An ultimate beneficial owner, or UBO, is the person or people who ultimately own or control a company. When an organisation makes a transaction someone will be the ultimate beneficiary. Depending on the local definition of a UBO this can be an individual holding a minimum of 10-25% of the capital or voting rights.
Why is it so important to know the UBO of an organisation?
Every company has an ultimate beneficial owner, and organisations need to know who exactly they are dealing with. Companies have a legal duty in Europe, the United States, and most countries of the world to identify their own UBO and to also conduct due diligence to ensure their third parties are not running a money laundering operation or financing terrorism.
Companies must therefore be both transparent with their own organisational structure and UBO and verify that of their counterparties. Knowing the UBO of an organisation is a vital part of know your business (KYB), as discussed in our previous blog post [insert relevant blog post link]. Legislation means that ignorance is not a defence and suspicions should be reported.
The Financial Action Task Force (FATF) was set up to create and promote international standards to prevent money laundering. The prevention of terrorist financing was added after the attacks of 2001. In the US the main anti money laundering (AML) legal authority is the Bank Secrecy Act, and the European Union’s AML Directive was most recently updated in 2021 with its sixth amendment. Compliance with the relevant legislation is a must for companies.
Funding criminals and illegal activities
The United Nations Office on Drugs and Crime (UNODC) says that “the estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or USD 800 billion – USD 2 trillion”.
- Laundered money is money obtained by illicit means that usually ends up back with the person that generated it. At the end of the money laundering cycle it will appear to have come from a legitimate source.
- Funding terrorist activities is different in that money ends up in the hands of terrorist organisations to fund activities that can be a threat to national and international security.
- UNODC also identifies proliferation financing as an illegal activity, describing it as “providing financial services for the transfer and export of nuclear, chemical or biological weapons; their means of delivery and related materials”.
Companies in Europe and other jurisdictions have a legal duty to identify their UBOs. Requirements vary but this information will include a company’s registration number, name, address, official status, and information about senior team members. Potential counterparties should then undertake their own checks using independent, reliable data that proves the information is as presented.
Some UBOs will be flagged as higher risk than others. Those that come up as possibly linked to money laundering or terrorist activities should be further investigated. Companies who fail to do this and either unwittingly or knowingly deal with third parties who are involved in these activities put themselves at risk of fraud and fines.
How can automated processes help?
With the potential for fraud and all the other risks that are associated with dealing with third parties, prevention is always better than the cure. Costs will not always be easy to quantify. Actual losses and the costs of any fines, penalties and other direct costs can be assessed but the effects of loss of reputation, market position, morale, and future earnings are harder to estimate.
As well as educating employees on what constitutes fraud and how to spot it, the right processes and systems need to be in place to effectively combat the risks of fraud, both internal and external. Knowing the counterparties that a company is dealing with is the first step.
Company structures can be extremely complicated even for legitimate organisations. Organisations may operate multiple businesses in various countries and jurisdictions. Other company structures may be deliberately complicated to try and obfuscate the real UBO. They may also use off-shore accounts to hide certain activities and fake addresses or personal details.
- Trustpair’s automated systems monitor all organisations and their subsidiaries to reduce risk, regarding compliance and AML directives.
- With automatic checks and international coverage, our systems provide an extra layer of security when dealing with other parties.
- Bank details of suppliers and other third parties are continually checked and verified to validate their identity, reducing the risk of wire transfer fraud.
- Our solutions also free up valuable employee time, enabling them to focus more on the profitable tasks that grow a business.
To find out more about how our software can help reduce your company’s fraud risk, please contact us now to request a demo. We would love to tell you more.
- The ultimate beneficial owner (UBO) is the person or people who ultimately own or control a company
- A company’s failure to disclose their UBO information and check the UBO of counterparties can lead to the risk of fraud and fines
- Trustpair software will give extra security and peace of mind