Money laundering; bribery and corruption; drug trafficking; and terrorism financing are issues that are rapidly infiltrating business operations. In recent years, our modern world has been dragged down by these activities and the resource–intensive investigations to mitigate the risk they pose. These activities often trace back to opaque corporate entities that link to unaware individuals, businesses or falsified government agencies. It is not uncommon that the organization you intend on partnering with could be owned by someone on a sanction list or other watch list. This lurking threat and the growing volume of illicit activity presents the need to truly understand who the Ultimate Beneficial Owner (UBO) is for the organizations you do business with.
The International Monetary Fund (IMF) estimates that somewhere around 2.5% to 5% of the world’s GDP is directed to criminal activities such as money laundering, drug trafficking, bribery and corruption, terrorist financing, etc. For this reason, it is becoming increasingly critical for banks and other financial institutions to understand exactly who their Ultimate Beneficial Owners are.
SWIFT, a global member-owned cooperative in the financial services industry and the standard for financial messaging services, defines an Ultimate Beneficial Owner as the “person that is the ultimate beneficiary when an institution initiates a transaction.” Unfortunately, this owner can be hidden through a trail of fraudulent and fictitious entities. The official definition of a UBO can vary between different legal jurisdictions, but broadly speaking, a UBO can be defined as an individual who holds between 10-25% of capital or voting rights in an organization or entity.
However, many individuals may avoid being identified as the Ultimate Beneficial Owner to mask their nefarious purposes. A criminal can take many different avenues to prevent being identified as the UBO thanks to the web of legal, corporate entities, and geographic and political borders available that lack transparency. This helps criminals to conceal the source and use of funds they receive through transactions with established relationships.
There are many reasons an individual might exploit these corporate entities to leverage their opaqueness: bribery and corruption, drug trafficking, money laundering, tax avoidance or even terrorist financing. Regardless of the exact rationale behind an individual’s actions, these legal entities are being used and exploited for illegal and inappropriate purposes. Organizations need to fight back and avoid their own compliance penalties for not conducting proper due diligence on the organization’s relationships.
Increase in Anti-Bribery and Anti-Corruption Regulations Worldwide
Regulators worldwide are beginning to crack down on criminal activities to address the damage they cause to individuals and organizations. The Financial Action Task Force (FATF) is an excellent example of a global, intergovernmental organization leading the charge of setting anti-money laundering and counter-terrorist financing standards.
The FATF standards and guidance helps organizations implement systems and standards that can tackle transparency in beneficial ownership and the criminal misuse of legal persons within countries. This necessary step in initial and ongoing due diligence in third-party relationships enables an organization to fully understand who they are doing business with.
The FATF recommendations outline a risk-based approach to Ultimate Beneficial Owners, beginning with an assessment of all the risks that could emerge in a legal arrangement with a third party. It also requires collaboration and cooperation by providing updated information on UBOs to the relevant legal and regulatory authorities.
The FATF recommendations are not the only emerging regulatory framework. The Fourth & Fifth EU Money Laundering Directives were published to abate and help put an end to money laundering, tax avoidance and terrorist financing. Member states within the EU were required to transition to the Fifth Directive by January of 2020.
The amendments included in the Fifth Directive provide significant requirements to assist member states in cracking down on criminal activities within the financial and legal system. The Fifth Directive from the EU builds on the recommendations from the FATF by expanding on many issues to promote the highest standards for anti-money laundering and counter-terrorism financing in financial services organizations.
Global Gaps in Regulations
Identifying and establishing Ultimate Beneficial Ownership is easier said than done. Although global regulators have taken giant leaps towards building transparency, the modern organization’s complexity and dynamic nature make these standards and recommendations incredibly difficult to implement – especially in today’s dynamic global environment.
Some countries, for example, have created obstacles to gathering information on UBOs and pride themselves in being off-shore tax havens, where organizations and individuals can do business outside of the sight of prying eyes – a loophole that criminals too often easily exploit with eagerness.
To address requirements and conduct due diligence on Ultimate Beneficial Owners in third-party and client relationships, organizations need to implement an automated process to collect beneficial ownership information that can deliver transparency and promote a culture of ethics. This process starts with initial onboarding by painting the full picture of a third-party profile: where they do business and who the UBO is in the third-party relationship. However, onboarding is just the first step. There also needs to be a regular – preferably continuous – due diligence and monitoring process for all contracted business partners and suppliers.
Organizations can adopt two different routes to collecting beneficial ownership data.
- Manual processes that are often cumbersome, error–prone, and cost too much manpower and resources to effectively manage and monitor UBOs in the organization’s extended relationships. This is burdened by a massive paper trail of documents, spreadsheets, and emails for due diligence that lacks an accurate system of record and real-time insight into UBOs.
- Automated processes supported by technology allow the organization to continuously (e.g., daily) monitor UBOs and transactions. Technology enables this process by automating the workflow, tasks and collection of information in assessment questions on UBO and integrating with trusted external data sources – such as Refinitiv or Dun & Bradstreet – to identify third parties, determine their real UBO and screen for nefarious activity.
The days of manual processes to manage Ultimate Beneficial Owners and third-party risk are a thing of the past. Organizations need real-time data and assurance on third-party risk, particularly UBO data, to keep up with the dynamic threat environment. Implementing an automated solution can enable the organization to quickly and efficiently reach its core data assets relating to global share ownership.
To learn more about how your organization can integrate Ultimate Beneficial Owner data into the ProcessUnity Vendor Risk Management platform for vendor profile clarity, visit https://www.processunity.com/vendor-identity-intelligence-dun-and-bradstreet/