All You Need To Know About The Ultimate Beneficial Owner (UBO)

Several terms and jargon are used repeatedly when we talk about Anti-money laundering laws and their various requirements and components. One of them is UBO, Ultimate Beneficial Owner for AML compliance. Let’s discuss the beneficial ownership for AML/ KYC compliance. 

Cases of financial crimes, money laundering, and criminal and terrorist financing are increasing day by day. Also, criminals are misusing the advancement in technology and using it to evade government scrutiny. So, it has become vital more than ever now to identify the beneficial ownership of business customers, promoters, shareholders, and other stakeholders to get a clear picture of the identity of all the people and entities involved in the business relationship.

Global AML regulations require financial institutions to know who they are doing business with and the beneficial ownership status. They need to know the risk of the customers they are associated with. There are several queries of the compliance department- the answers to which will help them comply with the AML rules better.

Who Is An Ultimate Beneficial Owner (UBO)?

A beneficial owner can be described as a person who is the owner of a business – a legal entity or controls it. Knowing the legal entity and the person who manages the company, who is likely to get the maximum benefit associated with the financial institution and other legal entities, should be known. It will help correctly assess the customer risk of associating with the particular business. Knowing the ultimate beneficial ownership will allow the compliance officials to comply with the Anti-money laundering laws and rules. The best way to assess the business risk is to know the person’s identity who will benefit the most from the business relationship. 

As per the FATF -Financial Action Task Force (FATF), the ultimate beneficial owner or the natural person(s) is who ultimately own(s) or control(s) and refers to a customer- a natural person on whose behalf transactions are carried out. The FATF also says that the ultimate beneficial owner (UBO) includes people who have ultimate effective control over a legal person or arrangement.

What Is Customer Due Diligence (CDD)?

Customer Due Diligence (CDD) is an essential part of the KYC process that helps financial institutions and businesses identify money laundering and mitigate the risks associated with illicit money. There are two components in the CDD- the first is to learn about the customer identity, and the second is to risk assessment of money laundering. 

There are legal requirements that have to be fulfilled to follow the process of EDD- whether the business has PEPs- Politically Exposed Persons or is operational in high-risk third countries. 

Several sectors require an in-depth understanding of the money laundering risk. Associating with such businesses requires EDD- Enhanced Due Diligence. If the customers cross the threshold of the transaction limit, then it is necessary to conduct the EDD process. It is essential to know the requirements that need to be fulfilled by the particular local jurisdictions. Such due diligence will help companies get a clear picture of the risk of associating with a business. 

Who Is The UBO For KYC Purposes?

KYC refers to Know Your Customer, a primary and legal requirement that financial institutions and other regulated entities must follow and strictly perform the CDD- Customer Due Diligence process. However, it’s important to note that each country’s KYC laws are different. Still, the basic rules are the same such as collecting the customer information to identify and verify the customer identity. It helps in risk assessment and green light the onboarding process. The main objective is that the individual or the entity with whom the institution will establish a business relationship is legit, and the activities are not illegal. 

An individual who is likely to be classified as UBO is subjected to the KYC process. Their identity is verified following the process mentioned in the KYC process. 

What Is AML?

AML is a popular term resonating in the financial industry for a long time. AML refers to the Anti-Money Laundering laws designed and developed to combat money laundering and terrorist financing. It identifies and prevents people from running the illegal funds into the legal system, which is used to finance all unlawful activities such as the trade of illicit drugs, human trafficking, extortion, kidnapping, tax evasion, and funding of terrorist activities.

The AML laws help prevent this illegal money from entering the legal system as the authorities are equipped with a robust framework to identify criminal activities. The AML regulatory mechanism allows financial institutions and regulated entities to identify fraudulent accounts and transactions and prevent money laundering. They follow the KYC process, which helps correct risk assessment, closely monitor transactions regularly, and report suspicious transactions to the concerned authorities.

KYC for individuals and KYC for Corporates is equally vital. It helps identify the ultimate beneficial ownership of people involved in the business who want to associate with a financial institution. The process also includes an assessment of the business accounts. In this way, the institutions can differentiate between genuine companies, stakeholders, and shell companies. 

Who Has To Follow The AML Rules? 

