?

The 6th anti-money laundering directive (6AMLD) directs all EU member states to criminalize the concealment of ultimate beneficial ownership under multiple layers of ownership. Like FinCEN's final rule, it differentiates between ownership versus control and expects the details on both.

One of the biggest reforms it attempted was making UBO registers public so that anyone with a  public interest can access UBO details, including journalists and civil society organizations involved in investigating, preventing, or combating money laundering and terror financing. However, as of November 2022, a court has put this facility on hold over privacy concerns. New legislation that accounts for privacy aspects may pass this year.

6AMLD also imposes due diligence on the entire crypto ecosystem.

Want Help With Staying Compliant?

The above covers the major regulatory changes and factors going into 2023. The next section explains basic concepts that you can safely skip if you're a compliance veteran. But we recommend scrolling down to the last section to find out how Certa can help your business stay on top of these changes.

Section 2 — Basics and Background of Beneficial Ownership Regulations

If you're new to ownership concepts and regulations, the following sections are for you.

What Is UBO?

The Financial Action Task Force (FATF) defines ultimate beneficial owners as the natural persons — i.e., humans as opposed to legal persons like companies — who ultimately own or control a customer or on whose behalf financial transactions are being conducted.

Ultimate beneficial ownership is different from legal ownership and control. Legal ownership may be natural persons or legal entities (i.e., companies) who create or register a business. However, the profits or other benefits may accrue to a different set of persons who are in ultimate effective control of the legal owners or legal arrangements. Such an ultimate beneficiary is called an ultimate beneficial owner.

The significant control that characterizes UBO may be exercised through a variety of tricks:

• Holding a controlling equity interest
• Using different types of entities like shell companies or holding companies
• Setting up complex corporate structures with multiple layers of ownership
• Controlling or influencing corporate directors, nominee directors, or boards
• Having power of attorney over the company
• Using an investment company
• Having influence over a majority of voting rights
• Using subsidiaries or partnerships
• Exercising control through company's bank accounts

Why Is Knowing UBO Important?

UBO is often a vehicle for a variety of financial crimes. Criminals obfuscate ownership structures to escape scrutiny by law enforcement agencies. Typical criminal activities where UBO is prevalent include:

• White-collar financial crimes like money laundering and tax evasion
• Laundering the proceeds from illicit activities like the narcotics trade and arms trade
• Terrorism financing

For anti-money laundering (AML) and controlling terrorist financing (CTF/CFT), regulators insist that companies report their beneficial ownership interests and do customer due diligence.

Overview of FATF Beneficial Ownership Guidance

The gold standard for these regulations is the FATF's guidance on beneficial ownership. FATF publishes recommendations and safeguards after wide consultations. These are adopted by its member states through laws that impose regulatory requirements in their respective countries.

FATF's recommendation 24 covers beneficial ownership of legal persons while recommendation 25 does the same for legal arrangements.

FATF is not a passive body. It actively monitors AML compliance and CFT by its members. Any non-conforming member or non-member state is sanctioned to enforce regulatory compliance. For example, a country on FATF's sanctioned list can't get loans from institutions like the International Monetary Fund (IMF).

Overview of U.S. Beneficial Ownership Regulations

The U.S. has several acts, broadly guided by FATF recommendations, for beneficial ownership compliance in different areas of governance:

• The Bank Secrecy Act: This law requires covered financial institutions to maintain records and file reports.
• The USA PATRIOT Act: This law includes provisions to combat money laundering and terror financing.
• The Beneficial Ownership Rule: This rule is by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. government's Department of Treasury. The rule requires some financial institutions to obtain, verify, and retain information about the beneficial owners of legal entity customers.
• The Corporate Transparency Act: This act requires companies to disclose the identity of their beneficial owners to FinCEN at the time of their formation and update the information periodically. It aims to prevent shady practices like using non-U.S. shell companies for illicit activities.
• The Foreign Account Tax Compliance Act: This law requires foreign financial institutions to report information about accounts held by U.S. taxpayers to the Internal Revenue Service to help combat tax evasion.
• The Customer Due Diligence rule: This FinCEN rule requires financial institutions to identify and verify the identity of their customers.
• The Securities Exchange Act: This act requires any entity involved in securities to file beneficial ownership information with the Securities and Exchange Commission.

An Introduction to EU UBO Regulations

Similarly, the European Union (EU) has several regulations guided by FATF recommendations. A few important ones:

• The Fourth Anti-Money Laundering Directive (4AMLD): This requires EU member states to identify and verify the identities of beneficial owners of companies and other corporate entities.
• The Fifth Anti-Money Laundering Directive (5AMLD): This strengthens 4AMLD and introduces central registers of beneficial ownership information.
• The Sixth Anti-Money Laundering Directive (6AMLD): This closes some loopholes in 5AMLD and covers crypto assets.
• The EU Anti-Tax Avoidance Directive: It prevents the use of companies and other legal entities for tax evasion, through measures like identifying beneficial owners.

5 Due Diligence Best Practices

To ensure compliance with beneficial ownership regulations, you must follow due diligence best practices for all your business relationships, whether with customers or third-party vendors and suppliers.

1. Know Your Customers (KYC)

KYC covers several strategies like customer due diligence and transaction monitoring among others. When onboarding a customer, verify their beneficial ownership details. Once onboarded, monitor their transactions if you're a financial institution and file suspicious activity reports with government regulators.

2. Identify High-Risk Industries

Some industries are known to be more vulnerable to money laundering, tax evasion, or terrorism financing. Real estate, gambling, cryptocurrency services, and art and luxury goods are well-known examples. However, more "innocent" industries like law firms, accounting firms, or non-profit organizations may also be vulnerable or sometimes even complicit.

3. Risk-Based Assessments

Assess the risk of shady UBO practices for all stakeholders like customers, suppliers, and vendors. Apply different risk levels based on their country and industry. Make use of sanctions lists published by governments to inform your risk levels. If ownership points to politically exposed persons (PEP), bump up that entity's risk.

4. Adverse Media

Local news media are often the best sources of information about the true nature of ownership. Use web and news search engines to look for adverse media reports on a company or PEP.

5. UBO Screening

Use third-party services and public registries to conduct UBO checks on your customers or suppliers during your compliance process.