There is one question the bank will definitely ask when reviewing the application made by your company for a business bank account: What is the identity of your ultimate beneficial owners?
An Ultimate Beneficial Owner is an individual not recorded as a shareholder of the company but who has actual power and authority to direct the company and reap their profits.
Since the turn of the century, money laundering and terrorist financing crimes have been on a constant increase.
The International Monetary Fund (IMF) estimates that these activities amount up to €1,000 billion per year.
This works out to almost 5% of the world’s GDP.
In practice, complicated networks of companies are often used by organized crime as a way to mask their illegal financial activities.
Because of this, government and international organizations have enforced much firmer regulations to enforce financial transparency surrounding company structure and ownership.
The identification of the ultimate beneficial owners of a legal entity is part of the compliance duties imposed on financial institutions
To understand more about this, in this article we explore what UBO legislation is and the reasons why it was created, as well as how it applies in the context of bank account opening.
1. What is Beneficial Ownership?
The concept of “Beneficial Ownership” was first developed in the 1933 U.S. Securities Act in relation to the ownership of a security (such as shares in a company).
This concept was then adopted by multiple national and international laws and is now applied not only to the ownership of securities but all other sorts of goods which ownership is subject to registration in legal records (for instance real properties and vessels).
Understanding beneficial ownership requires to explain what legal ownership is.
The legal owner of a good is the person whose name is entered on the relevant legal record maintained to keep track of the ownership of that good.
Think of the ownership of a house.
In most countries, you are the legal owner of a house because your name is entered in the appropriate ownership legal record maintained in these countries. which is the way to prove you have ownership of the house.
Now think of the situation where your name would be duly registered in the ownership legal record for the house, but another person would enjoy the benefit of owning the house.
In this case, you would be the legal owner when the other person would be the beneficial owner.
So, beneficial ownership refers to an individual who enjoys the benefit of the ownership of a real-estate property, security or some other goods without being registered as the proprietor on the relevant records.
2. What is an Ultimate Beneficial Owner (UBO)?
In the context of fighting money laundering and terrorist financing, the Ultimate Beneficial Owner of a company, otherwise known as “UBO”, is the individual person who ultimately enjoys the benefit of owning that company.
To put it simply, the ultimate beneficial owner is the individual not recorded as a shareholder of the company but who has actual power and authority to direct the company and reap their profits.
Ultimate Beneficial Ownership has emerged as a crucial notion for the performance by financial institutions of their compliance duties after the creation of the Financial Action Task Force (or FATF) in 1989.
Founded by thirty nations, FATF is an organization tasked with outlining advice and regularly assessing the processes that countries should adopt to counter money laundering and terrorist financing.
Today, most legal definitions of UBO in national regulations are established on the guidelines set by the FATF, and so the UBO of a legal entity is internationally recognized as an individual person who:
- Holds minimum 25% equity in the legal entity’s capital;
- Can exercise, directly or indirectly, minimum 25% of the voting rights at the general meeting of shareholders of the legal entity; or
- Is the indirect beneficiary of minimum 25% of the legal entity’s capital.
On this particular point, it is worth mentioning that banking practice goes beyond legal requirements.
When researching for the identity of UBOs, banks will indeed retain a 10% threshold compared to the 25% one provided by the regulations.
3. Reasons for the UBO legislation
The following practices and situations have led to the rise of the Ultimate Beneficiary Owner legislation:
3.1. To respond to problems surrounding money laundering
Money laundering refers to large amounts of money being earned illegally and then being put into the legal economic system to conceal how the money was procured.
This money is made through unlawful activities such as the sale of drugs or weaponry, human trafficking, tax evasion, and prostitution, to name a few.
The aim for individuals who launder money is to hide these sums of cash and their provenance by masterfully covering up how they inject them back into the economy.
Money laundering consists of three main measures:
- Depositing: the first stage involves the launderer bringing the illegal sums of money into the economic circuit. To do so, the amount is divided into smaller sums and then deposited into various accounts.
- Concealing: from those accounts, the different amounts of money are moved into new accounts. Most commonly, these accounts will be abroad in countries foreign to the one where the money was made. This is done in an attempt to conceal any trace of the sums of money and this usually involves multiple overseas company structures.
- Integrating: in this final stage, the different amounts of money are put into the legal economic system through a series of investments. These can be in the form of property, high-end and luxury goods, or capital surges.
3.2. To respond to issues surrounding the financing of terrorist groups
Terrorists need money and other assets to run their organizations (travel, accommodation, weapons, training…) and set their attacks into motion.
Disrupting financial transactions that are terrorism-related will directly prevent future attacks by cutting their finances.
Countering terrorist financing is therefore an essential part of the fight against terrorism crimes worldwide.
Terrorism financing is different from money laundering in three ways:
- Its purpose is to hide the final use of the sums of money, as opposed to where they come from and how they were made.
- It does not always revolve around large sums of money as opposed to money laundering. It can actually comprise of relatively little amounts of money but that can still have a substantial impact in terms of destruction and disruption on civilians and society.
- Although terrorist groups support their activities through crime, lawful money can be found to be stolen and misused to financially provide for terrorist acts.
3.3. To prevent and fight fraud
Fighting fraud, especially commercial scams and tax evasion is a significant problem in today’s global economic system.
Fraud done on a large scale is often assimilated with the unlawful use of businesses and commercial systems.
Up to 60% of improperly used companies are involved in financial and economic offenses.
Organized fraud is usually buried in an international company, this is done in order to prevent the identification of the criminals involved and their network inside the firm committing a fraudulent crime.
4. Which organizations have the obligation to check the UBO?
Anti-Money Laundering and Anti-Terrorist Financing regulations provide which organizations have the obligation to research the identity of Ultimate Beneficial Owners of their business relationships.
This obligation is part of a more general “Know Your Customer” compliance process whereby certain organizations must find out information about who they are dealing with.
All financial organizations are obligated to check UBO, including:
- Commercial and investment banks;
- Insurance firms;
- Brokerages and investment firms; and
- All companies that handle money, such as credit unions, money transfer businesses, payment gateways.
These financial organizations must identify the UBOs of legal entities at the time they start a business relationship with them.
Also, as long as the business relationships remain active, they must verify from time to time that the UBOs have not changed.
That explains why a bank will require to know who is the UBOs of your company when it applies for a business account, and then ask you to confirm this identity on a regular basis.
Once provided with the UBO information, banks will check this is consistent with public information available at companies’ registries.
In the case such public information is not available, they will require a confirmation from you in the form of a certificate of incumbency issued by a qualified third party.
In cases when UBO information is not collected, financial organizations may face significant sanctions, ranging from financial penalties to time to jail, or even both.
Aside from penalties, it is clear that they also put their reputation at risk for doing business with unchecked UBO should the latter turn out to be associated with money laundering, terrorist, or fraudulent activities.
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