All the processes involved in AML compliance require financial institutions to follow the AML rules. Financial Institutions include banks, insurance, investment companies, brokerages, money transfer firms, payment services, marketplaces, and gaming companies.

Money launderers are using new ways to launder money, and therefore the government has extended the scope of the AML laws to other companies. 

When Were The AML Rules Implemented? 

The governments implemented the AML and KYC rules years ago, but the rules for beneficial ownership have come into effect recently. 

UAE: UAE implemented the UBO rules in July 2021. The Cabinet Resolution No. (58) of 2020 regulating Beneficial Owner Procedures (the “Resolution”) came into effect on August 28, 2020. It replaced Cabinet Resolution No. 34 of 2020. The new resolution introduces new requirements for entities to disclose their beneficial owners. The objective of the new resolution is to make the processes more transparent and introduce regulatory mechanisms regarding beneficial owner data.
Europe:The 4th AML Directive came into effect on June 26, 2017, providing beneficial ownership provisions. Further Directives were implemented, and the 6AMLD came into effect on June 3, 2021.
In the U.S., the FinCEN CDD Final Rule came into effect on May 11, 2018, and also provides provisions about beneficial ownership. In 2022, the Corporate Transparency Act was introduced.

Processes That Need To Be Followed For UBO Identification

Financial Institutions need to follow the recommended processes to collect information about the UBO. Financial institutions seek documents and other essential information during the customer onboarding process. The details include the business’s name, the place of operation, the nature of the business, registration number, etc.

The objective is to gather all the relevant information about the ownership of the business and know who’s in control of the company. If there has been a significant change in the account or transaction activities, collecting beneficial ownership information is necessary. It will identify who benefits the most from the association.

The UBO is defined as a 

natural person who directly or indirectly owns or controls a company.
Individuals who own at least 25 % share or voting rights in a company.
Individuals with the power to dismiss and appoint a majority of a company’s directors.

Requirements Which Companies Will Be Required To Fulfil Soon

AML laws are becoming stricter and financial institutions and other regulated entities will have to adopt a comprehensive AML/ CFT framework to avoid non-compliance. The strictness results from the rising money laundering cases and high-profile cases that have come into the public domain. Such cases question the integrity of the financial institution, other entities, and the government, which is expected to take strict actions to combat money laundering and financing terrorism. 

The best way to prepare for a challenging future for entities is to comply with strict laws and avoid non-compliance at all levels. Employing a proactive approach to UBO, KYC, CDD, and EDD should be the way forward to be AML compliant. 

Relying on professional AML consultants would be the best idea. Their comprehensive range of services, such as in-house AML compliance department set up, AML training, AML software selection, and AML/CFT Health check, are some of the measures businesses need to adopt and implement to stay AML compliant and avoid penalties. 

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article KSA

What is Money Laundering?

Money laundering is a process of passing illegally obtained money into the financial system by fraudulently showing the sources of such funds to be legal. The criminals try to disguise or conceal the origin and owner of illegal proceeds, and such funds are transferred to the legal, financial systems using various money laundering techniques.

If they deposit a large sum of illegally obtained funds at one bank, the action will trigger suspicion, and the possibility of catching hold of the criminals would be very high. So, generally, criminals deposit a small amount in multiple banks through a network of people to avoid the reporting threshold or being caught by the authorities.

Criminals first try to distance themselves from the source of illicit money, as authorities can easily spot when large transactions from unverified sources are made. So, the criminals quickly launder this money by creating multiple layers to escape the eyes of the authorities.

Money laundering, with its intensity, attracts a considerable penalty and ends up with the criminals in prison as per the AML regulations of the respective country. The government of Singapore has introduced various regulations, such as the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Terrorism (Suppression of Financing) Act, and Precious Stones and Precious Metals (Prevention Of Money Laundering and Terrorism Financing) Act, to prevent money laundering and financing of terrorism and criminal organizations.

Different methods used by criminals to launder money

Criminals use different methods to launder money and exploit various institutions to use them as a medium to transfer money into the legal system. To combat money laundering, it is critical to understand these money laundering techniques:

Smurfing:

By this method, the transactions are broken down into smaller amounts to avoid the reporting threshold or triggering the attention of the authorities. The money is transferred to different accounts and banks through groups of people to prevent detection.

