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Several terms and jargon are used repeatedly when we talk about Anti-money laundering laws and their various requirements and components. One of them is UBO, Ultimate Beneficial Owner for AML compliance. Let’s discuss the beneficial ownership for AML/ KYC compliance.
Cases of financial crimes, money laundering, and criminal and terrorist financing are increasing day by day. Also, criminals are misusing the advancement in technology and using it to evade government scrutiny. So, it has become vital more than ever now to identify the beneficial ownership of business customers, promoters, shareholders, and other stakeholders to get a clear picture of the identity of all the people and entities involved in the business relationship.
Global AML regulations require financial institutions to know who they are doing business with and the beneficial ownership status. They need to know the risk of the customers they are associated with. There are several queries of the compliance department- the answers to which will help them comply with the AML rules better.
A beneficial owner can be described as a person who is the owner of a business – a legal entity or controls it. Knowing the legal entity and the person who manages the company, who is likely to get the maximum benefit associated with the financial institution and other legal entities, should be known. It will help correctly assess the customer risk of associating with the particular business. Knowing the ultimate beneficial ownership will allow the compliance officials to comply with the Anti-money laundering laws and rules. The best way to assess the business risk is to know the person’s identity who will benefit the most from the business relationship.
As per the FATF -Financial Action Task Force (FATF), the ultimate beneficial owner or the natural person(s) is who ultimately own(s) or control(s) and refers to a customer- a natural person on whose behalf transactions are carried out. The FATF also says that the ultimate beneficial owner (UBO) includes people who have ultimate effective control over a legal person or arrangement.
Customer Due Diligence (CDD) is an essential part of the KYC process that helps financial institutions and businesses identify money laundering and mitigate the risks associated with illicit money. There are two components in the CDD- the first is to learn about the customer identity, and the second is to risk assessment of money laundering.
Its important to continuously monitor customer activity. During customer onboarding, the documents submitted are verified. If there’s a massive change in the customer activities, then a thorough analysis of the source of the funds is carried out, and the risk is assessed. After the process, EDD- Enhanced Due Diligence is followed if there is a substantial reason for further investigation. Additional information is collected to get an in-depth understanding of the customer activities.
There are legal requirements that have to be fulfilled to follow the process of EDD- whether the business has PEPs- Politically Exposed Persons or is operational in high-risk third countries.
Several sectors require an in-depth understanding of the money laundering risk. Associating with such businesses requires EDD- Enhanced Due Diligence. If the customers cross the threshold of the transaction limit, then it is necessary to conduct the EDD process. It is essential to know the requirements that need to be fulfilled by the particular local jurisdictions. Such due diligence will help companies get a clear picture of the risk of associating with a business.
KYC refers to Know Your Customer, a primary and legal requirement that financial institutions and other regulated entities must follow and strictly perform the CDD- Customer Due Diligence process. However, it’s important to note that each country’s KYC laws are different. Still, the basic rules are the same such as collecting the customer information to identify and verify the customer identity. It helps in risk assessment and green light the onboarding process. The main objective is that the individual or the entity with whom the institution will establish a business relationship is legit, and the activities are not illegal.
An individual who is likely to be classified as UBO is subjected to the KYC process. Their identity is verified following the process mentioned in the KYC process.
AML is a popular term resonating in the financial industry for a long time. AML refers to the Anti-Money Laundering laws designed and developed to combat money laundering and terrorist financing. It identifies and prevents people from running the illegal funds into the legal system, which is used to finance all unlawful activities such as the trade of illicit drugs, human trafficking, extortion, kidnapping, tax evasion, and funding of terrorist activities.
The AML laws help prevent this illegal money from entering the legal system as the authorities are equipped with a robust framework to identify criminal activities. The AML regulatory mechanism allows financial institutions and regulated entities to identify fraudulent accounts and transactions and prevent money laundering. They follow the KYC process, which helps correct risk assessment, closely monitor transactions regularly, and report suspicious transactions to the concerned authorities.
KYC for individuals and KYC for Corporates is equally vital. It helps identify the ultimate beneficial ownership of people involved in the business who want to associate with a financial institution. The process also includes an assessment of the business accounts. In this way, the institutions can differentiate between genuine companies, stakeholders, and shell companies.
All the processes involved in AML compliance require financial institutions to follow the AML rules. Financial Institutions include banks, insurance, investment companies, brokerages, money transfer firms, payment services, marketplaces, and gaming companies.
Money launderers are using new ways to launder money, and therefore the government has extended the scope of the AML laws to other companies.
Financial Institutions need to follow the recommended processes to collect information about the UBO. Financial institutions seek documents and other essential information during the customer onboarding process. The details include the business’s name, the place of operation, the nature of the business, registration number, etc.
The objective is to gather all the relevant information about the ownership of the business and know who’s in control of the company. If there has been a significant change in the account or transaction activities, collecting beneficial ownership information is necessary. It will identify who benefits the most from the association.
The UBO is defined as a
AML laws are becoming stricter and financial institutions and other regulated entities will have to adopt a comprehensive AML/ CFT framework to avoid non-compliance. The strictness results from the rising money laundering cases and high-profile cases that have come into the public domain. Such cases question the integrity of the financial institution, other entities, and the government, which is expected to take strict actions to combat money laundering and financing terrorism.
The best way to prepare for a challenging future for entities is to comply with strict laws and avoid non-compliance at all levels. Employing a proactive approach to UBO, KYC, CDD, and EDD should be the way forward to be AML compliant.
Relying on professional AML consultants would be the best idea. Their comprehensive range of services, such as in-house AML compliance department set up, AML training, AML software selection, and AML/CFT Health check, are some of the measures businesses need to adopt and implement to stay AML compliant and avoid penalties.
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