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The impact of Corporate Digital Identity standards on beneficial ownership identification

By Dr Henry Balani | Tue 25 June, 2024
Impact of CDI

Digital transformation marks a shift in how financial institutions operate, interact with clients, and combat financial crimes.

What is CDI and why is it useful

Central to this transformation is the concept of a corporate digital identity (CDI). This has emerged as a vital tool for banks to authenticate corporate entities efficiently and securely. In this blog we explore the value of CDI to effectively identify company beneficial ownership. A fundamental process as part of a bank’s due diligence Know Your Customer (KYC) onboarding process.

CDI enables the real-time electronic capture of a corporate customer’s unique attributes and data to establish a robust digital identity. This digital identity can then be used for authentication purposes. The process involves gathering specific attributes directly from the customer. Additionally supplementing them with information from third-party data sources, including official records and commercial data providers.

The collected attributes are used to verify the customer’s identity. Incorporating the corporate structure, and identifying the beneficial owners of the corporation, as required by jurisdictional regulations. By establishing a CDI, customers can seamlessly access an array of services without the repetitive burden of additional documentation requests.

Regulatory requirements

A primary use case for CDI is to address regulatory compliance requirements. Banks must comply with stringent regulations across jurisdictions. A CDI helps banks meet GDPR, KYC, and Anti-Money Laundering (AML) requirements by managing complex corporate ownership structures and fragmented records. By standardizing CDIs to include necessary regulatory attributes, banks enhance customer due diligence. They also ensure transparent operations and support accurate financial reporting. This transparency is vital for identifying bad actors and preventing financial crimes. Therefore, upholding regulatory obligations and protecting the financial system.

This singular, portable digital identity can also be utilized both within the bank, and across different industry segments, serving multiple business purposes. Such an approach not only reduces customer service friction but also facilitates the delivery of new banking services while ensuring adherence to regulatory compliance obligations.

CDI has multiple use cases beyond regulatory compliance

While regulatory compliance obligations are paramount, there are other benefits banks can derive when establishing CDI. These include:

  • Access management

Banks need technologically integrated systems to control access to sensitive data in line with privacy regulations. A CDI enables granular, role-based access control, centrally managed for compliance to multiple internal systems.

  • Transaction security

Digital identities must secure transactions’ integrity and authenticity. CDI applications use multi-factor authentication and public key infrastructure to ensure secure, verifiable transactions.

  • Interoperability

Banks and corporate customers require CDIs that work across different systems and platforms. Standardized attributes for CDIs facilitate seamless, secure interactions within complex ecosystems, supporting KYC onboarding and due diligence.

 

Role of corporate digital identity standards relevant to UBO identification

Standards relevant to beneficial ownership identity are crucial for ensuring transparency, regulatory compliance, and efficient management of ownership data. Here’s how standards can play a role in beneficial ownership identity:

  • Regulatory compliance and transparency

Standards help organizations comply with AML and Counter-Terrorism Financing (CTF) regulations by accurately identifying and verifying beneficial owners. This prevents illegal activities and promotes transparency. Standards also facilitate the implementation of KYC processes, ensuring that financial institutions can reliably verify the identities of beneficial owners.

  • Interoperability and data sharing

International standards like the Global Legal Entity Identifier (LEI) system provide unique identifiers for legal entities. These make it easier to track ownership across multiple jurisdictions. Data formats and protocols also benefit from establishing standards. The Common Reporting Standard (CRS) by the OECD or FATF guidelines ensure consistent data formats and reporting protocols, enabling efficient data sharing between institutions and regulatory bodies.

  • Automation and efficiency

Standards allow for the automation of beneficial ownership identification and verification processes. Streamlining these processes reduces the need for manual checks, therefore increasing efficiency.

  • Integration with technology

The integration of beneficial ownership data with other systems to facilitate real-time updates and monitoring is enabled with standards. These include enterprise resource planning (ERP) and customer relationship management (CRM) systems.

  • Enhanced security

Standards ensure that beneficial ownership data is managed securely, with appropriate encryption and access controls to prevent unauthorized access and data breaches. Auditability also benefits from standardized processes as they can provide a clear audit trail, making it easier to track changes and identify discrepancies in beneficial ownership data.

  • Accuracy and consistency

Data quality standards ensure that beneficial ownership data is collected and maintained consistently, improving data accuracy and reliability. Access to real-time data improves data-freshness reducing stale databased data.

  • Harmonized definitions

By providing clear definitions and criteria for beneficial ownership, standards reduce ambiguity. Also ensuring that all parties have a collective understanding of what constitutes beneficial ownership.

 

UBO identification and how CDI can support the process

To identify a UBO, beyond personal and contact information, ownership details of the firm(s) and their tax identity are required, along with control information that can include voting and decision-making authority. Documents that verify these details are required from authoritative sources to ensure this information is valid.

Public data on company ownership (where available) can be combined with non-public data to provide a complete picture of ownership. A CDI can store these attributes to use for UBO identification purposes. The CDI can subsequently be used across multiple bank business lines to meet both operational and regulatory requirements.

 

Driving efficiency in UBO

The implementation of CDI standards is essential for driving efficiency in identifying beneficial ownership. By establishing a robust CDI, banks can streamline the KYC onboarding process, ensuring compliance with global regulatory requirements such as GDPR, KYC, and AML.

This comprehensive digital identity enables precise verification of corporate structures and beneficial owners, supporting transparent business operations and accurate financial and regulatory reporting.

CDI’s role-based access control and transaction security features enhance data protection and integrity, while its interoperability ensures seamless interactions within complex banking ecosystems and beyond.

CDI standards facilitate the automation of beneficial ownership identification, reduce manual processes, and improve the accuracy and reliability of ownership data, thereby upholding regulatory obligations and safeguarding the financial system against illicit activities.

Learn how Encompass delivers CDI.

 
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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