Ultimate Beneficial Ownership : Under The Microscope

Posted on 13th November 2013 by Editor

For an investigation into suspicious transactions to be successful, it's extremely important to possess information on ultimate beneficial ownership (UBO). Equally, for prosecutors to build cases against suspected criminals, UBO information is crucial. Furthermore, understanding what access there is to UBO information helps organizations when assessing the risk profile of their business relationships. At a national level, countries completing their national risk assessment, as required by the Financial Action Task Force (FATF), need an understanding of UBO issues in their jurisdiction.

The FATF, the global standard-setter with respect to anti-money laundering and combating the financing of terrorism (AML/CFT), recognizes the importance of UBO information and has dedicated Recommendations 24 and 25 to it. In essence, the Recommendations state that countries should take measures to prevent the misuse of legal persons and legal arrangements for AML/CFT by ensuring there is adequate, accurate and timely information on beneficial ownership. Crucially, this information needs to be accessible in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and Designated Non-Financial Business Providers (DNFBPs) (R.25).

Effectively, Recommendations 24 and 25 mean that maintaining beneficial ownership information is now considered international best practice. However, the use of eligible introducers has caused some problems for a number of regulated entities and jurisdictions which allow its application. In a nutshell, the eligible introducer regime is an administrative measure that is designed to reduce or eliminate duplication of effort and documentation. It allows regulated entities to rely on their introducers to conduct customer due diligence and risk assessment and to hold such information on their behalf. Whilst the practice may be advantageous in principle, (insofar as costs may be reduced without compromising the quality of the UBO details), some regulators have concerns about the practice, and some people have asked whether the recent changes to FATF Recommendations 24 and 25 will mean the end of the regime.

Arguably, there is no need for the abolition of the regime if eligible introducers really conduct the appropriate customer due diligence and risk assessments, and more importantly, share the information in a timely manner. However, one of the main risks for regulated entities is if eligible introducers do not fulfil their regulatory obligations. Also, it is possible that, even if introducers are meeting their obligations, others in a jurisdiction might not be, in which case there could be significant changes to the eligible introducer regime in store.

So what does all this mean for you and your business?

• Come to terms with the reality that it is very likely that you will be required to maintain certain beneficial ownership information locally, for all of your customers, regardless of whether an introducer arrangement is in place.

• Start preparing your customers and intermediaries for what may lie ahead. 

• Be as proactive as possible.

If nothing else, ask if your company peels the layers back to unveil the beneficial owners of at least your end user clients. At a minimum, it's important to ensure that for each of your end user clients you have the necessary due diligence information and documents for the UBOs. Do not stop at corporate shareholder and corporate director level; you must get to the individual UBOs.

Countries are trying to find creative ways to generate income and reduce spending, and with renewed impetus resulting from the ongoing effects of the global financial crisis. One approach is the creation of a centralized public register of beneficial ownership. Labeled as a 'transparency initiative', the idea is driven by a common belief that there is a pool of taxpayers who have not been accurately reporting to the relevant tax authorities and thus have not paid their dues. For example, David Cameron, Prime Minister of the United Kingdom, is championing this idea and has stated his intention of starting a public centralized register of beneficial ownership in the U.K., even though this is not an explicit requirement of the FATF Recommendation. One of the major concerns about creating a public centralized register is how it will impact an individual's or entity's ability to comply with local privacy laws, and if countries outside of their operating or home jurisdiction will require a register to be maintained.

Only time will tell if this idea catches on and becomes the new gold standard for transparency. Meanwhile, a number of countries have begun to assess the merits and pitfalls of such a move. The British Virgin Islands has already issued a document on the matter which it has circulated to the private sector and other stakeholders for consultation. The Cayman Islands has also announced its plans to also prepare a document for consultation. We can expect many other countries to take a similar approach.

It is anyone's guess at this point as to whether public centralized registers of beneficial owners will become a reality. One thing that is certain is that the goal posts have been moved again, and countries are unlikely to follow suit at the same time. This will create an uneven playing field, and potentially result in more black-listed countries and result in even higher costs in relation to remediation action. In any case, forward-thinking firms will already be considering ways in which the possible codification of FATF's Recommendations may affect them, in the jurisdictions in which they operate. Would your firm be ready now, for example, to hand over complete and accurate UBO records to a government agency maintaining the centralized registry for instance? Should your firm be preparing for such an event? 

About the Author

Kyria Ali is the Chairman of the BVI Association of Compliance Officers (previously Ethics Chair), the Head of Business Advisory for Baker Tilly (BVI) Limited and the Chairperson of the Captive Industry Advisory Council in the BVI.  She is a prize winning Fellow of the Association of Chartered Certified Accountants, a Certified Internal Auditor, a Certified Fraud Examiner and a Member of the Chartered Institute of Securities and Investment. She has over 13 years of experience working within the business advisory, risk management, audit and compliance fields.  Kyria has extensive experience with compliance, risk management, corporate governance, audit, education, business advisory and development services and has worked with entities within various industries, including but not limited to, financial services and government.  The British Virgin Islands Association of Compliance Officers ("BVI ACO") aims to foster a culture of compliance in the Territory. It is the BVI ACO's ultimate goal to contribute to the reputation of the British Virgin Islands as a highly attractive and regulated international financial centre.  The BVI ACO, through its membership, promotes the importance of compliance through various forums, encourages the sharing of information and exchange of ideas amongst the industry as well as with the policy makers and provides opportunities to the entire industry for professional development. The BVI ACO also holds its members to a high ethical and professional standard and performs a monitoring role.

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