Account opening with a false name:

An account is opened in a fictitious name, through which the fictional transactions are carried out. It is done to hide the person’s original identity or the source of funds.

Partnering in crime with financial institutions:

Partners in crime from financial institutions hold back the information related to money laundering and avoid record keeping. This method uses non-functional companies or shell companies to launder money.

Foreign financial institutions:

Cross-border centers and foreign financial institutions collaborate to transfer illegally obtained money into another country’s legal system.

Exchange offices:

Exchange offices enable the conversion of currencies (in cash) using illegally obtained funds and provide a receipt for the same, creating a layer between the funds and their illegal source.

Cash smuggling:

Criminals transfer the illicit proceeds to countries where AML regulations and reporting requirements are weak and not rigidly applied to the people used as money couriers. By exploiting the legal vulnerabilities, the cash is smuggled into the legal system of other countries, where such money can be used without fear of legal repercussions.

Prize money from jackpots:

Sometimes, the jackpots or lotteries are planned to launder money. Here, the winner is pre-decided, and the award price is too high than the usual jackpots given to the criminals to display the same as originating from genuine sources.

Casinos:

This method is used by criminals to buy chips to gamble, but very little gambling is involved as opposed to the vast amount shown in gambling. The criminals then replace the chips and take cheques to be deposited in the banks. The illegal money is transferred to the casinos and later on (after the deduction of commission) is shown as earnings from gambling rather than illegally sourced funds.

Off-Shore Financial Centres:

Off-shore financial centers often become the hub for laundered money. Banks or shell companies are created in such centers, where legal entities are formed in which the source of the real owners remains dubious and unknown. The cross-border centers are established, and the process is easy to set up, as they don’t follow legal rules and regulations. So, these financial institutions become the perfect place for criminals to launder money.

Why is the prevention of money laundering important?

A massive amount of illegal money, or we call it ‘black money,’ has seeped into the legal systems across the world. As per an estimate, billions of dollars are laundered annually, and it’s high time to check on this crime.

Such money is obtained illegally through activities like drug trafficking, smuggling, etc., which ultimately increases money laundering activities and the widespread of vice-like narcotics. Usually, terrorist groups control them, which are dangerous and pose a massive security threat to the country and its citizens.

Black money is used to fund other criminal activities such as commercial fraud, human trafficking, organ trafficking, blackmail, kidnapping, etc. These activities threaten society, the country, and the entire globe. It encourages the criminals to become financially strong and exercise control over democracy and the country’s political affairs, leading to corruption and bribery. This way, the country’s financial, social and political system starts deteriorating.

Therefore, countries create Anti-Money Laundering laws to identify suspicious financial transactions and catch criminals immediately before they exploit the economy. Financial Action Task Force (‘FATF’) has issued international recommendations to control financial crimes, and various member countries are bound to follow these recommendations and implement their AML regulations.

It is vital to eradicate the organizations or firms that use illegal money to fund criminal and terrorist activities, which are a massive threat to the country’s economy and society. It destroys the social fabric of the country.

NIYEAHMA – your partner in the AML compliance journey

Global and local laws are implemented to prevent money laundering. AML Singapore is a highly committed firm providing AML consultancy services in a cost-effective manner. With core expertise in AML and a comprehensive range of services such as AML policy, control, and procedures documentation, AML software selection, AML training, AML health check, etc., we can be your reliable partners in your AML compliance journey and safeguard your business.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article Singapore

Importance of AML/CFT measures

As the world economy is growing and the entire globe is coming together as an integrated society, two vices are trying to take a toll on this society – Money Laundering and Terrorism. Money laundering has been a setback to the global financial system, pumping the illegally generated money into the economy, making it appear to have come from a legitimate source. Such funds generated from criminal activities are used again for multiplying the effect of illegal activities, such as terrorism, and impacting the security and integrity of the countries. The need of the hour is to be resilient against such evils of the society to make it a better place to live, and thus, various countries are coming up with AML/CFT measures.

AML/CFT Measures undertaken by various countries

Singapore Ministry of Law has developed a division under the name of “Anti Money Laundering / Countering Financing of Terrorism,” with whom Cash Transaction Report for suspicious transactions is furnished.

