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Digging deep: Archan Bahulekar on UBOs

Archan Bahulekar
December 3, 2020

Ultimate beneficial ownership and indeed money laundering hasn’t always been taken as seriously as you might expect.

In this blog, Archan Bahulekar tells us that it wasn’t until the relatively recent compliance wave which took over in the 2010s that industry really began to take action. By 2018 regulators were exercising their authority with big fines becoming increasingly common for money laundering and sanctions breaches.

It was around this time that banks started investing in compliance. For example, in 2016 Thomson Reuters reported that some major financial institutions were collectively spending up to $500 million annually on KYC and customer due diligence.

A recent study conducted by the US Government Accountability Office has shown that compliance costs still remain a burden for banks in the USA - Read a summary of the study here

The compliance boom led to The Economist branding compliance officers as the “killjoys of finance”. The international weekly newspaper reported in 2019 that “to bankers and traders keen to let rip, they are the po-faced types who frown at any transaction that might breach this rule or contravene that regulation”.

Such negativity had been fuelled by the associated costs of compliance and other implications, such as substantial increases in onboarding time.

Things are obviously much better now given the recent (and ongoing) tech innovations in this space as well as more guidance from regulators on clearer expectations of banks and other institutions.

But who is the UBO?

An UBO is an individual who ultimately owns and controls an entity. If the UBO is a company, then it’s an “other beneficiary” and you will need to follow its trail until you reach an individual.

The UBO is always ultimately a person. You can look into controlling stakeholders from a company perspective, but banks always need to know the UBO. Who has the entire controlling stake in the entire corporate group? It boils down to control.

The nature of control can be any means of influence, for example, voting rights or by the likes of management position. These individuals would need to be subject to due diligence checks, such as sanctions and PEP checks.

However, the challenge with UBO is that there is no consensus on how to calculate or identify the control of an UBO. Most banks/FI methods differ. That said, the general consensus is that a person should be identified as a UBO if ownership is identified as:

- X% at first level;

- Min y% at any level;

- Unknown % at any level.

There are however some exceptions to this:

- If a company register provides information of a business owner then the vendor/database will pin that to the results, regardless of definitions at the bank.

- Some registers mention a company name as the business owner. In that case the vendor/database should drill down further to find the individual BO.

What UBO information is needed – and why?

Any organisation with responsibility to investigate UBO is going to be looking to understand the following information, which basically revolves around everything you need to know from a KYC perspective:

- What is the legitimate business?

- Who are the legitimate people behind that business?

- What shareholdings do they have?

- Who are the ultimate owners of the business?

- Who are the beneficial owners of the business?

- Who has the controlling factors?

We'll need this information to:

- Know every owner and percentage stake.

- Understand the corporate group.

- Know who has the controlling stake.

- Understand the evolution of ownership.

This will help us understand the associated risk factors of doing business with the other party.

Ultimately, we need to understand the risk of doing business with unethical/inappropriate businesses and people, which would ultimately create reputational risks, financial risks and regulatory and legal risks.

How to understand company ownership

Company ownership can be incredibly – and often deliberately – complex. It is important to break things down according to the level, link and controlling factors.

By level

The level of company ownership can either be owner or subsidiary.

- Owner – the owner of a company can either be a company or an individual. You will need to consider the global ultimate owner (GUO) and/or domestic ultimate owner (DUO). A company in Singapore, for example, could have a DUO that is ultimately owned by a company overseas (GUO).

- Subsidiary – this is where the ownership is within a company where a subject company has its own subsidiaries. A sister company or affiliate is also a subsidiary. If there is ownership percentage between two entities, one of those is a subsidiary of the other.

By link

Understanding the link between various companies and individuals will help to determine the ultimate owner. The link may involve total ownership, a direct link (where A owns B) or an indirect link (where A owns B which owns C).

By controlling factors

When you understand company ownership by level and link you will be able to understand who has the controlling element. A subsidiary may be wholly owned (100%), majority owned (>50%), jointly owned or negligible, which is where there are lots of shareholders.

It’s important to recognise that controlling shareholders are present in the path between the subject company and its ultimate owner (UO) (according to the selected UO definition). To identify controlling shareholders most banks follow the path with the highest percentage (direct or total ownership).

An immediate shareholder is the first shareholder in the path from the subject company to its UO.

Financial institutions use controlling stake indicators, which are ratings or grades given to show how controlled an entity is. These are general terms and vary for every organisation but typically follow the below parameters:

A = less than 10% control. Banks would consider companies in this bracket the safest since stakeholders will not be controlling the decisions. In the case of the likes of credit and sanctions risks, it would be easier to make a recommendation for such an entity.

B = 10-15% control.

C = 25-50% control.

D = More than 50% control. Due to the high level of control, this kind of company would need to be looked at more closely. In particular, the company stakeholder will need to be identified. For example, if the controlling stakeholder has a higher stake in this company then the credit risk is less of the subject company and more of the controlling stakeholder. You would need to do due diligence checks on both the company and the controlling stakeholder.

Sources of data for identifying UBO

The data you use for identifying UBO is really important. It must be reliable, up to date and vendors should typically offer trusted and verified sources of data, as well as enhanced due diligence features where manual searches can be requested to ensure the most up to date information is being used.

Data sources include:

- Local sources, including regulators and registries, ranging from stock exchanges to tax authorities;

- Local information providers, such as the UK’s Companies House, Singapore's ACRA;

- Annual reports;

- Company websites;

- Press releases;

- Direct contact.

Data provider considerations

Date providers should also offer global sanctions checks through WorldCheck and WorldCompliance, as well as adverse media checks where archived information can be searched and media reports can be tagged to analysis, since news wires would match individual names. Similarly, you should be able to request the latest or more info in relation to UBO screening.

Finally, you should also be able to get corporate group information with full graph view or download as image/PDF. The likes of analytics and shareholder maps can make a huge difference to user readability and understanding but there is still vast scope for improvement from data providers in this area.

About Archan Bahulekar

Archan has more than a decade of business development experience and six years of that within information services industry, which is where he gained his understanding of UBO. He has worked on custom solutions for credit risk, scoring and AML/KYC related processes at banks and MNCs in Asia. He's currently at HireRight developing business in APAC with a focus on banks and financial services industry.

Archan has more than a decade of business development experience and six years of that within information services industry, which is where he gained his understanding of UBO. He has worked on custom solutions for credit risk, scoring and AML/KYC related processes at banks and MNCs in Asia. He's currently at HireRight developing business in APAC with a focus on banks and financial services industry.