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Dr. Henry Balani: Employing a digital and automated approach to UBO

By Clare Puplett | Mon 20 November, 2023

In this fourth and final instalment of our UBO blog series, we interview Dr. Henry Balani (Global Head of Industry & Regulatory Affairs, Encompass). Here, he shares his views on digital ultimate beneficial ownership (UBO) identification. Also, shedding light on the critical role data plays in enhancing compliance efforts and the opportunities that arise for firms able to employ a digital and automated approach.

Q: Given the complexities of UBO identification, is it feasible for firms to achieve full compliance through manual checks and reports?

A: In short, no! UBO identification is an intricate, complex, and globally interconnected exercise. Illicit actors do not just operate in isolation. They operate across multiple jurisdictions and are aware of the regulatory limitations and barriers tied to specific geographic regions. Criminals capitalize on regulatory arbitrage by establishing entities in jurisdictions with weak or opaque regulation. They know how to exploit the financial system’s loopholes and evade accountability.

International cooperation and visibility are therefore crucial in identifying organized crime groups with a global footprint. A manual approach is neither efficient nor sufficient against the complex and globalized backdrop of financial crime. Vast data volumes and inherent inconsistencies make it virtually impossible to effectively unearth complex corporate structures at scale. The cost-inefficiency of manual checks further drives the need for automated data analysis and technology-driven solutions.

Q: What remains the biggest hurdle or challenge in achieving a truly efficient and accurate UBO identification system?

A: The most prominent challenge is the multi-jurisdictional nature of the UBO identification. The need to share data seamlessly across different jurisdictions proves to be a substantial hurdle. This is exacerbated by the fact that criminals and their professional enablers are acutely aware of this jurisdictional fragmentation and exploit it for their benefit. They manipulate differences in UBO registry requirements across jurisdictions to evade detection, making the challenge even more complex.

This issue is only exacerbated by the deliberate use of shell companies designed to obfuscate the true identity of the UBO.

Offshore tax havens

Certain countries offer attractive opportunities for individuals and corporations to minimize tax liabilities. Allowing criminals to safeguard assets, and benefit from favorable legal and financial conditions. However, their rules are structured in such a way that allows individuals to attribute beneficial ownership to a registered agent. However, the agent may have nothing to do with the firm or its actual beneficiaries. Attracting more of these types of corporations provides a robust and reliable revenue stream for these countries.  In turn, they inadvertently foster an environment that not only allows for financial crime, but actively enables it.

Company registries

Many registry structures and rules were not initially designed with UBO identification in mind. The historical intent behind their creation was often unrelated to identifying the beneficial owner. This leads to challenges, even when reforms are introduced.

In the UK, for example, Companies House was initially established to register joint stock companies for tax collection purposes. As a result, a lack of thorough data verification has led to instances of firms being registered in the UK where Jesus Christ, Donald Duck and Mickey Mouse are listed as the persons of significant control. With that said, this will hopefully improve in the UK with the introduction of the Economic Crime Bill, set to reform the role of Companies House and improve transparency over UK companies and entities.

In the United States, the registration of companies primarily occurs at the state level, with each state having its own rules and regulations. This decentralized approach leads to inconsistencies, with some states requiring stringent identification while others do not. The challenge lies in reconciling these historical legacy issues with the evolving landscape of UBO identification. While technology plays a crucial role in improving the accuracy and reliability of UBO identification, these jurisdictional and historical challenges persist, making UBO identification a complex and multifaceted issue that goes beyond technology and digital profiles.

Q: How would a change in regulation, such as the lowering of the UBO threshold, affect the delivery of know your customer (KYC)?

A: Lowering the UBO threshold represents a strategic shift aimed at bolstering efforts to apprehend individuals involved in illicit activities. The conventional threshold is set at 25% ownership. This has presented loopholes for criminals who adeptly divide their ownership into smaller, less conspicuous percentages to evade detection. By reducing the threshold, regulators cast a wider net, increasing the chances of capturing these individuals. However, this broader approach comes with a trade-off – a more extensive workload for compliance teams. By lowering the thresholds, regulators inadvertently create a surge in the number of potential matches. Also increasing the risk of false positives, and the ensuing need for comprehensive investigations.

Technology plays a pivotal role in addressing this challenge. Significantly enhancing the accuracy of matching by incorporating advanced algorithms that consider a wide array of variables, moving beyond like-for-like name matching. This multidimensional approach ensures a more precise identification of true matches and serves as a powerful tool enabling firms to capture what truly matters.

Q: What are some of the benefits that can be achieved through automating different aspects of UBO identification?

A: It is essential to explore the broader context of UBO data and its untapped potential beyond traditional compliance. The data collected, primarily gathered for the purpose of compliance, can be an asset for other applications.

Imagine harnessing this data for marketing, product development, or even credit rating and decision modeling. As things stand, many financial institutions exist in functional silos. Meaning customers find themselves repeating the same information when seeking different services from different departments within the same bank. These duplicative processes not only frustrate customers but also hamper operational efficiency.

Creation of digital profiles

Automation in UBO identification, combined with the creation of digital profiles, not only ensures compliance but also unlocks the potential for broader data utilization. By digitizing and democratizing data storage, it improves accessibility and visibility for those performing KYC checks. This enables teams to address deltas in the data, making the entire process faster, more accessible, and repeatable.

From a strategic perspective, this automation not only streamlines compliance but also facilitates collaboration throughout the bank. By breaking down silos, banks can leverage customer data for multiple aspects of their operations, thereby transforming UBO identification from a cost center into a potential revenue generator.

 

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

 
Author: Clare Puplett

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