Similarly, the Australian Government has issued the Anti-Money Laundering and Counter-Terrorism Financing Act in the year 2006, which requires businesses to have a proper program in place to protect the company from financial crimes by timely identification/mitigation of these kinds of risks.

The United Arab Emirates is also one such nation amongst the list, devoted to controlling the money laundering activities and financing of terrorism or other illegal activities from there. As a part of this strategy, the UAE government has introduced the regulation “Anti-money laundering and combating the financing of terrorism and illegal organization” and issued the guidelines to enforce the law better.

Designated Non-Financial Businesses and Professions (DNFBPs)

When it comes to protecting the financial sector from such criminal exploitation, certain businesses and professions could serve as first aid to curb these. With the same thought, under UAE guidelines, class of people/businesses have been defined as Designated Non-Financial Businesses and Professions (“DNFBPs”).

They have been obligated under the law to perform the Due Diligence of their customers and risk profiling. These DNFBPs have been made responsible for reporting the transactions to the authorities, where any suspicion involving money laundering or illegal activities such as financing terrorism, drug trafficking, etc., is doubted.

It is pertinent to know the group of businesses and professions that have been identified as DNFBPs. This list includes the following:

Auditors and accountants;
Lawyers, notaries, and other legal professionals and practitioners;
Company and trust service providers;
Dealers in precious metals and stones;
Real estate agents and brokers;

If one deep dives into the lawmakers’ intent, one would understand that DNFBPs have been categorized looking at the risk involved in the business or the vulnerability of business towards the criminal activities or the one having access to the suspect’s accounts/ finance details.

If we take the example of auditors, the federal laws regulating the audit profession anyway imposes specific obligations on auditors regarding the reporting of crimes detected during auditing the accounts of clients, as they have access to the books and internal controls.

Let’s talk about precious metals and stones. The high intrinsic value of the product vis-a-viz the compact form of the same and the value appreciative nature of such items (gold, silver, diamonds, etc.) make it easy for the money launderers to exploit the sector and fund the criminal activities.

Looking at the nature of business/professions obligated with tasks under anti-money laundering and combating of financing of terrorist activity, it is apparent that the purpose is to trace back such money launderers and check the illegal or criminal activities. For this, it is important to have in place a dependable source of information about the business relationships and transactions. This is pertinent as the money launderers and the persons involved in criminal activities try to hide their identity and camouflage the proposed transactions.

Responsibilities of DNFBPs

In the context of the responsibilities shouldered on the DNFBPs, it would be treated as an offense if they do not report the suspected transactions (where they doubt the involvement of money laundering or any other criminal act) or tip-off about the transactions reported with the supervisory authorities.

For this, the regulations have suggested specific ways and means to assist the DNFBPs to comply with the guidelines and discharge their obligations of reporting the suspicious transaction in a fair method, such as:

Developing and implementing the internal controls and policies/procedures (commensurate to the size and complexity of the business) that seems to be adequate to identify the doubtful transactions and prevention of the money laundering related activities; 
Maintaining appropriate AML documentation such as “Know Your Customer” document, Customer Due Diligence practice, Risk profiling policy, etc.
Communicating such policies to the staff and imparting training thereupon; 
Monitoring and adhering to the compliance requirements under the guidelines.

Thus, the law revolves around adequate measures for identifying customers and risk assessment to evaluate the cause for concern and report the same to apt Governmental authorities for necessary proceedings against the felonious person.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article UAE

AML Defense Mechanism for Jewellers in Bahrain

AML Defense Mechanism for Jewellers

The Ministry of Industry, Commerce and Tourism has issued a guide, “AML Defence mechanism for Jewellers, Bahrain”, to help them understand their responsibilities for Prevention of Money Laundering/Terrorism Financing and enlighten them about numerous threats.

An individual is considered carrying out Money Laundering if he is involved in Directing, channelizing, possessing the proceeds of the crime, and concealing the source of Income.

We provide the following compliance services to our esteemed clients :

The stages of Money Laundering/Terrorism Financing.

Definition of money 

Instances of Money Laundering 

Identifying a potential money-launderer

Examples of Common signs’

Assessment of Risk 

Filling of Suspicious Transaction

Appointment of a Compliance officer 

Training of the Staff AML/ CFT policies and procedures

Customer Due Diligence/Enhanced Due -Diligence

Spotting a potential money-launderer 

Non-disclosure of residential address, sources of fund, etc 

Account holder in various Banks located in the same jurisdiction.  

