Banking leaders are familiar with Know Your Customer (KYC) requirements. The same requirements also apply to businesses, but identifying the ultimate beneficial owners (UBO) behind businesses can be a challenge.  The thresholds for level of ownership have decreased in recent years, creating challenges for financial institutions, especially because the tools for determining beneficial ownership remain limited.

Why Are UBO Registries Important Now?

To meet UBO requirements, organizations must identify any individual who holds a certain amount – normally 25% – of the ownership of an underlying entity. An ultimate beneficial owner may have 25% of the voting right in a general assembly or 25% of the stake in the capital of a legal entity. Nested corporate structures can make beneficial ownership hard to track, yet the 25% threshold can apply even if control is scattered among numerous legal entities.

Verifying UBOs is vital to recent international regulations related to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF). Unfortunately, criminals who launder money or finance terrorist organizations often go to great lengths to avoid being known. Indirect shareholding and complex legal structures conceal beneficial ownership, and UBO registries are imperfect because of it. 

Still, financial institutions are required to know their customers better, which makes them responsible for escalated due diligence. Know Your Business (KYB) and Know Your Customer (KYC) verifications aim to reveal all ultimate beneficial owners.

The Current State of Ultimate Beneficial Ownership Registries

Several governments and tax authorities—including the European Union, the United Arab Emirates, and the United States— have implemented UBO registries to verify ownership of companies and report that ownership transparently. UBO registries are meant to be public in the EU, while they are only available to banks and financial institutions in the US.

Financial institutions have to navigate the differences in rules by government and tax authority depending on where they do business. The EU has rules in place to verify UBOs when there are trusts in place, even if the trusts aren’t public. No such criteria has been finalized in the US, which is only one of several unresolved issues. While governments have mandated the creation of UBO registries, the mandates have spurred little progress as far as developing the registries themselves.

There are fundamental disconnects between various stakeholders:

• Regulators mandate banks to identify UBOs.
• Banks lack sufficient data to identify UBOs.
• Governments mandate UBO database creation, but have difficulty building and populating said databases.
• Meanwhile, bank needs for UBO data increase, but there has been little progress as far as the limited tools at their disposal.

There are missing pieces in the process to implement UBO registries, and these disconnects are causing a number of challenges.

UBO Registry Challenges for Financial Institutions

KYC efforts at financial institutions entail extra steps and checks. Banks and financial services organizations must check their own databases against the relevant UBO register. The system works if the UBO register is accurate, but shortcomings in accuracy and credibility create a challenge.

The “Honor System” and Credibility Concerns

Unfortunately, organizations self-report their ownership information. Proactive companies with excellent compliance systems are unlikely to have any issues registering their UBOs. Operations with questionable intent or lackadaisical legal compliance continue to circumvent UBO registry attempts and provide muddled information. As a result, the UBO register can contain information that fails to fully represent the ultimate beneficial owners of organizations.

Financial organizations are left to notice discrepancies and recognize bad data in the UBO register. Organizations need ample, accurate, accessible data to verify the UBO register. Banks can uncover hidden UBOs by scanning, analyzing, and building predictive models with their own data. Exposing the difference between a stated owner and an ultimate beneficial owner is more complicated than simply scanning the UBO register.

Banks Must Plug Data Holes

The use of trusts provides a common way for individuals and entities to hold ownership without being completely transparent. This is especially problematic when there are insufficient laws to clarify reporting around trust ownership. As a result, there are gaps in the data required to confirm UBO information.

For better or for worse, the onus of overcoming this shortcoming and clarifying UBO information falls upon financial institutions. In other words, banks and financial services organizations are unable to rely on UBO data alone to pursue their identification efforts.

Compliance Thresholds Below UBO Reporting

Some institutions have stricter requirements than even their relevant UBO registers. If the national UBO register only tracks parties beyond the 25% ownership threshold, but a bank wants to identify every owner with a 10% stake or greater, there is a coverage gap. In such situations, banks must perform enhanced due diligence.

Identifying and Managing Alternative Datasets to support UBOs

Institutions are responsible for identifying and evaluating a variety of data sources, including their own data as well as secondary and tertiary datasets. Financial organizations might receive secondary or tertiary information from resources including mobile networks and social media.

Leveraging a variety of datasets is crucial to gaining a holistic picture from KYB and KYC efforts. These efforts can be tedious, but they can also uncover ownership information that organizations and individuals fail to provide proactively. Secondary and tertiary datasets often give the ownership reporting system a boost by offering insights and information the UBO missed.

A Solution on the Horizon

In the near future, AML and KYC efforts might not be so burdensome, especially as UBO registers help lighten the load of consumer identification and compliance. Realistically, though, banks and financial services organizations are still expected to recognize situations when enhanced due diligence is necessary. Further, they must possess the capability to perform such due diligence.

Solving UBO Problems for Financial Institutions

Automated processes, AI, and machine learning offer solutions to UBO challenges. Such systems flag customers who may require enhanced KYC efforts, minimizing exposure to mundane, error-prone tasks such as manual research. AI and machine learning tools offer greater insight into UBOs than a registry might, especially when they’re paired with automated data integration. 

Some financial institutions still find it unrealistic to get perfect visibility into every UBO at every organization in their customer bases. With or without national registers, though, banks are finding new ways to achieve superior visibility. For more access to Liminal’s research on KYC, KYB, and identity verification, become a member.