Author: Niall Hearty
12 February 2024
7 min read
The term beneficial ownership – which is often called ultimate beneficial ownership – refers to the person who is responsible for, ultimately owns or controls an institution, business or legal entity. The term is most commonly referred to regarding control of companies, so this article will usually refer to it in relation to companies.
The intergovernmental body the Financial Action Task Force (FATF) defines an ultimate beneficial owner (UBO) as the person or legal entity that directly or indirectly reaps the benefits of ownership of an asset (such as a company) or exercises ultimate effective control over it, even though that asset may be legally owned by a different party.
A UBO may have the power to vote on or influence transaction decisions involving the company. Regarding personal beneficial ownership of a company, the beneficial owner is the person who controls over 25% of its shares and has the right to exercise significant control over the company or the right to remove the majority of its board of directors.
Identifying a UBO can involve a number of legal structures. To give a simplified example, if Company A is owned by Company B and Company B is owned by Mr C, then Mr C is the UBO of Company A (as well as Company B).
There is, however, no formal standard for how the definition of beneficial ownership should be applied around the world. The issue can also be complicated by, for example, changes regarding who is the ultimate beneficial owner (UBO) of a company and any changes made to regulations relating to beneficial ownership.
As beneficial ownership of something refers to those who have ownership or control of it, such a person can be the owner or manager – someone who has control and responsibility for its activities, as well as influence over how it acts.
A company having a UBO is not illegal, providing the UBO is complying with all relevant laws. But having a UBO is often a tactic used by those looking to commit financial crimes such as concealment of assets and money laundering.
In some cases – especially in criminal situations – it is often not clear who the UBO is, as this may be disguised by complex legal arrangements that are used to hide the identities of those involved in illegal activities.
Legal ownership refers to who, according to the paperwork, owns an asset. In most cases, the legal and the beneficial owner will be the same. For example, a person who runs a café and is registered as a sole trader who owns that business is both its legal owner and its UBO.
But there are situations where a registered owner of a business may not be its UBO. Some of these will be legal – others will not.
Such a legal situation would be a person trading securities under their broker’s name for reasons of safety and convenience. Another would be a famous person having assets registered under someone else’s name for the sake of safety and privacy.
But some people may have assets registered under a different name so they do not have to forfeit them in a legal case or a divorce. This would be fraud. On a larger scale, those involved in organised crime and / or handling the proceeds of crime may use this tactic as a form of tax evasion, as part of a money laundering operation or to help individuals avoid the effects of sanctions.
There is little doubt that the amount of money laundering and terrorist financing activities that have been identified around the world have strengthened the argument of those who believe there is a need for legislation that can tackle UBOs involved in criminal activity. But this can be difficult, as such people can use international (and often secretive) accounts and fake addresses to hide their activities and move the wealth that these generate.
However, even without specific UBO legislation, various types of business are under various legal obligations to make UBO checks. For example, banks have always had to identify UBOs as part of their anti-money laundering (AML) responsibilities. And the wide-ranging nature of the UK’s Bribery Act – including its offence of failure to prevent bribery – could be used against those believed to be using beneficial ownership as a means of enabling bribery or moving the proceeds of it.
The sudden increase in the number of sanctions being imposed in the wake of Russia’s 2022 invasion of Ukraine has also put the issue of UBOs high on the financial crime agenda.
Businesses face the prospect of prosecution under sanctions legislation if they fail to make proper UBO checks and do not identify those attempting to evade sanctions through the practice of beneficial ownership.
There are strategies that are used by many financial institutions to try and identify UBOs. While they may vary slightly from organisation to organisation, they tend to involve four steps:
Acquisition of credentials: This first step involves requesting credential data from the company. This is any documents, objects or other information that can prove the identity of those with involvement in a company. Organisations have a legal obligation to supply this data.
Chain of ownership research: After the first stage, a financial institution will attempt to identify anyone who has shares or another interest in the company, and whether they directly or indirectly own the business.
Identification of ultimate beneficiary: Once this activity has been conducted, the UBO will (or at least should) have been identified. Information about their share ownership and how much management control they have should be known.
Conducting KYC, AML and CTF checks: At this point, the identified UBOs will be subject to scrutiny, usually AML and KYC checks. These may be performed regularly in an attempt to ensure the UBO is known at all times. Such ongoing checks can also be important in ensuring that nobody involved with the company is a politically exposed person (PEP) or a designated person subject to restrictions under a sanctions regime – either of which could pose a significant legal risk. It can also be a worthwhile precaution to check for any negative media coverage about UBOs.
UBOs can pose differing levels of risk. Those that are classed as being in the low-risk category may only require a relatively straightforward visual check, using ID documents, to determine who they are and their role in a company.
But those considered to be high-risk UBOs may require Enhanced Due Diligence (EDD). This could include additional searches, assessment of their PEP status, scrutiny of their wealth and examination of their access to funds and other assets.
The level of due diligence and the number of checks that are required for each UBO will depend on the risk that they are thought to pose, based on their possible exposure to or involvement in criminal behaviour.
Identifying beneficial ownership is a useful procedure for any individual or organisation looking to have any dealings with an institution, business or legal entity. This is because anybody in business wants - and needs - to know exactly who they are really doing business with.
But identifying beneficial ownership is also vitally important because it:
The UBO of an organisation may want to prevent anyone from knowing about their control of it. This is often for business crime reasons, such as their involvement in offences such as money laundering or sanctions evasion.
If their beneficial ownership of a company were to become widely known, it would restrict or prevent their ability to conduct their criminal activities using that organisation. It would also harm the organisation itself. They may, therefore, take steps to prevent anyone beyond their immediate circle of associates knowing of their involvement.
They can do this by:
But there are other reasons why it can be difficult to identify a UBO.
It is important to emphasise that a UBO check is not simply a bureaucratic hoop that has to be jumped through.
Anybody doing business has a legal obligation to identify the UBO of any company it trades with, whether they be suppliers of goods or services, customers or agents or other third parties. Knowing exactly who you are doing business with reduces the risk of unknowingly becoming involved with those who are using an organisation for illegal purposes.
The consequences of not conducting UBO due diligence – or not conducting it properly – can be enormous. Any UK business that does not assess the UBOs of those it has dealings with runs the risk of failing to comply with anti-money laundering (AML) regulations and customer due diligence standards. Such failures are a criminal offence. For example, failing to comply with the UK’s AML regulations can lead to up to 14 years imprisonment and / or huge financial penalties.
If the authorities realise a company or individual has been doing business with an organisation whose UBO is involved in criminality, there is every chance that company or individual could themselves become the subject of an investigation.
An investigation could eventually lead to prosecution and stiff penalties being imposed for anything from compliance failings through to active involvement in the UBO’s criminal activities. Even if no prosecution is brought against that company or individual, the cost of having to respond to an investigation - and the negative publicity it can generate - can be hugely damaging to their finances, reputation and position in the market.
The issue of ultimate beneficial ownership is arguably as important as it has ever been. For those in business, it presents a challenge that has to be dealt with appropriately.
This can involve seeking advice from those with expertise and experience in relevant fields such as, to name just some, sanctions, money laundering, bribery and compliance. As a legal firm recognised internationally as being at the forefront of such matters, Rahman Ravelli can provide the UBO advice required by anyone in business.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.