Secretive in nature, nervous, over-explanation for a transaction, reluctant to meet in person, over-friendly 

Accompanied/watched by others 

Asking several questions about internal policies/procedures and documentation 

Asking for prompt completion of the transaction, hinting to give a bribe, etc

Indicators of Money laundering can be broadly classified as below:

Reporting mechanism 

The customer directly/indirectly tries to avoid the documentation and reporting. He has a thorough knowledge of the Money laundering Law and justifies the transaction, etc 

Identity Documents 

The individual provides forged/false documents. He is unable to produce the originals, share the telephone number. A corporate is reluctant to share Memorandum and Articles, Commercial registration certificate and other Identity documents, etc 

Cash Transactions 

There is an unusual increase in cash transactions from the customers. The Banknotes are oddly packed, dirty/musty, are a combination of different denominations, etc.

Economic purpose 

The transaction is very complicated and is not economically feasible. The transaction is not related to the customer’s normal business activities, etc 

Transactions involving other Countries 

The customer has no link to Bahrain, and the transaction is crossing many international borders. The customers are associated with High-Risk countries, etc. 

Risk-Assessment Key Points

The Risk-Assessment should be done on the following key-points

Products/services 

Delivery channels

Geographic location

New technologies 

Transaction risk, etc. 

The guide issued also discusses how a Company can file suspicions transaction report (STR), implementation of the “PROTECT” self-defence toolkit for the Jewellers, Customer Due Diligence (CDD), Enhanced due -Diligence (EDD) 

AML Defense Mechanism for Jewellers

The Ministry of Industry, Commerce and Tourism has issued a guide, “AML Defence mechanism for Jewellers, Bahrain”, to help them understand their responsibilities for Prevention of Money Laundering/Terrorism Financing and enlighten them about numerous threats.

An individual is considered carrying out Money Laundering if he is involved in Directing, channelizing, possessing the proceeds of the crime, and concealing the source of Income.

We provide the following compliance services to our esteemed clients :

The stages of Money Laundering/Terrorism Financing.

Definition of money 

Instances of Money Laundering 

Identifying a potential money-launderer

Examples of Common signs’

Assessment of Risk 

Filling of Suspicious Transaction

Appointment of a Compliance officer 

Training of the Staff AML/ CFT policies and procedures

Customer Due Diligence/Enhanced Due -Diligence

Spotting a potential money-launderer 

Non-disclosure of residential address, sources of fund, etc 

Account holder in various Banks located in the same jurisdiction.  

Secretive in nature, nervous, over-explanation for a transaction, reluctant to meet in person, over-friendly 

Accompanied/watched by others 

Asking several questions about internal policies/procedures and documentation 

Asking for prompt completion of the transaction, hinting to give a bribe, etc

Indicators of Money laundering can be broadly classified as below:

Reporting mechanism 

The customer directly/indirectly tries to avoid the documentation and reporting. He has a thorough knowledge of the Money laundering Law and justifies the transaction, etc 

Identity Documents 

The individual provides forged/false documents. He is unable to produce the originals, share the telephone number. A corporate is reluctant to share Memorandum and Articles, Commercial registration certificate and other Identity documents, etc 

Cash Transactions 

There is an unusual increase in cash transactions from the customers. The Banknotes are oddly packed, dirty/musty, are a combination of different denominations, etc.

Economic purpose 

The transaction is very complicated and is not economically feasible. The transaction is not related to the customer’s normal business activities, etc 

Transactions involving other Countries 

The customer has no link to Bahrain, and the transaction is crossing many international borders. The customers are associated with High-Risk countries, etc. 

Risk-Assessment Key Points

The Risk-Assessment should be done on the following key-points

Products/services 

Delivery channels

Geographic location

New technologies 

Transaction risk, etc. 

The guide issued also discusses how a Company can file suspicions transaction report (STR), implementation of the “PROTECT” self-defence toolkit for the Jewellers, Customer Due Diligence (CDD), Enhanced due -Diligence (EDD) 

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article Bahrain