What is a UBO and How to Identify It

Business owners juggle a multitude of responsibilities, from managing finances to overseeing operations, and among these tasks lies the crucial duty of identifying and verifying Ultimate Beneficial Owners (UBOs). This step ensures greater accountability, avoids and prevents illegal activities such as money laundering, and helps businesses comply with regulations.

We’ll explore UBO’s meaning, different legal frameworks, importance, methods of identification, challenges, and best practices for compliance.

Meaning of UBO

Ultimate Beneficial Owner or UBO is the individual or entity who ultimately owns or controls a company, trust, or similar legal entity. These individuals hold significant influence or ownership interests, often exceeding 25% of shares or voting rights.

The real purpose of having a UBO in a business is to identify the individual(s) who ultimately benefit from and control the business, even if ownership is held through complex ownership structures or entities.

Essentially, disclosing UBOs helps maintain honesty in business dealings, fosters trust among those involved and encourages responsible corporate governance practices.

The Legal Framework Surrounding UBOs

Amidst a global surge in money laundering and terrorist financing activities, regulators worldwide are confronted with the pressing need to enact robust legislation targeting criminal Ultimate Beneficial Owners (UBOs).

UBO legislation plays a pivotal role in the legal framework, with jurisdictions worldwide implementing Anti-Money Laundering (AML) directives and regulations to mandate the disclosure of UBO information. For example, the European Union has implemented Anti-Money Laundering (AML) directives that mandate the identification and reporting of UBOs.

It is important to note that the meaning of UBO differs from country to country, and in certain jurisdictions they may be defined as a person holding at least 10% to 25% of the voting rights or shares in the underlying legal entity.

Identifying Ultimate Beneficial Owners (UBOs)

Despite its complexity, businesses are expected to pinpoint UBOs to ensure adherence to regulations and foster a culture of accountability and integrity within the company. Identifying Ultimate Beneficial Owners (UBOs) holds significant importance in combating financial crimes, particularly in preventing money laundering. By uncovering the individuals who ultimately control or benefit from a company’s operations, authorities can better trace and prevent illicit financial activities.

Criteria for Determining a UBO

Typically, individuals with ownership stakes exceeding 25% are categorized as UBOs, although this threshold may vary depending on regulatory requirements. Additionally, those who wield substantial influence or control over decision-making processes, irrespective of their ownership percentage, may also qualify as UBOs.

Other criteria include indirect ownership, economic interest, trusts/nominee arrangements, control through contracts, and family relationships. This comprehensive evaluation ensures transparency, compliance, and accountability in identifying UBOs. By adhering to these criteria, organizations can ensure transparency and accountability, aligning with regulatory mandates and mitigating the risk of illicit activities.

The Process of Identifying UBOs

To identify Ultimate Beneficial Owners (UBOs) within organizations the process typically begins with thorough due diligence to identify shareholders, partners, or trustees with substantial ownership stakes or decision-making authority.

Here’s a step-by-step guide:

1. Acquisition of Credentials: Request credential data from the company. This data includes names, addresses, registration numbers, and information on management and other key personnel.
2. Research into Chain of Ownership: Conduct research to uncover all individuals, both legal and natural persons, who have shares or interests in the organization. Determine whether they hold direct or indirect ownership of the business.
3. Identification of Ultimate Beneficiary: Once the chain of ownership is established, identify and verify the Ultimate Beneficial Owner (UBO). Gather data on the percentage of shares they own, their ownership stake, and the extent of their management control over the business.
4. KYC and AML Compliance Check: Finally, subject the identified UBOs to a series of checks, including Anti-Money Laundering (AML) and Know Your Customer (KYC) checks. These checks help ensure compliance with regulatory requirements and mitigate the risk of financial crimes.

Challenges in UBO Verification

UBO verification isn’t always simple – it can be a time-consuming process if you aren’t aware of the challenges that lie ahead. Here are some ways UBO verification can cause a few hurdles for your team!

Complexity of Ownership Structures

Despite the critical importance of Ultimate Beneficial Owner (UBO) identification, numerous challenges persist in verifying ultimate ownership. Identifying who really owns a company, the Ultimate Beneficial Owner (UBO), can be hard because ownership structures can be extremely complicated, especially in larger companies. With several layers of ownership, it’s like trying to find your way through a maze without a map, making it hard for regulators to figure out who’s actually in charge.

This confusion not only makes it difficult to catch financial “bad guys” but also makes it hard for people to know who is really in control.

Evolving Legal Definitions and Standards

Legal definitions and standards for Ultimate Beneficial Owners (UBOs) are constantly changing in different places, making it harder to verify them. Because of these differences, businesses dealing with multiple jurisdictions face challenges in identifying UBOs consistently. To address this, businesses must implement strong compliance measures and thorough verification practices to accurately identify UBOs.

Best Practices for UBO Compliance

As mentioned before, the process of determining UBOs can be tricky – and UBO compliance follows the same suit. It is imperative that companies follow KYC procedures to ensure compliance is practiced correctly, or your company could be at risk of losing millions.

Implementing Effective KYC Procedures

Businesses should follow best practices to identify and verify Ultimate Beneficial Owners (UBOs) efficiently. One crucial step is implementing strong Know Your Customer (KYC) procedures. By thoroughly researching customers and counterparties, businesses can discover the real beneficial owners and meet regulatory standards.

1. Customer Identification: The first step in KYC procedures involves collecting basic information about the customer, including their name, address, and identification documents such as government-issued IDs or passports. For businesses, this also entails gathering details about the legal entity, such as registration documents and articles of incorporation.
2. Ownership Structure Assessment: Businesses need to delve deeper into the ownership structure of their customers to determine the ultimate beneficial owners. This involves identifying individuals or entities that directly or indirectly own or control a significant portion of the customer entity.
3. Beneficial Ownership Verification: Once the ownership structure is identified, businesses must verify the identity of the ultimate beneficial owners. This may require collecting additional documentation, conducting background checks, and ensuring compliance with anti-money laundering (AML) regulations.

Leveraging Technology for UBO Identification

In addition to Anti-Money Laundering (AML) software and databases, businesses can leverage a range of cutting-edge technologies to enhance Ultimate Beneficial Owner (UBO) identification:

1. Artificial Intelligence (AI) and Machine Learning: AI-powered algorithms can analyze vast amounts of data to identify patterns and anomalies associated with UBOs.
2. Blockchain Technology: Blockchain offers a decentralized and tamper-proof ledger system that can provide a transparent and immutable record of ownership transactions.
3. Data Analytics: Advanced data analytics techniques, such as network analysis and link analysis, can uncover hidden relationships and connections between individuals and entities.

By leveraging these advanced technologies in conjunction with AML software and databases, businesses can create a thorough framework for UBO identification.

Incode’s Role

By prioritizing accurate UBO identification and verification, businesses can contribute to a more transparent and secure financial ecosystem. Incode is the leading provider of world-class identity solutions that is reinventing the way humans authenticate and verify their identities online to power a world of digital trust. For a layer of extra security for your business, be sure to check out the Incode Omni Platform, our privacy-preserving technology, to help ensure identity data is safe!