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Beyond the why: How banks can overcome the challenges of UBO

By Dr Henry Balani | Thu 26 October, 2023
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This is the first blog of a series about ultimate beneficial ownership (UBO). Dr Henry Balani first explores how banks can overcome the challenges of UBO identification. Other topics in the series include:

  • How to determine the UBO and the requirements for reporting
  • Adopting a data driven approach to UBO identification
  • Concluding thoughts on the topic from Dr Henry Balani, our Global Head of Industry & Regulatory Affairs

Introduction

Banks have always been mandated to identify ultimate beneficial owners (UBOs) as part of their anti-money laundering (AML) obligations. However, recent global scandals have thrust this requirement into the limelight. The Pandora papers, a massive leak of financial documents, exposed the intricate web of offshore entities. These complex corporate structures were used for hiding trillions of dollars of illicit funds. Coupled with recent Russian sanctions, targeting thousands of individuals and entities, banks are now navigating new and evolving restrictions on who they can do business with.

The overall trajectory of global regulation is largely aligned with respect to UBO identification – demanding more rigor, proof, and transparency. However, individual authorities are at varying implementation stages as they address local issues based on UBO database access. The Financial Action Task Force (FATF), the global setter of AML standards, seeks to unify approaches. Especially through the tougher guidance measures it issued on Recommendation 24 which covers the beneficial ownership of legal persons. This will lead to stricter standards and regulations, thereby strengthening UBO requirements across an even broader range of regions.

For operational heads within financial institutions, it is no longer a question of merely understanding the concept of UBO. It is about how they can effectively and transparently deliver on this requirement. Particularly given the increasing complexity and challenges in identifying these UBOs.

Navigating UBOs – challenges in identification and compliance

The task of identifying a UBO is incredibly complex and time consuming for several key reasons:-

  • Complex ownership structures
    Tracing the UBO in multi-layered ownership structures comprising legitimate legal entities, shell companies, nominee shareholders, and bearer shares is costly. Both in time and effort, as well as being highly prone to errors when delivered manually.
  • Data inconsistencies
    The absence of a unified, reliable UBO information source across jurisdictions means banks juggle multiple, sometimes contradictory, data sources.
  • Dynamic UBO landscape
    With mergers, acquisitions, and other corporate events, the UBO landscape is ever shifting, necessitating continuous updates.
  • Elevated regulatory expectations
    Regulatory bodies are raising the compliance bar, necessitating not just adherence but also demonstrable proof of due diligence.
  • Legacy systems and manual processes
    Many banks remain tethered to outdated UBO processes, relying on manual methods and fragmented legacy systems. These not only pose greater risk of human error, but also lead to operational backlogs and delays. Tools like Excel spreadsheets offer limited efficacy in highlighting genuine risk mitigation efforts.

Harnessing technology – the way forward in UBO compliance

To overcome the challenges of UBO identification, firms need to embrace modern technology to maximize efficiency and efficacy. Intelligent automation is the key enabler to improving UBO compliance. Armed with these tools, banks can tackle UBO in new ways.

Automated data collection and analysis

Modern software solutions are adept at collecting, merging, and matching data. They can perform intricate analyses that were previously time-consuming or even impossible. This automation accelerates the data capture process, enabling real-time analysis of complex ownership structures. Using dynamic process automation to access KYC data and documents, banks can streamline their KYC search procedure to provide the full picture of a corporate customer within minutes.

Efficient workflows and decision-making

With automated systems in place, information, tasks, and requests flow more seamlessly across an organization. This improved flow not only enhances efficiency but also expedites decision-making processes. Gone are the days of fragmented data and siloed departments; with the right tools, banks can ensure that every stakeholder has access to the information they need when they need it.

Real-time digital KYC profiles

With leading technology solutions, banks can automate the real-time creation of digital know your customer (KYC) profiles. By ensuring that every piece of information is current and accurate, these profiles provide banks with the confidence they need to build out comprehensive UBO structures.

Optimized resource allocation

By automating routine tasks, banks can free up valuable resources, allowing them to focus on more complex UBO investigations. This not only ensures that these investigations are more thorough, but also allows banks to address potential issues proactively.

The digital future of UBO compliance

The digital transformation of UBO processes is not just a luxury but a necessity. Automation and digital profiles are no longer just tools; they are the backbone of a robust due diligence system. Their deployment establishes a transparent audit trail that stands up to increasing regulatory scrutiny.

In an era where data is abundant, technology becomes the beacon for banks, helping them sift through vast amounts of information and ensuring quality in UBO delivery. Digital KYC profiles not only strengthen the foundation for customer due diligence (CDD) but also pave the way for perpetual KYC (pKYC) practices.

Regulatory bodies, recognizing the potential of technology, are bound to intensify their oversight. Furthermore, ramping up their expectations for banks to harness technology in refining and improving their UBO processes. With capabilities like complex ownership unwrapping, seamless integration, and unique match-and-merge functionalities, Encompass is poised to lead this digital revolution, to support banks overcome the challenges of UBO identification.

Read our eBook for a summary of the Understanding ultimate beneficial ownership series.

EBOOK

Understanding ultimate beneficial ownership

A detailed look at how to navigate the complex world of ultimate beneficial ownership

 
Author: Dr Henry Balani

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.

LinkedIn Profile | Dr Henry Balani

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