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UBO determination, including the shifting thresholds for reporting

By Dr Henry Balani | Mon 6 November, 2023

The first blog in our series on ultimate beneficial ownership (UBO) explored the challenges of UBO identification. Now, this second instalment looks at the evolving regulatory landscape surrounding UBO determination, including the shifting thresholds for reporting.

Look out for upcoming blogs on a data-driven approach to UBO identification, and the concluding insights of Dr. Henry Balani (Global Head of Industry & Regulatory Affairs, Encompass).

Introduction

Beneficial ownership, at its core, revolves around understanding who truly benefits from, controls, or influences a legal entity. Determining UBO is a nuanced process. Often involving the disentanglement of complex corporate structures and tracing ownership percentages. Additionally, identifying individuals with significant influence or control over the entity’s operations and decisions.

The Financial Action Task Force (FATF), a global watchdog, plays a pivotal role in shaping the approach to beneficial ownership. When reflected in enforceable law, Recommendation 24 mandates financial institutions to ascertain the legal beneficial ownership of entities. Furthermore, ensuring they aren’t misused for illicit activities. However, the implementation of FATF guidelines varies, leading to a diverse regulatory landscape across jurisdictions. This diversity poses challenges for global banks as they navigate different standards and registries.

FATF and a multi-pronged approach

A multi-pronged approach, leveraging multiple information sources, is crucial. Not only for banks to interact confidently with customers, but also to provide regulators with a clear audit trail, evidencing thorough due diligence. With discussions around reducing the beneficial ownership threshold from 25% to 10%, banks face the prospect of deeper corporate structure analysis and increased investigations. This shift underscores the evolving nature of UBO requirements and the need for banks to stay ahead.

UBO determination, including the shifting thresholds for reporting, across jurisdictions

United Kingdom
  • The UK has beneficial ownership registers for companies, properties, land, and trusts, setting the reporting threshold at 25% ownership.
  • In 2022, FATF deemed the UK largely compliant with Recommendation 24.
European Union
  • The EU is also considering reducing UBO thresholds as part of a new AML Package, potentially lowering the 25% threshold to 15% for standard cases and 5% for high-risk cases.
  • EU member states vary in their compliance with Recommendation 24.
United States
  • The US Corporate Transparency Act (CTA) requires that reporting companies provide detailed information about themselves and their beneficial owners, defined as individuals with substantial control or those owning at least 25% of a reporting company.
  • In 2020, the US was not compliant with Recommendation 24.3.

For global banks, varying UBO requirements across jurisdictions creates a maze of compliance, especially since each requires different data sources. The potential shift in UBO thresholds would magnify the inefficiencies of manual processes, underscoring the urgent need for automation that can seamlessly adapt to evolving requirements at scale.

UBO compliance – Unlocking risk-based strategies with automation

To effectively manage UBO determination and compliance, banks should begin with a risk-based approach to know your customer (KYC) procedures. This involves categorizing customers based on their risk levels, then implementing automation for those at the lower end of the risk spectrum. Such an approach not only streamlines the KYC process but also ensures that resources are optimally allocated to higher-risk profiles that demand more rigorous scrutiny.

Automation is pivotal for scalable growth within compliance teams and processes, especially considering evolving regulations. As beneficial ownership thresholds potentially shift – whether from 25% to 20%, or even 10% – the onus on banks intensifies. They must swiftly and accurately identify UBOs with more granularity. A task made daunting with manual processes, but streamlined with automation.

Increasing straight-through processing (STP) is a key component of the efficiency gained through automation. With tools like Encompass, banks can achieve close to 100% STP. By integrating with existing customer lifecycle management (CLM) systems and establishing a real-time digital KYC profile, Encompass offers a unified view across the business.

This consolidated perspective serves as a single source of truth, laying a robust foundation for perpetual KYC (pKYC). Moreover, leading automation technologies ensure a comprehensive audit trail, providing instantaneous evidence of due diligence.

This improvement in efficiency can also mean a market competitive advantage for banks. Particularly as it results in a more responsive level of customer service due to improved due diligence process.

The future of beneficial ownership compliance

Banks must prioritize a risk-based approach to beneficial ownership, and when combined with cutting-edge automation technologies, this strategy yields:

  • Efficiency
    Through optimized resource utilization, banks can streamline operations, reduce overheads, and minimize customer burdens.
  • Assurance
    By minimizing human error and leveraging real-time KYC profiles, banks can ensure a higher level of accuracy in their compliance efforts.
  • Flexibility
    With the agility to swiftly respond to evolving threats and the adaptability of automation across diverse jurisdictions, banks are better equipped to handle changes in the regulatory landscape.

Harnessing these benefits, banks position themselves at the vanguard of compliance, prepared to steer through the intricate maze of dynamic global UBO regulations.

 

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

 
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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