From 10 January 2020, the Fifth Anti-Money Laundering Directive (2018/843) is in force in the UK and around the European Union. The changes are not as extensive as those that were introduced in the Fourth Directive, such as the concept of risk based due diligence, but the Fifth Directive will impact an increasing number of businesses who must now have regard to money laundering laws.
What is Ultimate Beneficial Ownership (UBO)?
Who is a Beneficial Owner?
A beneficial owner is any person controlling or owning more than 25% of the shares or voting rights. The details of beneficial owners must be recorded and held on a central register accessible to competent authorities.
Ultimate Beneficial Owner UBO Definition
Ultimate beneficial owner refers to someone who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. An ultimate beneficial owner (UBO) is always a natural person.
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Beneficial Ownership Examples
Examples of a beneficial owner could include:
- A person that owns at least 25% of share capital in a mutual fund
- A person that exercises at least 25% of voting rights
- Someone who is a beneficiary of at least 25% of an entity’s capital
- A person with power of attorney
- Guardians of minors
- Corporate directors or nominee directors that are appointed to conceal the true owners of a given firm
- A publicly traded security that is registered in the name of a broker for safety and convenience.
- A wealthy individual who is at risk of lawsuits who uses a trust to act as the legal property owner.
- A custodian bank holding shares of a mutual fund
- A brokerage that holds a security in the name of a client, i.e., the security is held in “street name”. In this case, the broker’s name appears on the stock or bond certificate, but the person who paid for the securities retains ownership rights.
UBO in Banking
Recently, there have been changes in legislation in many jurisdictions that require financial institutions to change how they collect customer data. Financial institutions will be required to verify the identities of beneficial owners who have over a certain amount of equity interest in legal entity clients.
There are several steps that financial institutions have to take to identify ultimate beneficial owners (UBOs):
1. Acquire the organisation’s credentials
While the exact details might vary depending on the jurisdictions, basically, banks must do customer due diligence (CDD), also known as know your customer (KYC). This means that they must obtain from the customer comprehensive, current information including an organisation’s registration number, name, address, official status and names of top management employees that can be verified for legitimacy and accuracy.
2. Research the ownership chain
Financial institutions must determine who are the natural or legal persons who have a percentage in shares or interests and whether their ownership is direct or indirect.
3. Identify and verify the Ultimate Beneficial Owner(s)
For every individual, financial institutions must identify the total percentage of shares, management control and ownership stake and determine which (if any) falls under the definition of UBO.
4. Perform an AML and/or KYC check
All UBOs must go through the appropriate AML/KYC checks and file them consistently.
Whom Does the UBO Compliance Law Apply To?
Under Fifth Anti-Money Laundering Directive (5AMLD), UBO regulations apply in the following situations:
- Anyone with ownership or control of more than 25% of the shares or rights in a legal entity are obligated under UBO regulations
- Senior management officials are treated as beneficial owners when the above cannot be determined
- Entities in the EU’s jurisdiction need to keep UBO lists, including up to date ownership information, in a central registry that is accessible to authorities, obliged entities, and public persons with a legitimate interest, and these lists must be publicly accessible
- Trusts are obligated to observe beneficial ownership regulations and make that information available
- UBO national registers must be inter-connected at an EU level in order to make the exchange of information between member state authorities possible
- Member states must make separate UBO registers for bank accounts. These are not publicly available but rather only accessible to authorities.
Is the UBO Declaration Mandatory?
The EU’s AML directives require EU member states to set up UBO registers for legal entities, and there are similar regulations that have been made in the United States by the U.S. Treasury Department. This is one measure set up to combat money laundering and terrorist financing. But each member state is able to decide who to implement the directives, and member states have taken different approaches.
What is 5th AML Directive?
While the Fourth Directive set out requirements for its members regarding ultimate beneficial ownership (UBO), including that companies must obtain and hold “adequate, accurate and current information” about their beneficial owners, the Fifth Directive places greater emphasis on transparency around ultimate beneficial ownership. This is part of a targeted attempt to fight back against financial criminals who hide behind often complex and opaque corporate structures.
Under the Fifth Directive, member states are required to maintain inter-connected, publicly available national UBO registries. Separate UBO registries for bank accounts must also be created, although these will only be accessible by authorities. UBO regulations will also extend to trusts. The Fifth Directive introduces “effective, proportionate and dissuasive measures or sanctions” for those failing to comply with UBO-related requirements.
It also extends the requirements relating to central registries, requiring that the registries contain information which is adequate, accurate and current. In many circumstances, members of the general public will be able to access this information, although a legitimate interest test has been maintained for trusts.
Beneficial Ownership Registers
Some EU nations such as France, Germany, the UK and Ireland have already introduced beneficial ownership registers, while others are still in the process of setting them up.
Under the Fifth Directive, beneficial ownership registers for corporate and other legal entities must be set up by 10 January 2020, and for trusts and other similar legal arrangements by 10 March 2020.
Centralised, automated mechanisms for identifying holders of bank accounts, payment accounts and safe-deposit boxes must be set up by 10 September 2020.
National registers will be connected via the European Central Platform by 10 March 2021.
Access to UBO registers for trusts will be available without restriction to competent authorities, financial intelligence units, professional sectors subject to anti-money laundering rules such as banks and lawyers, and to other persons that can demonstrate a legitimate interest such as NGOs and investigative journalists.
Complying with UBO rules
Differing standards for UBO rules exist around the world. In some instances, the term UBO includes those with a 25% or greater equity interest or voting rights, but may also encompass those who control a legal entity or those who benefit from a legal entity.
To comply with the Fifth Directive, organisations must secure access to reliable, accurate and complete UBO data as well as have the capability to unravel even the most complex corporate structures. This is important in order to identify UBOs to required thresholds before screening them for potential links to financial crime.
Anti-money laundering compliance resource page
VinciWorks regularly updates its bank of anti-money laundering resources with relevant course demos, webinars, policy templates and articles, including a comprehensive guide to the Fifth Directive.